Cautionary tales about when a board might be able to help
Years ago I came across a great company that was selling well internationally and making profits. Let’s say its revenue was about $30 million and its profit $2 million. There were three shareholders: the technical founder/product guru, the CEO and an outside businessman who funded them to get going. The three of them formed the board. Then, the unexpected happened: the outside businessman died. And, not surprisingly, his estate wanted to sell their one-third share. The board, that is the founders, hadn’t thought about this possibility. They had no contingency plan. So they offered the one-third shareholding to their largest customer — a very large overseas company. The overseas company said, “We don’t want one-third, but we’ll buy the whole thing.” So, that’s what happened. The company was sold. That made the CEO and CTO pretty wealthy, but it wasn’t the future they had in mind. They loved that company. (Of course, once the non-compete agreement ran out after a couple of years, they were free to go again, and they did.)
Around the same time, I came across another great company that hadn’t thought much about its future. This company had two major product lines which were selling well offshore. Its board consisted of the founder CEO, the company’s accountant, and the company’s lawyer. The business was going so well that the CEO decided to redevelop both product lines. They really needed external capital to do this, so he engaged a top local investment bank to raise money for them. Confident that this capital raising was underway, the company set about re-developing both product lines. That is, they were going to really need the money. But, in December, the investment bank dropped them! Well, they said they hadn’t had any interest. In fact, they probably hadn’t even tried — because they had much larger and more important clients to look after. Suddenly, this successful company was in crisis. It ended up being split in two and sold.
In both cases you have a successful company BUT the owners hadn’t thought very much about the future. That is, they hadn’t answered the strategic question, “What Journey am I on”. This lack of strategic planning led to unforeseen circumstances and the loss of their companies.
I’d like to think that in both cases that if they’d had a good board they would have thought about the possible futures in advance. In the first case, were they building the company for sale? Had they thought about how far they wanted to take the company before sale? Had they considered who the potential purchasers might be? Did they consider the option of taking the company public — allowing them to retain a shareholding while getting some cash out, and allowing other shareholders to exit?
In the second case, the company put all its eggs in one basket: redeveloping both product lines at once and making themselves dependent on external financing from an unknown source. Could they have identified potential investors in advance of the decision to raise money for product development? What kind of investors might they attract? A patient long term investor who would be happy for the company to remain private? Or investors who would invest expecting a stock market listing within a few years to give them the option of selling all or some of their shares?
