CEO's Diary: Coincidence?
The CEO is worried
August 29 – All is quiet on the deal front, but another curious incident happened today. Two members of the team in the East, both basically covering the same area, quit at the same time. The chance of this happening by coincidence seemed remote. It has worried me. Has Hitchin alienated them? Is someone stealing my staff? Are they setting up on their own?
I discussed it with both Hitchin and East, who was their former manager. It's been agreed that both should be subject to debriefing interviews on Monday, one by each of Hitchin and East, just to see if different views emerge. I don't really want to have to invest a lot in new people right now.
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August 28 – It didn’t take long to get feedback from the shareholders. The ex-CEO rang me this morning, absolutely furious.
As a matter of courtesy he had been sent a copy of the draft contract at the same time as his solicitor had received one (the fact that the two shareholders cannot agree on one solicitor does, of course, complicate matters). He is no fool, whatever anybody thinks of him, and it had not taken him long to get to the issue of warranties. There was no way on earth, he said, that he would sign any of these. The investors must think he was stupid if they thought he was going to sign an undertaking that the company's tax affairs were, for example, correct. He had no way of knowing. That had always been my job, he said, and not his, and I should therefore be signing.
I tried to be as calm as possible, which is always easier when the person you're talking to is being so wholly irrational. I asked him to speak to his solicitor. I assured him that such warranties were absolutely normal. I told him that I could not sign them because I was not getting the cash. And I told him that anything was up for negotiation, but as far as I understood it no deal on buying a company had ever progressed without tax warranties being given.
I do not know if he was reassured. He did not get back to me. But if this is a sign of what's to come we are in for a bumpy ride.
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August 27 – The shareholders are out of limbo. They have been told that the price has not changed as a result of the due diligence (which is unsurprising, I knew the data was right). The contracts are about to be issued. It has been agreed that I will not be a major player in this process, at least at first. There is a business to be run.
That is also out of limbo. We are in the final stages of summer holidays. Sales performance has not been stunning. There is a difficult autumn to face. Anyone selling into companies at a time when they are facing profit and cash flow pressure is going to need to be on the ball.
Our strategy is a pretty straightforward one. We know that there are competitors who have not invested in automation to the degree that we have. We know that our marginal cost per site is lower as a result once the initial investment in the contract is secured, which it is when we get someone to sign up for two years. As a result we know we can beat people on maintenance support costs, largely because very often we don't have to attend to put something right. We can often tell somebody on-site what they need to do to correct something from the end of a phone. Some of our competitors can't do that. They are the people we are targeting, and there is a pretty intensive research process going on right now to make sure we know who they are supplying because we want their business.
It may not be a pretty strategy. I'm not very worried about that. I want the sales. People here understand what we're trying to do. When there are worries about the economy, believing that your employer has a clear strategy to secure your job is pretty important for maintaining morale. I'm pleased to say that appears to be something we are achieving.
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August 26 - Full marks to the lead investor for his initiative over the weekend. He called me late on Friday. One reason was to follow up on my visit to another company in which he had invested. I have to be honest and say that visit was reassuring - the management team there felt that the relationship with the investors had been open, honest, and constructive.
I relayed this but he said that he felt we had faced a crisis of confidence. He thought there was only one way to resolve this. He wanted to meet me and my wife for dinner, which his wife would also attend. He was candid. He said that it was not enough for me to be convinced. He knew that a decision of this sort involved my family. He frequently sought his wife's opinion on what he was doing, and trusted her judgment, and assumed I would do the same.
So, on Sunday evening, with my in-laws roped in as babysitters, my wife and I met the investor and his wife at a hotel not too far from here to which they had come for the weekend, apparently with this objective in mind. He also insisted on paying for a taxi so that I need not worry about having at least one decent glass of wine. I don't drink and drive.
The meeting was a straightforward success. It was a real opportunity to see the man I will have to work with and understand a little more about him. Of course he and his wife might have been consummate actors, but I doubt it and so did my wife. We decided that he was trustworthy and the opinions they presented reflected the people they really are.
I called him yesterday. I told him that as far as I'm concerned the deal is on. I want to work with him. I also told the Chair. He was relieved.
Now it is time for the next stage. The phoney war is over. Now we have the shareholders to deal with.
That’s an important message to relay to the management team today.
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August 21 - I should have felt pleased after yesterday, but didn't. I admit I felt slightly deflated.
So I have done two things. The first is to spend much of today out with Newc because he is like a breath of fresh air. Nothing gets him down for long and he is always full of new ideas. Most of them are mad and have to be ignored, but his sheer inventiveness and perpetual optimism guarantees that you will feel better after some time in his company.
The second thing has been to accept some advice offered here and I have asked to meet the CEO of another company in which my investing team have held shares for some time. I just want some reassurance that I really am doing the right thing in trusting the Chair's judgment about these people.
That meeting will happen tomorrow. At least they took my request seriously. I admit I am then giving myself the weekend to seriously consider my reaction and after that it will either be full steam ahead or I decide I have made a serious mistake.
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August 20 – I met the lead investor today. The Chair decided it was the only way to make progress.
We did make progress. I set out my case clearly and calmly. I made it clear to what extent I would compromise and at which point I was willing to walk away from the deal.
He was left in no doubt that I would do just that.
He accepted my compromise offer. To be candid, I think he did much more than that: he realised that I'm a tough but fair negotiator who is willing to drive a hard bargain but who knows his bottom line, and won't go beyond it. If I was him I would value that.
I got a call later on from the Chair saying that he did value it: I had impressed.
The deal is back on. But I bet that this is not the last problem we will encounter.
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August 19 - The Chair tells me that the investors are not being very flexible on the issue of my being a bad leaver. As predicted by a commentator on this site, they see this as a form of golden handcuff. I readily admit that I see it as a lack of trust and an opportunity for abuse and I am well aware that no one gets the best out of me when I feel shackled and constrained.
I am trying to keep my calm on this issue. The compromise that I have suggested is that I be considered a bad leaver if I leave the company except for reason of ill-health and have secured a job paying more than 80% of my salary at the time of departure (bonuses included) within 12 months of having left, assuming that the options have not exercised in the meantime. Otherwise I am considered a good leaver.
My logic is simple. They don't want me to leave for a better offer and I think that reasonable. If I do, I should lose. If I leave because of ill-health or because they sacked me then I do not see why I should suffer. I will still have delivered the company to them. This puts a reasonable obligation upon them to treat me well.
I am not sure whether the Chair thinks I'm being reasonable or not, but I do know he thinks I'm being intransigent. That's OK, that is exactly what I am right now. If we do not get this one right now the relationship between me and the investors will not work. They have to understand that. If they do not it is best that I walk and face the music with the shareholders.
Or just walk.
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August 18 - I am not even trying to post this until 19 August.
I took Saturday off and then read the documentation that has been prepared by the investors who want to partner the management team in the bid vehicle.
There was the usual gubbins requiring considerable correction because lawyers had simply sent out what was sitting on their precedent file without making any effort to modify it to suit their client's needs. That took some time. And then I got were bit where it was clear that some effort had been expended.
Earlier in my career I spent some time working in companies that were backed by venture capitalists (and that hasn't been enough to put me off). As a result I have some awareness of the concept of 'good leavers' and 'bad leavers'. For those who aren't, a good leaver keeps their shares and options when they go, and a bad leaver does not.
I admit I was livid to find that I was described as a bad leaver in the contracts that were being presented. I know that this has been thought about: the terms that were applied to me were slightly different from those that applied to the rest of the management team.
It isn't true to say that my blood boiled. If it had I wouldn't be here now, but I have to admit that I found this contempt for entrepreneurial ability in the face of the investor's hard cash exceedingly annoying. Thankfully my family were out at the time I read this and the only person who suffered was my dog, who got taken for a very long walk while I calmed down.
I also, and very usefully, persuaded myself not to react immediately. So, yesterday (Monday) morning I rang the Chair feeling a little calmer and more sure of my negotiating position.
I made it clear that there were no circumstances that I would accept where I was anything but a good leaver. This was a bottom-line. In addition, no member of staff was to be a bad leaver with regard to the shares that they were now being issued with in the bid vehicle, but I had to accept that they would lose their options if they left. If there was any other arrangement it would look like we were being asked to join the investment team and that is not true. They are being asked to join us.
Candidly, the shareholders are a complete pain at the moment but I do have considerable flexibility. If I give that up to work for more active participants who could force me out with nothing this whole process is not worthwhile. And they need to know that.
The Chair calmed me down and said he'd negotiate this on my behalf because he felt that the best approach. So far, very early on Tuesday, all I know is that he hasn't managed to have the appropriate conversations as yet. Until he does this is on hold.
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August 15 - Keeping up with myself is proving to be a problem! I doubt I have ever faced so much time pressure in my career.
Yesterday I ran through the allocation of shares in the bid vehicle with each of the senior management team here to make sure they are happy. Newc, East and Office get the highest allocations. That reflects time served and their contributions. North, #1 and Hitchin get much less due to their recent arrival. Options will count for more with them. Everyone seemed happy.
Then I had to deal with another pressing issue: there is real pressure on pricing at the moment, which will be no surprise to anyone. We have worked on a menu of services for some time and it has served us really well, but in one or two cases we need to change this if we are to keep our competitive edge. With all the operations managers in I took the chance to bash this issue out with them. With five opinions around the table this took a long time, but it is vital to respond quickly to pressure in this area at the moment and so keep customers. I think that is key. We did reach agreement on a new formula.
Then today I had to run through all the questions on the due diligence that had been raised by the firm undertaking it. Few took much time by themselves, but there were loads of them. None, however, seemed in any way material. I think I can feel pretty confident that we got through, as we always have done with our audits.
I need a weekend. I am not expecting to get it. The draft of the investment agreement between the bid vehicle and the business angels who are going to back it needs my serious attention and no lawyer that I have ever met is very good at these things. They can supply the boilerplate. I insist on doing the detail. That's not going to leave a lot of time for my family. That's life right now. At least I have a job, for the moment.
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August 13 - It's very late. I had to visit the North today. And then I had to meet the Chair tonight.
The north is going well - North is another team player and he is doing exactly what's expected of him right now. Of course, he's not doing everything exactly as I'd want it. But I'm learning to accept that. So long as systems are complied and things are being delivered that things are not done my way does not matter. Even my wife is saying I appear to be losing my feeling of omnipotence and am replacing it with a new tolerance. It seems to be to my own benefit.
The meeting with the Chair was to resolve the structure of our bid vehicle. We have formed this. We are bearing some costs irrespective of the success or failure of the deal. This is our equity. And small elements of that equity are being issued to key staff, for cash. On the basis of advice received this is, we think the way to go. It also feels right. We're taking the initial risk on this, we are bearing the burden of responsibility, we will invite others in if they think it’s right and the due diligence works. But we will, for example, bear the legal cost of reaching agreement on them coming in and we will have other bid costs we are going to bear. In that case this is real commercial risk. We can (and may) suffer a loss.
The key managers know this. For them the stake is not big. But it helps, and gives real ownership as well as future options.
I admit, this is exciting. I can’t deny the adrenalin rush of this process.
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August 12 - Had an extra management meeting today to brief those who were here on how the buy out is going. It seems vital they have a chance to know and ask questions.
In terms of how it's going all I could really so is "no obstacles have appeared so far that I know of".
In terms of involvement two things are clear. The first is that the capacity to pay much for shares is limited. I guess that's hardly surprising in the current economy. This is not a time for everyone to take on credit exposure. Not all of them could probably get it.
The second is as a result that option arrangements are pretty essential. EMI or other option schemes here we come, I think. It's for others to mug up and advise my team on that, but I assured them that this is in the plan.
What I had to make clear though was that this was no 'get rich quick scheme'. I think there's a remarkable amount of realism about that, and for all involved some degree of potential upside ownership stake is clearly a matter of considerable interest, even if the date of realisation is unknown.
With this option on the table all are in, and the desire to do it is high.
What worries me is the potential effect if it does not go through. The shareholders will have a mighty problem on their hands. I'm coming to the realisation that for me that may not be a position I'll want to manage. I think I'm going for broke.
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August 11 - I was so tired by the end of Friday I just didn't have the enthusiasm to write. It must have been bad. Not much keeps me from a keyboard.
Thursday night I worked very late (into Friday) with the Chair and lead investor on the financial plans for the future. It felt late to me for this due diligence to be happening at this stage, but in the end it moved on from that (because it was clear that unless we have an end to all regulation and a melt-down of a scale that even the CBI aren't predicting this weekend our down side is covered) and became a session on where we go from here.
The key issue is twofold. One is how we deliver future services in the core business, where it is apparent that we will automate more and supply stronger positive assurance as the sales pitch (which contrasts us with most of the industry, who sell fear). Second, we need to decide what we expand into because the core business has limits to growth. The new activity we've already launched is good. It could develop, but without acquisition only at a steady rate. It is people dependent. The other option is buying so we ended the evening with brain storms on what to do if opportunities arose.
I'm with Warren Buffet on this. A recession is a time to buy. We need to plan for it.
I might have been tired by the weekend, but I'm excited.
And by Friday night nothing had come back from the due diligence of any concern.
I'm hoping we'll be into contracts soon. That's when I'm expecting spanners to start flying.
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August 7 - End of day one of the due diligence and the auditors gave me feedback.
The concerns have been tax, tax , tax and nit-picking on the audit. Worries about contingent risk on employees is considerable, comment on the sales forecast in the financial projections almost non-existent.
Wasn't it always this way? Accountants can spot detail from a mile, just don't ask them to find an elephant.
More important, Hitchin has closed his first deal. I'm really pleased.
And the real due diligence is tomorrow. I'm going though my projections with the Chair and main investor. That's the real grilling.
And even so there's one big question neither I or anyone else can answer, and that's what impact is the state of the economy going to have on us? All I do know is that fuel costs are going to be higher, and the need to innovate to cut site visits to a minimum grows by the day.
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August 6 – I had to spend time on the business today. I am beginning to find this buyout process immensely destructive of my ability to manage the business I'm trying to buy. And, like it or not, delegation is OK, but the CEO must have some role in the company which has appointed them.
So today I had to juggle demands from the auditors (where the audit manager who has been in charge of our case ever since we went to the firm is on holiday, just to contemplate matters) whilst then dashing for a meeting with a major client to make sure Hitchin could close his first significant deal for us, then getting back to chair an IT meeting (because I think IT strategy is pretty fundamental to what we do) and getting a briefing from #1 before she goes on holiday with an, as yet, unclosed set of management accounts which may be quite important to the deal.
All of this is possible, but only just. I don't for one minute regret starting this process, but I can tell you, I'm already looking forward to finishing it. There is only so much one person can do, and I have a very strong impression that I will be at that limit for some time to come.
Oh, and just in case you're interested, we decided to adopt ODF format for all word processed documents in future: we’re having real problems with .doc compatibility in and out of the organisation now. We’re also seeking to work round Adobe because it’s such a pain. Foxit seems to do the job so much better.
Both are important: if you’re seeking to work on an electronic basis having the capacity to open what you get without hassle is pretty important, and Microsoft and Adobe seem to be loosing the plot here as far as we’re concerned.
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August 5 - I made a decision last night: if I'm involved in buying this company we will have to change auditor. There's nothing wrong with ours if you want a good audit, but it's very clear this 'due diligence' stuff has put them way out of their depth.
I thought I was virtually delivering the files last evening for them to hold, with their meeting room being used as the venue for their inspection. But instead I had to go through a long hand holding exercise virtually telling them what the whole process involved. I was there until far too late.
I gather they are laying their audit files open on the table as well. I've no problem with that because I know that the accounts are true and fair. But let's be honest, I recall from way back that there were procedures for doing this. I hope they've followed them.
It's my suspicion that if we buy we'll look to grow, even in the world as it is becoming. We'll need a firm up to that job. I'm not sure these people are.
Still, that's all part of the learning process I'm going through, rather rapidly.
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August 4 - Back to work with a resounding bump.
Saw the Chair yesterday for a progress report.
Dealt with all the holiday reports back from managers this morning. Nothing to alarm me. Lots to encourage, including the progress of Hitchin who seems well into the job now.
My PA has done miracles with my mail box: what she decided I didn't need to see had been shuffled into a secondary inbox and the major ones as she saw them needing attention had been highlighted. How much is that worth, especially as she seems to have got this near 100% right?
Then this afternoon back to due diligence and later today I have a meeting with the auditors who are to take over the files so they can be inspected later this week at their offices by those acting for the investors. The logistics of this are fun!
#1 has also done an amazing job: the files are very good indeed. She'll deserve a break when she goes away at the end of the week.
And in all this the shareholders have been remarkably quiet. But we're in the phoney stage right now when there's lots of paperwork and little for them to worry about. Wait until the contracts begin to roll. Worse still, wait until they begin to understand that there will be things like warranties to sign. Then the fun will begin.
But right now if you'll excuse me, I've got one heck of a lot to do.
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For previous installments of the CEO's Diary, see: