CEO's Diary: Extreme tedium

Due diligence is boring

July 29 - If anyone tells you doing due diligence preparation is fun tell them they're sad. It isn't.

Due diligence disclosure is about pedantry in the extreme. It's driven me mad checking both what has been done and preparing lists of what needs to be done this last two days. I've not enjoyed one minute of it. And it's been horribly hot and when (all going well) I rejoin the family for the rest of the holiday tomorrow there is bound to be a storm, either from them or in the skies above.

I know I was warned that this sort of deal is not fun. Right now, I agree.

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July 28 - It became clear as last week closed that #1 was going to need serious help if the due diligence was going to keep on track. I am, after all, responsible for the process, although with massive conflicts of interest inherent in it as far as I can see since this data will be presented by the shareholders for disclosure and it seems I will be one of those to whom it will be disclosed.

Either way, decisions were needed as to what to do next.

There was only one thing to do. I could have tried to do odds and ends from a distance, or I could leave the rest of the family for a couple of days, come back and deal with this issue alone and then go back to join them.

There was no real choice: it would have been miserable and ineffective to try to do this from a distance. So I'm here today and tomorrow. And I have given strict orders that I am to be left alone. I have enough paper to look at to sink a battle ship, all of which I want to sign off.

So if you'll excuse me, I'll get on with it.

It would help if it was cooler!

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July 23 – It could not last. Some of the questions the lawyers have raised relate to IT and in particular to the software that we use. Our database might be written on a proprietary base, but it is of course tailor-made for our purposes, and I am the first to admit that not every step of that process has been documented. My PA wanted to know how she should handle this.

I called the lead investor. He was pragmatic. He wants to know what the risks are, how they have been handled to date and what we will do in the future. He does not care about the legal niceties.

I can live with that.

I relayed this point to my PA and suggested that she viewed all questions in that light if they come up. It will help, a lot.

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July 21 – Staggering. No one rang me today.

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July 18 – I’ve never felt that I am leaving for a holiday at a worse time. On the other hand, I have agreed a bonus for #1 as she will be putting in a lot of extra hours for the accounting due diligence and my PA just took it in her stride. I have little doubt that despite her having been here for a relatively limited period time she will handle the vast majority of what is needed quickly and competently, and probably better than I would.

There is one compensation though. All the managers now know why I am having to delegate more to them. I really do think they are ready to take things forward.

Now I’m off to Yorkshire. It is only a relatively fast train ride back if I am needed.

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July 17 – The lead investor has accountants and lawyers lined up to do the due diligence. I got the questionnaires today. The lawyer’s runs to something like 150 questions. The accountant’s is more reasonable, but they do want to review the audit files. That meant a hasty visit to see the audit partner today. He believes that will be possible but will charge an additional fee over and above the time involved to compensate for additional risk. I am not sure how I can object.

#1 and I will be here late tonight working through the documentation that is needed. And we have already agreed that there is no way we can do this without the active participation of one other person. My PA is going to have to be involved in the process and is here over the next fortnight, by good fortune, whilst I am meant to be away. Since large quantities of the due diligence involves finding and proving the existence of documentation I am entirely happy that she can handle a significant amount of what we need, and it can be done as an exercise that would seem appropriate whilst I am away without arousing any significant suspicion.

I do however have a sneaking feeling that my holiday will be interrupted by telephone calls, emails and maybe return for a meeting although we have decided not go back to the shareholders with issues arising for at least four weeks, helped by the fact that we know that in combination they are absent for most of that time.

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July 16 – Only one immediate feedback. Hitchin wanted to know if I had known about the buyout when offering him the job. I could tell him quite straightforwardly that I had not. I asked him if it had changed his perception of the job he had taken and he was honest. He said it had. He realised that there was more risk in it now. Did that put him off, I asked? To my relief he said it had not, but it certainly made him view things differently. I am actually pretty sure that he will want to participate even though we are offering him an unusual opportunity given that he has only just joined the company.

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July 15 – It was a fascinating morning. The Chair does not always attend management meetings, so the fact that he was there at the outset did, I could sense, put people on edge. As a result I came to the point immediately and told people that this was nothing like an ordinary management meeting and had to apologise to Hitchin straightaway for that fact. Instead I told them that they were going to be given the opportunity to buy a part of the company they work for.

There was an immediate and audible intake of breath. It was amazing to see the reaction so I had to ask them to indulge me for a minute whilst I explained exactly what I meant before telling them what it might mean for them and the future of the company they work for.

It was incredibly important to have prepared documentation in advance. They needed the chance to have a simple explanation given verbally, on-screen and as a handout before the real message could sink in that the impasse that has governed this company for the last few years might be broken as a result of a takeover in which they can play a part.

Having given the initial message we then immediately took a coffee break. I wanted them to have the chance to simply talk about it. There was a shock element they had to get out of their system and that took 40 minutes of discussion between themselves and with me and the Chair before I then called them back to order and presented more detailed information on what we were planning to do, what role they might have, what this might mean if they wanted to participate (and I stressed continually that that was not an obligation), how long this might all take, and that it might fail.

I then gave each of them their own summary and said the Chair and I were available all day to meet with them, and afterwards. What I did stress was that at the moment I did not want anyone else to know what was going on. Although we will involve other members of the company in share option schemes it was unlikely that any others would be offered an opportunity to buy shares in the buyout and as a result it was critical at this stage that they were the only ones who were aware of what was happening. And I made it clear to #1, who will have to manage some of the due diligence process, that we will be telling her staff that the inspectors are from the revenue. Naughty, maybe, but sometimes that is the way it has to be.

Without exception every manager came to see me during the day. Without exception they are excited by the idea but right now only Newc and East have committed. The others all think they will need time, and I'm hardly surprised in the case of Hitchin! I was happy to give it. Indeed, I stressed that we have that option available.

What amazed me was that none of them had any apparent doubt in my ability to lead this process, and none seemed concerned about the increased financial pressure that it will impose. That is good news.

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July 14 – Please do not ask me what I did at the weekend. I worked. Thank goodness my wife is persuaded that this is a good idea.

Translating an idea about staff involvement into practical documentation that explains what we think might be available, what it might cost, what risk they might take, what the tax implications are, and how we will propose to buy out their shares if they were to leave before the company was ever sold to a third-party takes a lot of time, a lot of thinking, a lot of caveats, a lot of coffee, and no little stress.

Then, despite a lot of people calling upon my time I had to visit the lead investor this morning, and run it through with him and the lawyer who will be acting on his behalf (who I like, a lot, despite every instinct I have to distrust lawyers).

There were, of course, changes to make but he was happy. What we also added was an outline share option scheme. All of this can be linked to EMI arrangements, or so I am led to believe. I hope that might be true.

Now I have just got to tell them.

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July 11 – I am amazed. The Chair got a fax (who sends those any more?) from the ex-Mrs CEO's solicitor first thing this morning. To put it in a nutshell, she said that if her former spouse is happy due diligence can proceed. She does however reserve the right to discuss certain aspects of the deal including her compensation for loss of office (what?) and the terms of her future employment, but has noted the points made with regard to valuation and the change in the consideration to be paid and has in the circumstances agreed, bar these points, to allow negotiations to continue and presumes that due diligence will facilitate that process.

An almost immediate three-way conversation took place (Skype is an amazing tool for arranging these things: the Chair did it from his home PC with much greater ease than we can do it on the office system) between me, the Chair and the lead investor. We all agree that it looks likely that this process will be tortuous. This solicitor is going to prevaricate throughout. But we have at this moment got sufficient to go ahead with. The Chair will respond saying that any compensation for loss of office will have to come out of the overall consideration for sale, and will be dependent upon the resignation of the officeholder as a director. We know that will kill that one dead because she is bound to want to keep that position. More important, he has said that future remuneration must be at a realistic level for the duties to be performed. The existing level is inappropriate in that circumstance. We might as well be clear now.

However, he also noted her agreement to the other terms offered and assured her that due diligence would commence shortly.

The reality is that it will not start at the beginning of next week. It can't, and there is no reason to pay the premium that such haste would demand, especially as holidays will shortly be upon us. She is going away at the end of next week and so am I. Anyway, there is something much more important to do, and that is to tell the key staff who will be involved in the process.

We simply didn't have time to do that before this weekend, so it is another weekend lost to preparing documentation and a presentation for their benefit. I told them all that I wanted an early management meeting this month, to be held on Tuesday even though the management accounts will not be polished by that time. My excuse is the arrival of Hitchin. They will discover that the reality is something quite different.

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July 10 – No word from the other side, but I have kept the ex-CEO informed and he is pleased with the change. Indeed, he says he will see what he can do to help. In other words, he might even accept a deferred payment if it is necessary, although I now understand it should not be.

But to other matters today. We have finally got Hitchin on board. It has been a long wait but in view of the threat of legal action from his former employer we had to wait not only for his notice period but also for his accrued holiday to lapse before starting him here.

This morning I took him on a tour of the office introducing him to everyone he would need to know. I think that is my duty for a senior employee. This afternoon we had a staff meeting for as many of his team as we could get in. Actually, we didn't get them in. We used a hotel nearer their patch. It makes sense.

The reality is that we are giving him a fortnight before he takes the team over to familiarise himself with systems and to go out meeting key customers, but it was essential that we did the introductions as soon as he arrived.

As with everything else about him to date, I was impressed by the way he handled things. He explained clearly and succinctly to his team how he would want to work. He made it clear he would listen. He then proceeded to do so.

I am optimistic.

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July 9 - Things are speeding up. The Chair and I met the main backer over breakfast this morning (why does finance involve breakfast?). He could not give an immediate answer on whether funds would be available to pay the shareholders on completion, but he was also quite clear. He does not think this should be a problem.

He was amused at our tale of the meeting.

He gave a simple direction: we should respond and say that we believed the proposal could be modified to meet the requirements that had been specified and the full consideration for the sale of the shares would be met in cash on completion and that no prior distribution of assets would be required.

He had a sting in the tail. He asked that we say that if this condition could be agreed we were firm on the valuation, subject to due diligence. Since we had responded to their request on a timely basis could they now indicate acceptance of the suggested terms so that due diligence could begin next week?

I like that. But I will have a lot of work to do to prepare staff for due diligence if it really proceeds that quickly.

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July 8 – The Chair and I duly presented ourselves at the ex-Mrs CEO’s solicitor's office at 11am this morning, as requested. We were not alone in doing so, she and her accountant were also present. When we inquired we were told that her former spouse had not been invited.

Her solicitor did the talking. He thanked us for the offer that had been received. He told us that his client (to whom he referred to in the third person throughout) was grateful for our expression of interest in acquiring her shareholding but had a number of concerns. In particular she had not yet determined that the value of that offer was appropriate, but more particularly she felt that the structure of the deal that had been proposed was unacceptable.

It was, he said, her objective to minimise her taxation liability arising upon the sale of her shares, whenever that might happen. Since the proposed structure involved the distribution of a substantial proportion of the company’s reserves to her in advance of sale she would suffer income tax upon this consideration and she considered this unreasonable. We would, he said, have to overcome this obstacle or increase the consideration paid upon completion to ensure that she might enjoy the same net benefit as if capital gains tax were to apply to the whole sum paid.

So material was this point to his client that he felt he must communicate it to us on her behalf before we expended further effort in pursuit of our goal. In that case, he said, she had thought it appropriate to advise us of this fact at the earliest opportunity so that the matter might proceed on terms acceptable to her or might be laid to rest, as appropriate. He therefore thanked us for our time, wished us good day and looked forward to hearing our considered response within a few days. If this was not possible his client would presume that the offer had lapsed.

And that, I kid you not, was it. Without so much as a mention of a coffee, let alone an opportunity to reply, we were dismissed. I think it to our considerable credit that we managed to leave the building, and be out of sight before collapsing in almost hopeless mirth.

Our guess is that the ex-Mrs CEO's team think that they have delivered us a death blow, and a short, sharp delivery was the kindest mechanism for doing so. We couldn't help but think that if this was the best they could do we were in with a real chance of completing this deal.

The problem is, of course, surmountable. Instead of our proposed structure which strips the current company of profits before sale of its shares to our takeover vehicle we will instead have to borrow in our takeover company to pay a cash consideration to the existing shareholders, with the loans in the takeover vehicle then being redeemed out of dividends paid up to the takeover vehicle (which will by this stage own all the ordinary equity in the existing company) and by then gearing the trading assets to repay the loans.

There is only one real obstacle, and that is the fact that we will not be able to use the existing company's assets to secure the borrowings we will need to complete the transaction or we will breach rules on financial assistance to acquire shares in a company. As a result we now have to go back to the investment team and see if the borrowed funds can be raised on the security of other assets. Even I will be willing to put something up in this case: the risk is very obviously low.

I am well aware that deals have failed for this sort of reason before, but in this case if this is the sole obstacle she can find I suspect she has seriously underestimated the team I am now engaged with.

At least, that's what I hope.

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July 7 - I was amused to get a polite call from the ex-Mrs CEO's solicitor. He's not a man with whom I usually share pleasantries. He has seen it as his role to mirror his client's contempt to date. But I can only assume the smell of money has had an impact upon his view of my well-being, for he was quite solicitous as to my health.

That said, it's clear he's also going to out nothing in writing. What he has done is invite the Chair and me to a meeting at his office. Who might be present, I asked? He admitted he was not sure, and could not say if his client would be, but he was sure I was aware of the matter to be discussed and looked forward to seeing me at 11am on the 8th inst (or words to that effect, he being of that disposition).

OK, I'll turn up. Let's see what happens.

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July 4 – Independence day, heh? Not here it isn't. Not so far. No response from her ladyship.

So I went visiting customers. I haven't done enough of that of late, but it's vital. If you don't talk to the people who ultimately provide your income I can't see how you can run a business. Unless they're happy you can be as sure as eggs are eggs you won't be soon after. And right now I'm buying their happiness! It's darned important that's exactly what they are.

To be candid, although it's clear things are tough and that new deals are thin on the ground and property refurbishment, which is always lucrative for us, is off most people's agenda, we're doing OK. The maintenance is working, and we're being flexible to keep work. The automation I initiated here is a God send now. Without it our fixed costs would be pulling us down. As it is we have the flexibility to service the clients.

That's vital. I remain reasonably happy. It's never safe to be more than that.

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July 3 – It’s fair to say the ex-CEO is either wholly on side or is playing a great game of double bluff because within what must have been minutes of his having concluded his meeting with his ex-wife today he was on the phone singing like a canary as if a full-blown member of the buy-out team (which, in fairness, he probably is).

She was apparently completely taken aback by our offer. She had demanded if he had known of it. He had, if he is to be believed, played a good hand, suggesting it was all news to him too and this was the first time he’d seen details of it (I had taken the precaution of sending him his own version of the letter she had received so that he could table it at any meeting). He said he’d played it as if he was taking time to think on it, and had yet to take any advice, but since she was with both her solicitor and accountant, what had they got to say?

Apparently she was not hooked so easily and demanded to know if he liked the idea of the deal, and he said he did. It made sense to him, he said, for three reasons. First, his attachment to the business was reducing. He could imagine a time when he would be quite happy to put it behind him. Second, he liked the idea of diversifying his risk. Third, he’d like to help their children but could not do this without cash.

Apparently that was a winner. She rose to the bait. Help how? she demanded to know. Oh, with buying houses, he told me he’d replied. He could immediately sense that there was no way he was ever going to need to do so: if she just thought he might buy favour then she’d buy him out first, but she’d also need cash.

I asked if tax had featured. Apparently they’d been assured that entrepreneur’s relief should apply and 10% tax rates should be available. No further discussion took place.

But he was pushed by her solicitor about whether he had noticed only one seat on the board would be available. He said he had not: and played surprise, but also offered some indifference. He claimed he had noted the reduced the lower salary on offer. He said it was not a deal breaker for him. That left her options open, as planned.

The difficulty was he could not say whether she had bought into the idea of the deal or not. She’d eventually said she needed time alone with her advisers to decide what to do. But he thinks she is tempted.

We’ll see.

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July 2 – The ex-CEO called to say he has had an email from his former spouse’s lawyer asking him to a meeting to discuss 'certain developments'.

He’s going tomorrow. We’ve heard nothing. We’ve got 2.5 weeks until school holidays and effective deal close-down time. I hope we get something agreed by then.

Operationally, I continue to be amazed by my team. They know I have been distracted. I think they have a good idea why. And they have just got on with things, as if to prove my point that this was what we needed to do when suggesting that there was capacity for me to be a non-exec elsewhere.

And, on that theme, I had lunch with the owner of the company that asked me to join their board today. In truth, the Chair had been keeping him informed of what was happening, but I felt it polite to do so as well. He was fascinated by what is happening. You can almost sense he wishes someone would do it to him. Just wait, I told him, half joking, half not.

* * *

July 1 – Amazing to think we are half way through this year. I would not have anticipated where we are now when it began.

The investors approved the letter to the ex-Mrs CEO this morning, with very minor changes. It has been despatched by courier. It is the best I can do. Given the ex-CEO is now behind the scheme I am fairly confident it cannot rebound too badly, but you never known in this world.

That job done it was on with other issues. One is IT. The internal chap we asked to look at this a while ago is beginning to deliver, and candidly I have little problem with a lot of what he is doing. He’s taken cost cutting to heart, but operational efficiency with it.

He has a set a number of practical tests. One was to test transitions to Windows Vista or Linux. People resisted both, but one no more than the other. So why not Linux?

As important, he’s tested Open Office on a trial group. After very little effort in translation most could hardly spot the difference from a Microsoft product. After all, most people hardly use any of the features in either.

The big issue now is email management. If we can manage that and diary scheduling OK (which is a big question) the real issue is when some Linux platforms are now very stable and have long term support, why are we Microsoft based?

We’re not convinced, yet, but he’s got the job to carry on the search. The savings could make it worthwhile.

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For previous installments of the CEO's Diary, see:
June 2008
May 2008
April 2008
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February 2008
January 2008
December 2007
November 2007
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