As a mergers and acquisitions firm, we are constantly evaluating companies for the purpose of preparing their owners for a successful exit. In ideal circumstances, they are mature companies that are profitable and drama-free. But sometimes they’re not. Many times we are approached by owners who haven’t protected themselves from the threats that inevitably come from success, whether internal or external.
As companies grow, problems can emerge that were never anticipated. Partnerships that were once effective become frayed due to disagreements in future direction. Sudden profitability can lead to waste, fraud and abuse. There are a hundred ways a promising business model can end up in the ditch.
Whether your problems are caused by people, processes or market forces beyond your control, we might be able to help. We have cleaned up some real messes in our day. Here are a few examples:
Case #1 The owner of a professional minor league hockey franchise called us in a panic. After a stellar start to the season, his team had dropped several games in a row, and had just turned in several uninspired performances in front of increasingly dwindling audiences. We spent three days there observing day to day operations and discreetly interviewing people who didn’t know they were being interviewed. After watching the head coach conduct practices and instruct his players, we knew he wasn’t the problem. The guy was obviously an excellent coach, and we know the hockey business. It didn’t take us long to learn that the problem was his assistant –an ambitious guy who was also one of our clients’ sacred cows. He knew that just a few more losses might get the head coach fired, which might make him the head coach, and by subtly suggesting to key players that their head coach was unwilling to recommend them to organizations at higher levels he was creating massive dissension.
Instead of our client firing a valuable high level asset and eating a hefty contract, he fired a cancerous distraction for cause. And it wasn’t people at the executive level that we learned anything from. In fact, it was the towel boy, the lowest ranking person in the organization who had always been treated with courtesy and respect by his boss, the head coach.
Case #2 We were approached by the CEO of a startup medical device company for early stage funding. It was plain to see that they had brilliant and disruptive technology that would forever change the supply chain of an industry to which there are incredibly high barriers to entry. But money to get the necessary approvals and research done was always in short supply.
The majority stockholder and patent holder was actually the Chief Scientific Officer, and not the man who had hired us. When we looked at the company’s offering materials, we knew immediately what we were dealing with. Buried in the fine print, the stock subscription authorized the CEO to commingle the monies raised with offshore companies the CEO was involved in. A red flag if there ever was one.
When we asked the science officer if he knew about this, he replied in the negative with a distinct air of disbelief. We were hired immediately to audit the books. It took us less than an hour to determine that the CEO had converted hundreds of thousands of dollars to his personal use. We called him into his own office and gave him the option of resigning both his position and his stock in the company on the spot with no further repercussions. Knowing that the game was over, he shrugged and quickly signed the documents we had prepared. We never heard from him again and we didn’t spend a dime on attorneys. And we never wasted another minute with him.
We would have enjoyed prosecuting him but we knew that a competent defense attorney could have muddied the waters for a long time. More importantly, the equity we recovered was quickly resold to a new investor with real capital that is taking this project into clinical trials.
Case #3 Our client was an astute real estate investor who had diversified into the entertainment business. He had several performing arts venues that had pre-sold season tickets and already collected the revenue. Ticket sales were average but should have ensured no worse than break even. Yet they were bleeding red ink. When we looked at his books, it was apparent that the company would never be profitable with the inflated employment contract the General Manager had convinced our trusting friend to sign him to.
Far above the industry norm, it was a complete albatross around the organization’s neck. Attorneys confirmed that it was ironclad. Folding the operation was out of the question because the owner wasn’t willing to take the PR hit in his own community. When we asked the overpaid manager if he would be willing to renegotiate to a more reasonable but still generous deal that was sustainable, he steadfastly refused. His books were in complete order. Every dollar was accounted for. And is in his opinion, his performance was good. In ours, it was average, but none of the few contractual conditions for termination were present.
We suggested to him that this was a lopsided deal, and lopsided deals rarely last long. He replied that a deal was a deal, and he expected his employer to honor it. He had understood and taken advantage of the fact that our client was a man of his word and would not renege on an agreement that he had entered into in good faith, no matter how poorly he had represented himself. So we did some research and identified some people that could help us. They were vendors, executives and headhunters close to the hiring executives at the companies at higher levels of the business. We arranged situations where our client would be talking to these folks. Not to the hiring managers, but those close to them. And the only thing our client ever had to do to remedy his situation was to brag to these people about his General Manager’s capabilities and how he dearly hoped that he could hold on to him for awhile.
About two weeks later, our albatross informed his boss that he would like to be let out of his contract to accept employment elsewhere. Our client warmly shook his hand and wished him well, and said that if he wanted to join his new organization right away, he wouldn’t object. We really don’t know how our friend is doing at his new job, but his successor is doing very well.
Case #4 Our client was one of the founders of an industrial supply company. No single person had a controlling interest. The original two partners had sold off 25% of the stock to a half dozen investors in varIous sized chunks to raise operating capital.
Our friend the female partner assumed the office management duties. The man did outside sales. As business progressed, the two partners relationship deteriorated. Our friend wanted to forgo distributions in order to reinvest. The other partner wanted to pull as much out as possible as soon as possible. The second partner was also creating extreme liability for the company through his inappropriate behavior with female staff members. When our client learned that he had been recruiting investors to form a competing company, she knew she had to act.
Fortunately for her, her partner had used a very general shareholder agreement from an office supply store when they incorporated. Nothing addressed a necessary time frame to call a shareholder meeting. We quickly polled the minority stockholders and determined that our client would narrowly prevail in a vote. We introduced her to lawyers who specialize in contentious partnership issues.
These attorneys convened a shareholders meeting at their own offices where a quorum was present. The man was relieved of his duties, and simultaneously his access to the plant and network credentials were revoked. When we looked at his hard drive, we discovered evidence of a personal bankruptcy filing. We subsequently learned that he had failed to declare his stock in this company as a personal asset.
One of our partners had taken a contract position as CFO during this process. He had also assumed the title of VP-Investor Relations. The CEO went back to running the company and all calls from stockholders went to our operative. Inevitably the call came from the deposed manager threatening legal action. We informed him that the bankruptcy court would probably frown on the fact that he was trying to have his cake and bankrupt it too. And then we just forgot about him. We knew he couldn’t assert his rights as a shareholder without convicting himself of bankruptcy fraud.
We like solutions that avoid litigation. If you end up in court, it should be because your adversary is unreasonable and/or poorly informed. We hate to see our clients spend money with lawyers instead of reinvesting it. But when we need to go to court, we hire the best and we play hardball.
Before you get into an expensive and time-consuming scrap that corrupts your karma, let us take a fresh look at the situation. The value we bring to you is the combination of our experience and our critical thinking abilities. As experienced investors, we’ve seen a lot of cash flow statements, balance sheets, tax returns and business plans. We can quickly identify strengths, weaknesses, irregularities and risk. But we also have the analytical ability to observe what the numbers don’t reveal.