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CEO's Diary: Waiting for fireworks
The offer to the ex-Mrs CEO is almost ready to go
June 30 – If my job as CEO is meant to fill five days a week then adding a buy-out to the job spec has turned into a seven-day occupation.
This weekend was spent drafting a letter to the ex-Mrs CEO outlining the terms of the offer that I thought we could make to her and her ex-spouse. I know some dimensions of this are still unknown and we have still spent nothing on tax advice, but given the chance of rejection we do not think it's worth going overboard on that as yet.
Of course, the deal is not just mine. So on Sunday night I had a meet with the Chair and ran through the final version. There is no difference in essence from what we offered the ex-CEO, except the crucial point that she alone might in this scenario be a director, with a strong hint built in that this is the option that we would prefer.
The offer might not have changed, but getting these things right takes a massive amount of work. We do not want to be held hostage to fortune for a mistake now, and believe that any tax change can only improve the deal.
The job being done, today the Chair is running it past the investors to make sure they are happy and once that is resolved then we put it to her.
Wait for fireworks.
* * *
June 27 - I needed a clear head to decide how to take this forward. I hadn't got one. The Chair was not available. Heck, it can wait until Monday.
* * *
June 26 – I had been struggling all week with finding the idea that could make the idea of a BIMBO attractive to the ex-Mrs CEO. It dawned on me this morning when taking the dog for a walk (that dog has a lot to answer for, if she but knew it).
My suggestion to the ex-CEO made last Saturday had within it the proposal that he and his ex-spouse should both be directors under the new arrangement. But the obvious solution is that only one of them be a director, to protect their combined interest, and that the sole director should be the ex-Mrs CEO.
This would deliver to her the ‘knock out punch’ she had wanted when I sacked her former spouse several years back, only to deliver the same fate to her immediately afterwards. Finally she would have the ‘one up’ on him she has always wanted.
Of course it would require his agreement. I bounced it off the Chair. We agreed we should offer him some consulting if that happened (whether she knew or not would be another issue we would have to eventually face) but right now his agreement would be a real test of whether he really wants this deal or not.
The Chair thought it worth a whirl.
I rang the ex-CEO with the idea. He roared with laughter. He loved it! He actually thought it hilariously funny. He liked the idea of some consulting but his reaction was emphatic: it was a plan we should put to her. He reckoned the chance of success would, if presented in this way, be very high indeed.
So, now it’s time to tackle her.
* * *
June 25 - Dealing with business issues is hard when your mind is on other things.
Today though was spent with the new manager of the Eastern division. I'm aware that some have already expressed confusion about names used here, not least because East now manages the Western division and we already have someone called Newc, meaning New is no longer on the list of available names. So I'll simply call this new chap by the place where he lives. Hitchin will have to do.
And it's pertinent as that is where we met since he remains, officially, on gardening leave. This, we decided, did not preclude him having an induction session with me.
It's amazing how much knowledge needs to be transferred to a new person. Ignore for a minute all the systems they have to learn: others can teach him those. I wanted to brief him on people and customers.
It's my belief that this is my duty. I know others who disagree. Indeed, I remember a time long ago in my career (and when still in practice) when I joined a firm and shared an office with a chap. It took me more than six months to discover he was the senior partner’s son-in-law and therefore enjoyed a preferment that would never be available to me. I left soon after.
So my briefings are 'warts and all'. It's true, for example, that East and #1 only had a fling, and that they appear to have a perfectly cordial and workable relationship despite it. But he needs to know. I'd expect him to be livid if he found out later.
But there were a lot of people to introduce. And giving him the low down on just his five largest customers was enough to fill the rest of the day.
Was the day worthwhile? Oh yes. I learned more about Hitchin. And I liked what I learned. He combines several things I value. One is keen commercial sense. The second is a capacity to listen. The third is an ability to appraise the information he has been given, demonstrate that he has understood and synthesised the key elements to formulate a plan of action. Last there were clear signs of empathy.
If he can deliver on all those he will go far.
* * *
June 24 - Back in limbo land.
But I have had the first, very direct, question here about what is going on. Amazingly this was not from one of the senior management team but was instead from my PA.
Her question was simple, and was why have I been so distracted of late?
Without knowing whether there is any real prospect of a deal as yet I do not feel able to tell her so I had simply to say that there were a lot of pressing issues outside the company that were causing me quite a lot of concern at the moment, but because of their personal nature I could not share them with her at least right now. I just had to ask for further indulgence.
I don't really like having to mislead people but right now I have no choice. It is one of the many things that are already making this a stressful experience, and I know it can only get worse.
But I started this, and I know full well that I will now have to finish it, whatever happens.
* * *
June 23 - The Chair and I met the ex- CEO for dinner, as arranged. He brought his partner with him. She has usually been referred to as a 'girlfriend' in the past, but it's hard to see why. The description has, I admit, coloured my expectation, for we had not met before. In fact she was not at all the person I expected. She was certainly attractive, but not in the way I had (perhaps stereotypically) presumed, and was instead a mature, likeable, charming women of, I guess, about 40. She also had a lot of common sense. And for those who presume I'll follow that up with the question ' why's she with him then?', you're wrong: he's not so bad these days. Perhaps she reflects the fact that he too has grown up. Maybe she's made him grow up.
Either way, dinner went better than expected. We got to business quickly. A little to my surprise I led the talking: I somehow thought the Chair would. Part way through it dawned on me that would have been inappropriate. It is me who will be leading any team that takes over this company.
I was quite honest with the ex-CEO, the details of all we wanted to do had yet to be worked through, but the essence is that I want to lead a BIMBO. Yes, you've got it, a 'buy in management buy out'.
The essence is simple. First we want to strip the company of cash and pay it to the shareholders. Then the new management team want to do three things. The first is to subscribe for new equity at the same time as the existing equity of the shareholders is split in two: part they sell to the new team, which with the capital they will subscribe for will bring their holding to 60% of the capital. The rest, which is the subject of the third part of the deal, will be converted into redeemable shares to be paid off over the next five years, with penalty for late redemption and a ratchet to allow conversion back into ordinary equity and to increase the ownership ratio if there is a total failure to buy out. Whilst this is going on the shareholders can be directors, but the existing shareholder agreement is scrapped and their pay is cut. Their main return, which will be much reduced, will come from dividends on their remaining shares until redemption takes place. They have priority on these but they have no right of veto on management issues, and so long as their rights to redemption of their shares are not prejudiced will not be able to act in concert to block special resolutions either.
We think this a fair mix between cash now and cash in the future, and with suitable protection if that cash is not paid. It's not bad in tax terms (and for those who ask, I'm told that because of our cash pile they'd have had real problems with getting business rates of CGT before 5 April, so they may actually be better off now than then).
The plus is, of course, money now. Quite a lot of it. The value we'll pay though will be based on the assumption of future profits based on gearing that will exist after the deal, not current profit with no gearing. This took ages to explain! And there will not be that long before more cash at low tax rates will be paid out, with the prospect of an exit within five years.
I found myself selling the deal (and even the tax parts of it, where I was winging it a bit) with much more confidence than I expected. I'll have to check if I'm right later. For now it worked.
There was much discussion, some quite sensible issues coming from the ex-CEO's partner, relating to protection for future pay out in particular, which I think we can give (as far as anything is certain). But we could tell the ex-CEO liked it when discussion moved, as we'd rather hoped it would, to how his ex-spouse can be persuaded that this is in the best interest of her as well.
The ex-CEO was dismissive a first, but we said he had to be central to this. He was the obstacle she wanted to hurt, but also the only person with the possibility of breaking through to her.
It was his partner who had the idea. The shareholder's children are both of the age where first houses are on the agenda and a lot of cash is needed. Suppose, she said, they could be used as the pawn? What if the ex-CEO said he'd be willing to help with deposits if the deal went through? Would this provide the required leverage?
No one knew, least of all me. But, it was a good night's work. I'll wait for feed back from him, but I think he's bought the idea. Now it's time to work out the approach to her.
I think it has to follow, and not just from her former spouse. But I want to be sure he's on side before going any further. As usual, I anticipate delay, but I'm already reconciled to this being a long and stressful game. It will help when I can really open out to the staff about what is happening.
* * *
June 20 – The ex-CEO called back. I knew he would.
He was cautious. I wasn't surprised. He wanted to know why the Chair and I wanted to meet him, and not the shareholders. Because, I said, we needed to take him into our confidence in a way that would not be possible with his former spouse present.
His suspicion was not allayed. So I had to tell him we weren't going to discuss the non-exec issue any more and that to a very large degree that was now a matter for history, as his ex-wife had said during the week. What we wanted to do was buy the company, or at least most of it, and we felt we had the means to do so.
I think I could feel his recoil over the phone. It was his turn to say he'd think about it, but I was not in the mood to give him time. I want to get things rolling before the summer close down is upon us (and it's my guess that we'll get nowhere on any deal during August) so I asked for a weekend meeting, suggested a restaurant and a time (don't worry, I'd booked the table in advance) and asked if was on to meet.
He said yes. I said he should bring someone with him. He'll need to think about what we've got to say, and that will be easier if he has someone he trusts who has also heard it.
So it's an exciting date I have on Saturday night. But I admit, like a teenager anticipating a first date, I can hardly wait.
* * *
June 19 - I slept on it. The Chair slept on it. We both agreed. I called the ex-CEO. He didn't answer. But I've left a message. It's short and simple. I said 'can we meet to put an idea to you?'
I have no doubt he'll say yes.
I do not know if he has the courage to be a part of this.
But I've done my sums: there's a lot of cash in this for him if all goes well.
I think that's enough. Rather, I hope that's enough.
* * *
June 18 - Do you want the good news? It is that Newc landed another really good order for the new division today.
Now the bad news? That is the response that I got from the ex-Mrs CEO's solicitor (not a man with whom I can claim to have a good relationship at the best of times). This says that she had considered my letter and was treating it as a rejection of the offer the shareholders had made. In her opinion there was no other option on the table and as far as she was concerned the matter was closed and she did not, therefore, have any desire to meet.
It is an interesting negotiating style. The words 'take it or leave it' come to mind.
One of the advantages of being CEO is that it is always possible to create the pretext for leaving for a meeting. On this occasion it took very little time for me to set up a discussion with the Chair, which I thought best done face-to-face.
The outcome is another night when we think it best to sleep on things, but assuming we are of similar mind tomorrow then we are planning to call a meeting with the ex-CEO and tell him of our plans. If he sees merit in them (and we think he will because cash is king in his world) then this matter will be far from closed.
But there will always remain the possibility that she will just say no. I think that would be stupid of her, but she would be absolutely within her rights to do so.
And yet, for reasons I do not wholly understand, I think the time for a confrontation has come. I can either spend the rest of my career idling away my time here suffering increasing frustration as constraint is placed upon what I can do, or decide that I am plenty young enough to embrace a lot more change as yet.
For me that's not really a choice. It's a fait accompli.
* * *
June 17 – As usual in this game there has been no reaction to what I sent, bar messages of support from the Chair.
And indication from the Angel team that they want any deal to push the existing shareholders sub 40%, at least.
That’s enough fro now. Today posed different issues. It was management meeting day but East called in to see me first thing. His message was simple: his marriage was over. This was no big surprise after the events of last December. But as with so much in life nothing appears to have been as it seemed.
My immediate reaction to the news was concern that they had only just sold the house for East (and I’m still amazed they even managed a sale in this market). But, as I also knew, they had not bought and it now becomes clear there was reason for this.
It was not East who left, it was his wife. Freed of the house and the tie that went with it she announced she would not move with East, a move she initially agreed to, but has instead moved in with a ‘friend’. East suspects, and apparently has done for a long time that this person is more than a ‘friend’. What happened late last year was part of a process of a marriage falling apart, not just an incident in isolation.
He doesn’t seem too upset. More a man now resigned to the inevitable. But I couldn’t resist it, and didn’t, although I probably should have done. I asked if this meant a revival of a relationship with #1. Thankfully he dismissed that immediately. He’s adamant that was just a fling.
I hope so. Office relationships things make life darned difficult for everyone else.
As for the management meeting: they just accepted my update that things are in progress.
And the good news is the first quarter is looking better than I’d dare expect. That could be useful right now.
* * *
June 16 - I was just too tired to write on Friday. I can't be the only person who gets to that state by the end of the week.
The Chair and I met to discuss the response from the shareholders. And we decided to sleep on it. It felt so crass, so dispiriting that it was hard to be positive.
My wife was positive though. She and I managed time between shuffling children between venues over the weekend to discuss the issue. It seemed obvious that the tone of what was being said was petty, vindictive, and a punishment for initiative. It's obvious where that came from. It's the same way the ex-Mrs CEO treats almost everyone she seems to know.
But it seems to be reaching a point now where the attempt to keep her impact out of the company, which began with the departure of her and her ex-spouse from management relatively soon after I arrived, has now run its course. The managers are going to know I've been rebuffed. They will know that an opportunity for development has been denied. They will know that I am being treated absurdly and spitefully: the new bonus arrangements she suggests will be known to them and they'd have to know why I’d been denied mine.
This also, and rather usefully, gives me the leverage to address this. So I hit the keyboard, something I am prone to do in times of stress. This is what I wrote:
Dear X and Y
Thank you for communicating your decision with regard to my desire to become a non-executive director of Z Limited.
You will not be surprised to hear that I am disappointed by our response. It would appear to me that a deal has been offered in which there are no winners whatever outcome is chosen, but many potential losers.
As it stands I could not accept the offer you have made. There are two reasons. The first is that I believe the terms that you seek to impose on Z Limited are unworkable. If, as I would presume likely, they consult a lawyer on the proposed contract I am sure their advice would be unambiguous. The potential risk to Z limited from this deal is so great that any potential benefit would be negated and I am sure it could not proceed.
Second, I think it would be exceptionally difficult to explain to the senior management team of the company that I have lost my entitlement to my entire bonus from the company which I will still serve the vast majority of the time because I have agreed to work elsewhere, at no cost to it for a limited time each week. This does appear a draconian measure that would seem to penalise innovation, the desire to learn and a willingness to explore and bring back new ideas to the company when this is exactly the sort of thing I would want them to do.
For both reasons I cannot endorse the deal.
But I also admit I have some problems in thinking that this is the end of the matter. Your letter does appear indicative of an impasse we have reached. It seems that our capacity to go forward is now being curtailed. We are a company that has done very well over the last few years, but you have not seen the benefit of that. It is a company I'd like to see go further in the future, but it would seem my attempts at innovation are now being rebuffed. It is a company that is sitting on a pile of cash, but no one seems to know why, and what it is to be used for. That creates operational inefficiencies that will, almost inevitably over time show themselves in reduced performance and a loss of edge. I do not believe anyone can eventually motivate a management team to produce peak performance when their environment is comfortable. There is the risk of that in this company.
I would regret it if we lost the edge we now have. I want the company to go forward for its sake, the sake of those who work for it, and for your sake.
I am not sure for how long this will be possible if the current constraints remain in place. I would, therefore, like opportunity to now meet with you to discuss how the organisational management of the company can be changed to benefit rather than hinder all involved.
Might you confirm a suitable time when we might do this?
Yours etc.
I banged it past the Chair. It was courteous to do so. It got sent.
Now let's get on with the week.
* * *
June 12 - Well, progress of sorts. The ex-CEO delivered the minute of the meeting of the shareholders that did, apparently, represent their joint response to my request to be a non-exec director, which was the trigger for the whole current scenario in which I find myself, and of which the shareholders remain of course almost wholly unaware.
As we'd expected the consent for me to be a non-exec has been given. However, the conditions are absurd. First I have to forego bonuses as it is not now clear that I will be dedicating my time and efforts to the business wholeheartedly and as such any profit share must go to those who are doing so. Second, I and the company I wish to engage with must sign new confidentiality agreements which pose little additional burden on me but which make it virtually impossible for the company to agree. After all, if I chose to say something, how are they to know if it comes from within this company, a former employer of mine, something I've read, or is just blue-sky thinking. But if the shareholders think there might be any similarities (even if it does not give rise to loss to their company) between what the company I might be a non-exec of and what this company does then they can sue for any resulting profit if the terms of their deal are to be accepted. That's absurd.
There is no mention of any other change in the management arrangements of the company.
At first I admit my heart sank. Then I felt angry at the lack of trust shown in me. When all is said and done I have helped make these people a great deal of money over the last few years for which I have been reasonably rewarded but to which they have only contributed grief. Then I calmed down, had a coffee and called the Chair. We'll be meeting tonight. I mailed him a copy to look at. I know he thinks it's ludicrous.
I'm pretty sure already what his response will be and that's that this suggests that the company is becoming unmanageable as it stands and that the impasse has to be broken.
I know all the risks. They could sack me. Of course they could find someone else to run here. Of course some of the management team would stay for a while (although I suspect they'd all see the writing on the wall). And life would, of course go on.
But I suspect there are better options out there. We have to find them, for us, for the shareholders and for the people who work here. I think it's worth the risk.
* * *
June 11 - Still no feedback from the shareholders, bar the ex-CEO saying we should not worry. He thinks we're OK. That does worry me! His is not a judgment I rely on.
The meeting with the 'Angel' behind the investing team was much more interesting. He's about my age, has the grey hair to prove it, and has been around entrepreneurial companies. He's done all the usual IT, dot.com, and other stuff, but in amongst the latter is some real business that looks like he'll have an appreciation for what we do.
He's known the Chair for a decade. They have worked together. He is one of just three investors planning to back a buy-in, but will be the one I deal with.
I liked him, instantly. He exuded confidence, common sense, and ability, but with no hint of arrogance. It's a rare combination.
He spent a lot of time questioning me. I felt a bit like I was applying for my own job. But not once did he ask a daft question. The style he used was direct, and penetrating, but fair. He listened. In fact I'd say he listened well.
He'll do. More than that, he could add value on the board. His relationship with the Chair is clearly good, amicable and respectful. I'm won over.
And he has, in response to my questioning (as I'm putting my neck on the line here) said he is happy to submit information to prove he has the facilities to see this deal through. I think that's pretty important. He might be the Chair's friend, but I also want to have a feel for the colour of his money. If anything he seemed pleased I'd asked.
I suspect as a result that all will be OK. I think I passed my interview, and he's passed his.
Except we're not shareholders yet, and I have no idea if we will be.
* * *
June 10 - Some new computer kit came up for approval today.
I sent the approval back with the request that financing options be considered.
#1 was aghast. "Why", she asked "given our cash pile?"
I had to explain I thought that the time was coming when the shareholders might want to lay their hands on it and as a result we needed to at least think alternatives. Could she find some options?
Actually, I think she was quite happy to have an issue thrown at her.
Tonight I'm meeting the representative of the investors the Chair has identified.
As yet we don't know the outcome of yesterday's meeting between the ex-CEO and his former spouse. We do know it took place. He confirmed that, but said he was waiting for minutes before discussing it, and her accountant was preparing them. I think he's probably being wise. Knowing her the minutes might not reflect what was discussed.
* * *
June 9 - Met with East and Newc today because they wanted to know what was happening.
I had to tell them I did not know, and that genuinely it was the case that no progress had been made that I know of.
It was not enough for them. 'What's going to happen to resolve this?', they asked, reasonably.
I assured them that the Chair and I were working on options but until we knew more there was little I could say.
'Will you try a buy-out?', they asked.
'Why?', I responded, 'would you support one?'
The answer was unambiguous: 'Yes'.
'Thanks', I said 'assume you'll hear as soon as I know that it's on the cards.'
But to be candid, right now I can't say it is.
Nothing is. I think they sensed the frustration. So we got back to work.
* * *
June 6 (again) – The ex-CEO called. He says he’s meeting his ex-wife and her accountant on Monday. He has no idea why as yet, but promises he’ll try to break the impasse.
More encouraging, he asked me if I could give him an estimate of how much cash the company could distribute to him if we were to restructure the way we worked. It’s clear he has tuned into the messages we gave him on Wednesday. I promised him I’d think about it and get back to him. No point in saying I already knew. That would have been indecently hasty.
* * *
June 6 – I’ve already realised that if this process of buying out this company is going to happen it’s going to be a real rollercoaster. To put it another way, emotional turmoil is going to happen. The Chair, who has done this sort of thing before (and who will, in answer to those who have asked, be an active participant in any deal, with my warm encouragement) says that any deal like this is like getting divorced, moving house and suffering a bereavement all at the same time, not least because before it is over I’ll hate our lawyers, as seems to happen in all three of the aforementioned cases as well.
Well, I can’t agree so far but after the ex-Mrs CEO’s show stopping non-arrival on Wednesday yesterday became a day where it was mighty hard to concentrate, especially as I have, as yet to share what I am hoping to do with the senior management team.
So I tried to concentrate on routine issues, the run of the mill stuff, and keeping people happy. I’m not sure I really managed and my PA (who is now confident enough to take me to task) asked me what was going on, and could she do anything about it, and I just had to say that right now everything was OK. She didn’t believe me.
And neither the Chair or I heard anything from either shareholder. It’s welcome to limbo!
* * *
June 5 - You can plan for almost everything you consider possible, and still get it wrong.
At 4pm yesterday the Chair, the ex-CEO and I were all in the designated room at the designated hotel to be used for our meeting when a note was brought from reception saying that the ex-Mrs CEO would not be able to make the meeting. She believed there were key issues to resolve before it should take place.
We were staggered. The ex-CEO was ballistic for a bit (which is not uncommon in his case, especially when his ex-wife is involved). They had apparently met on Tuesday to resolve what they were going to say and he thought there was agreement on all key issues.
The Chair and I were amazed that she had not even had the courage to call any of us. The Chair tried to call her, but with no success. She clearly had no intention of talking. So we were left with what could have been a non-event.
The Chair had the sense to take us to the bar. A change of venue helped. The ex-CEO probably had too much to drink. But he calmed down. And in doing so he exposed his vulnerability. He clearly wants this impasse resolved. I can see his point. He's being denied funds in a company he created, and any attempt to sell would also be blocked. I admit to feeling very slightly guilty about that (but only slightly) and all because his ex-wife to whom he gave 50% of the show uses that to block all moves he tries to make. At the same time she has now pretty much poisoned their children against him as well. You can see whey he's fed up.
What to do? Well, the Chair and I seemed, implicitly, to agree he should be allowed to talk, but we were quite willing to nudge him in the direction we wanted to go. We stressed, he's the only person who can break the impasse. If she refuses to agree to meetings on any issue which is key almost nothing will happen.
In my case it was hard to remind myself after the discussions that the Chair and I have been having that all this meeting was supposed to address was the issue of me taking a non-exec appointment. But in time the Chair did get the ex-CEO to address that. As far as the ex-CEO was aware this had been agreed between him and his former wife, and I was apparently to be required to forego part of my bonuses as I would not have earned them in the company due to my effort being elsewhere, but otherwise I could do it. I have to admit, as far as I was concerned that was an immediate and plausible basis for negotiation. But now the ex-CEO had no idea whether she still intends to honour this or not, and I can only presume that she doesn't.
As he calmed down though he also got angrier in a perverse sort of way, or at least he focussed his anger onto possible action and in the end when he decided we could have a turn to speak (he's the sort of guy who takes a long time to notice other's might have an opinion, let alone one worth hearing) he began to ask us what we would do.
Acting together the Chair and I played innocent. It was as if we'd never thought about it, but the discussions of the past few days were, in part, laid out to the ex-CEO. But it was always done as 'if I was you I'd, etc.'. He has to believe any initiative is his, and for that reason the Chair in his own non-exec role was key. He could say 'in my experience situations like this are resolved by, etc.'. And he discussed MBOs, MBIs, and all related issues.
I can't be sure, but by the time we broke up I think the idea of an MBI was firmly implanted in the ex-CEO's mind. What we want is that he now firstly buys into this and second sells it to the ex-Mrs CEO. Since it would reduce his power in the company she may just go along with that. We hope.
It's the best outcome we could get from a disappointing afternoon.
* * *
June 3 (well, June 4 by the time this gets posted) - I've spent ages working out whether the bid we want to make is realistic.
I'll give you this summary. We're a small medium sized company (if that makes sense!). We're profitable. We have excess cash right now which we intend to distribute. What is more, that excess cash has been used as easy finance in the enterprise so we're very under geared.
To do a buy out, or more likely a buy in, I need to strip cash out of this place to the shareholders. My thinking is this. First, we have debt. It is derived from sales of product and for services supplied (about half) and maintenance contracts (much in advance). The payment record is pretty good, but some of maintenance is a bit slow, precisely because it is in advance. It still pays to do this. There is no charge on this debt. The bad debt record is good: we're tough. The customer profile is good. There are some big players, but only one over 10%. And that only just, and not always.
We have a mix of assets ranging from leasehold improvements (reasonably long leases), quite a lot of vans owned outright (although we do lease some in the North in particular where we use contract hire arrangements for convenience of the service element we buy as part of the package), the usual IT and office kit and, most especially, kit we supply to customers which is hired to them. This is specialist, but has a residual value in the market.
Stock an WIP is a mix: I can't see anyone financing that.
So, what do I want? That's the question. My research suggests I can do several things. Invoice financing is clearly possible, but is the fact that some is for services in advance an issue? Will I have to split the ledger?
I guess I can sell and lease back vans and maybe a bundle of IT. Is anything else possible?
Can I get a bank facility for normal trading variations on what is left? Especially if I get a capital injection, as planned?
Will I need to corporate restructure to do this? For example, will some debt need to be split out from the rest? That might be possible to offer different security on sales and maintenance invoicing, for example.
Should we in future use third party finance for kit effectively leased to customers? could we sale and leaseback that now?
Lots of issues.
Any comments gratefully received.
Now, I must think about the shareholders meeting, late today.
* * *
June 2 - It's normal for a holiday to fade into memory soon after it is over. In this case it was hard to forget work and the memory of holiday is of some nights in another bed, but little else. I admit my attention was elsewhere.
Still, the time was well used. My wife and I agreed it is worth trying to engage with a potential buy out of my employer, and we have agreed between us a sensible limit of the risk we are willing to take to achieve that objective. Given that this seems to me to be an essential pre-requisite of all that might follow I consider this time extraordinarily well spent, even if the children were not convinced that our desire to ignore them and talk was indication of our commitment to their entertainment.
As a result though I was ready to meet the Chair on Saturday. I suspect that this might be the start of a trend over the next few months: what was intended to be a couple of hours discussion became something altogether longer. That is, however, part of the commitment my wife and I have agreed.
What the Chair and I agreed was relatively simple. We will listen to the shareholders at the meeting. If they agree to the request that has been made that I be a non-exec elsewhere then we say thank you and leave it at that, for now.
If they attach conditions we note them. If the only condition is an increase in the dividend we can hardly argue, but it will still provide us with an opening. That opening will be exploited, but not explicitly at first. All we will do is suggest that in our opinion the constraints the shareholder's agreement has placed on the company has been to their detriment to date, given its success and that we feel that it is the time to review the whole issue of how the company is managed, how they want to benefit from it, and what its future might be more openly, and wouldn't it be wise to follow up this meeting with another where these issues can be aired? Of course the answer might be a flat no. But if it is there's nothing to stop us coming back to it.
The third option is that the arrangements are that more money is drawn by them and onerous obligations are placed on me, or that other employment arrangements are changed. I'll politely decline that at this stage and say this is really not an option when no harm will come to the company from what is being suggested. But I will also make clear that I think such restrictions will in fact impact to the detriment of the company in failing to allow innovation in ideas, progress key members of staff and encourage depth of talent to ensure opportunities for succession exist. So that sort of challenge will immediately be thrown back at them.
What we won't do is put any buy out plan on the table straight away. How and when that happens will depend on the reaction we get, and the chance that gives in a follow up meeting, which is inevitable, we think.
But we did discuss a buy out. My preferred plan is simple. I'd like to do three things. I'd like to have opportunity to acquire a stake in the company, and I'd like key staff to have that chance too. I'd like to reduce the shareholder's involvement by having a share buy back deal, or significant distribution now, but I'd like them to keep the rump of their value after that, but with preferential rights to dividend but reduced management involvement, and I'd like to introduce new capital and management to help really drive things forward.
The Chair believes this is viable as a working plan, and we spent hours working out how (bar tax issues, although I know there will be some) but in terms of commitment from me (and him) I think we can at least try this.
In the back of my mind I have also developed one other alternative during the course of my holiday. I admit that for the first time since I got here the option of leaving has occurred to me, and that it's one I could face if this does not work. Being able to walk away seems key to this plan.
But I know that for better or worse the Chair has set us on a high risk strategy. Now it's time to see how it pans out.
For previous installments of the CEO's Diary, see:
May 2008
April 2008
March 2008
February 2008
January 2008
December 2007
November 2007
October 2007
September 2007
August 2007
July 2007
June 2007
May 2007
April 2007
March 2007
February 2007
January 2007
December 2006
November 2006
October 2006
September 2006
August 2006
July 2006
June 2006
May 2006
April 2006
March 2006
February 2006
January 2006
December 2005
November 2005
October 2005
September 2005
August 2005
July 2005
June 2005
May 2005
April 2005
March 2005
February 2005
January 2005
December 2004
November 2004
October 2004
September 2004
August 2004
July 2004
June 2004
May 2004
April 2004
March 2004
February 2004
January 2004
December 2003
November 2003
October 2003
Number of comments: 17
AccountingWEB.co.uk 30-Jun-2008
Categories: Business Features, CEO's Diary
Times read: 19678
You say that any tax change can only improve the deal, but bear in mind that the shares you and your fellow-workers acquire will be employment related securities. That of itself is not a problem, but it does mean you need to make sure the BIMBO structure doesn't fall foul of the ITEPA 2003 Part 7 rules which could convert any capital gain into employment income. On the face of it, what you propose looks OK,because the only potential ratchet would effectively dilute your shares, but you might want to look at the HMRC manual paragraph here:
http://www.hmrc.gov.uk/manuals/ersmmanual/ersm90500.htm
and at the Memorandum of Understanding it references. You don't want to agree something in principle with Mrs ex-CEO and then have to go back and ask for changes which are needed to improve your tax position rather than hers.
One still to be resolved.
It's one step at a time.
Wow. You really HAVE got a cash pile then!
If the BATR conditions aren't going to be met for the last year of ownership, then they aren't going to get entrepreneur relief either. But 20% of the assets even when you include a valuation for goodwill? I f so, I can see why you want to use it to reduce the shareholders' stake...
your contract with the company explicity excludes you from undertaking other work on your own account?
Of the three scenarios/outcomes set out in the posts below, the one that I think entirely unlikely (and I'll eat my hat if I'm wrong) is Alistair's - that the ex-CEO will be reinstalled. Not without Mrs ex-CEO's approval, because of the shareholders' agreement, and that won't happen.
The suggestion that the two of them still have feelings for one another - well, feelings of mutual loathing perhaps... I think Marion has it right - the problem is that in order to make this work you have to get Mrs ex-CEO's agreement, and what really floats her boat is doing Mr ex-CEO down.
It's a shame this didn't blow up before 5 April, because you could then have used the argument that business asset taper relief was going to be taken away. Depending on how much money you are aiming on paying them for their shares, remember that they will need to remain employees or officers of the company if they do not use up all their entrepreneur relief in any deal you agree, so that they can get it on a subsequent disposal of their remaining shares.
The problem with the whole situation is the logjam of the 50/50 in the shareholder agreement. You can talk to the ex-CEO until you're blue in the face but it's not his agreement that you need in order to make any progress, but ex-Mrs CEO.
As you say, cash is king for the ex-CEO and it must seem a no-brainer from his point of view. You can probably create a deal with the Angels that effectively maintains his dividend and gives him a pile of cash. But to do that gives him what he wants, which is precisely what the ex-Mrs CEO doesn't want him to have.
You have to consider this from her point of view. In a way, it's not a meeting between you, the Chair and the ex-CEO, but one that the two of you take with her ladyship. I suspect what would float her boat would be something whereby she got one over on the ex-CEO and it's hard to work out how you could achieve that within a 50/50 deal. You really need to work harder at finding out what she wants and that's tricky without the intervention of her accountant and solicitor.
Obviously the shareholder agreement would dictate equal payments but how about some complementary deal which hires her skills for the company? It needn't be something that's substantial, or even long-standing but something that enables her to go tee-hee behind her ex's back.
No hope of bumping into her in the street? Is there anyone who might act as intermediary within the company still? And I'm guessing her relationship with the Chair than it is with you. Did the current Mrs-CEO form anything like a relationship with her? I'm clutching at straws here...
As Mr and Mrs ex-CEO are still bickering, I think that the best way forward for the company is for them to leave completely. They obviously still have feelings for each other, especially Mrs ex-CEO for Mr ex-CEO.
If they leave, they will no longer have to meet to discuss the company, and can this will help them learn to recover from the divorce. Do they have any children? They are surely in the worst position.
Also they will each have a pile of money to spend as each of them wishes; they will no longer have to get permission from the other to draw money from the company.
The company will benefit, because it will no longer be affected by their personal dispute.
I think that you should strive to remove them completely from the company; without having installments to pay for the shares, or any form of loan or debenture from them. If they each have a minority stake or are owed money by you or other people, then one is likely to insist on an AGM, and find excuses to discuss things with you; the company will still have to deal with their personal dispute.
1. If you do resign, rather than taking you back with modified conditions, you might find the shareholders agree that Ex-CEO stands in the gap and you stay resigned. It is clear they don't understand how this will add to your depth and ability to manage the company in their interest.
2. Business angels. They are buying into the man (you) and your team as much as they are buying into the company. Would they support you buying your way into the other company instead of you being a non-exec there? Is the owner there is somewhat older - you could become his retirement plan.
3. If you stay where you are - Don't buy in. Buy them out. Or if you do buy in, reduce their interests to a minority stake. You want to make sure you (and your team who I am sure will also want a stake) rule when the existing shareholders continuing foolishness leads to future conflict - which I am sure it will.
Following Dave Cameron's post below, why not resign and then seek re-appointment on condition that you be allowed freedom to act as a non-exec elsewhere for 42 days per annum!
In support of your principled stand I would promise not to apply for your job (which I would have no chance of getting) thereby showing (at no cost to myself) that I also am a highly principled accountant.
It's about time the general public saw what a jolly decent and principled bunch we accountants are (apart of course from those who belong to other professional bodies).
Only kidding!
I do wonder whether the shareholders might be plotting their own sale of the business, or part of it!
Hi CEO,
We're looking for new candidates, your political skills are astounding!!
Please contact me at conservatives.org if you want a new job?
Best of luck with the MBO
Dave Cameron
"The payment record is pretty good, but some of maintenance is a bit slow, precisely because it is in advance. It still pays to do this. There is no charge on this debt. "
There is always opportunity cost, though if you're awash with cash anyway then this may not be an issue.
...and carry on working with these people, in these circumstances?
You're either very brave or very, err, brave.
You could also look at deferring their payment over a number of months rather than payment on the day or alternatively base the deal on an earn-out basis i.e. base the goodwill of the company on actual 1/2 yearly / annual profits.
You have available:
Cash
Invoice discounting
Stock funding - it is possible
Unsecured bank borrowing - still available for MBOs
Deferred payment terms to the vendors
Management equity subscription
VC equity - if you really need it
Why not buyout the shareholders completely?
I used to be FD of a company that used invoice discounting. We sold a mix of goods and service. The service was billed monthly in advance. The discounter, HSBC, would not advance against the service invoices until the end of the month they related to, ie the service had been provided.
On a more general point if you have a good track record of cash generation and you can confidently project that into the future then one of the less agressive VC outfits would be interested with out you needing to be too concerned about the pornability of your assets.
Getting asset finance against the various existing assets is a route used where people feel they can get enough money without going to a VC. In a business with a low return on its assets there will not be much premium over asset value in the price, if any. In such a case borrowing against all the assets plus a little personal money and some deffered terms may be sufficient.
From your past writings I guess your return on assets, excluding surplus cash, is quite good. So I suspect asset finance will not be sufficient.
Having read the CEO's diary for sometime it occurs to me that the Chair has been pushing for this position for a while now, has this been the his ultimate aim since the beginning? Is the CEO being sweep along in some grand plan designed from the start by the Chair or is it my imagination? Aren't the roles of the CEO and Chair to further the interests of the shareholders? If so why has the whole situation evolved? Isn't the Chair supposed to be there to mediate between the shareholders and the CEO why is he pushing so hard for an MBO? Sorry may be I'm confused!
