Fired by your own company: How investors could lever you out
The drawn-out saga at Liverpool Football Club has shown once again that owners can be forcefully removed from office. It’s never in the plan but it happens, and when it does there are lessons to be learnt.
One of the great things about working for yourself is that you can’t be fired – or can you? Entrepreneurs are sacked by their own board much more often than you would think. As companies grow it is to be expected that the vision of the entrepreneur for the future of his or her business will diverge at some point from the investors, managers and professional advisers who made that growth possible. At some point the prime mover often gets fed up, bored, intransigent or careless and at that point he or she is vulnerable.
It has been said that CEOs fall into two categories: growers and cutters. Entrepreneurs are the former: single-minded and even obsessed about their product and their vision. Charles Russam, chairman of the longest established interim management provider in the UK, Russam GMS, has often had to fill the gaps left after boardroom grand guignol. “It’s like laying the tracks and driving the train. The skills are totally different. When the day job becomes a matter of getting into disputes with employment tribunals, firing people, managing the supply chain and talking to the banks they start to say: ‘this is not why I set out in business – I did that to develop my product and tell the world about it.’ “
It happens with some regularity that private equity companies invest in a business where the management team is led by the person who invented or developed the product, Russam says. “The point is often reached where you need a professional manager to take the company to the next stage. Sometimes you can have ugly scenes if the founder doesn’t want to go. You can vote them off the board – but if they are still a shareholder they can cause a lot of trouble.”
The assassination of trust
A successful business attracts investors. They may have a very different agenda from the founder though. “I think there are inherent risks when you grow your business; and particularly when you list your business you can lose control.” That’s the view of Martin Higginson, who was fired from AIM-listed Monstermob – the company he founded in 2000 then built into a business worth nearly £300m.
In a classic assassination, he was called without warning by his chairman Hans Snook and invited to resign – when he refused he was quickly sacked by the board. Why? The justification given was that he was too UK-centric in his approach, but the real problem lay far away in China, he believes. “Effectively, I was onto them, and it was much easier to remove the problem. In theory they were generating a lot of profit: what transpired a few months later was that the profit disappeared as I had predicted it would.”
That was in June 2006. Looking back, he thinks his mistake was to trust too much. “What I did wrong was not keeping tight enough control over my board. My advice is to make sure you put people on your board that you trust absolutely.”
Not everyone, Higginson says, is motivated by the same moral and ethical standards. Once you start to get involved in Far Eastern markets you may find yourself in a rip-off culture, he says. “As soon as you invite someone who is prepared to lie and defraud then the moral foundation on which you built the board has gone and the rules of engagement have changed fundamentally.”
Higginson is now CEO of the online gaming company NetPlay. Entrepreneurs are resilient people and not all attempts to sack them succeed. Alistair Gosling founded The Extreme Sport Company in 1995 and developed it as a global brand with the help of a group of angel investors who imposed a financial director. In 2005, as the business passed its £25m milestone, the FD presented him with a crisis. “He told me we should expect a cashflow deficit of half a million pounds for up to six months, after which the ship would right itself again.”
Ripping up and ripping off
Tearing up an agreement that any deficit would be funded by all the shareholders, the board suggested that Gosling should step down as CEO and sell his shares at a valuation that, five years on, looks like a rip-off. The motivation behind this completely unexpected coup attempt remains mysterious, but he was disappointed to say the least in the duplicity of people he trusted. “One in particular I regarded as a close friend. It was a shock to realise they were just playing the game.” His right hand man, a lawyer, was offered the top job and 10% of the equity: to this day Gosling doesn’t know whether or not he was complicit in the plan.
The period that followed was, appropriately, a corporate version of white-water rafting. “I went to war with the board,” recalls Gosling.
“I decided I was not going to accept these terms, so very quickly raised about £150,000 from friends and family, which I put into my own lawyer’s bank account rather than the company account.”
Guided by his lawyer through six months of what he describes as attrition, he held on to his job and his company. “They realised I had a lot of grit: I was not going to move but was going to hold firm.”
In the event, no money had to be injected into the company bank account and the projected cashflow crisis did not happen. He had the satisfaction of firing the FD in question and taking back the reins of his business.
Are entrepreneurs naïve?
There is more than one way to decapitate a business. Charlotte Semler and Nina Hampson had the opposite problem to Gosling. They actually wanted to step back from day-to-day management when in 2005 severe cashflow issues forced them to hand most of their up-market lingerie company Myla over to private equity investors Daniel and Leo Gestetner. “We were very much hoping for professional management as part of the deal: we got investors who had no experience of management, in this industry or for that matter any other,” says Semler.
After a while both founders jumped ship. “I can’t say we were forced out, but there was no meeting of minds, no operational management,” adds Semler. Myla was a seriously cool business selling real silk lingerie, g-strings with real pearls and even up-market vibrators to top London and international stores. But, instead of bringing in someone with retail experience in the high-end lingerie business, the investors decided they liked the company so much they would run it themselves. Semler and Hampson realised they weren’t going to learn anything, so they left.
Like Gosling, they thought that what they saw was what they would get. “We are both very straightforward people and I don’t think either of us is very good at politics or understanding hidden agendas – which is probably why we are both entrepreneurs rather than still working in large corporates where we had successful careers before,” says Semler.
Unlike Gosling they had relinquished majority control and had little clout left. “We felt we were not going to thrive in that environment; I think it is common among certain types of entrepreneur to see things in black and white. You either want to work with someone or you don’t.”
Learning to let go
Founders invest so much more than money in their businesses, admits Semler. Myla was their baby and it is very hard to walk away and leave your offspring in the hands of someone you have little faith in. Simon Woodroffe, the founder of the YO! Sushi restaurant chain, is the first to admit to this umbilical attachment. “Back in 1997 I was the midwife and the mother of YO! You are protective of your children but you have to be prepared to let them go when the time is right. Most entrepreneurs are control freaks, which makes it harder when the time comes to go,” he says.
Nevertheless, in 2008 YO! Sushi was sold for £50m to a private equity firm Quilvest and its management team led by Robin Rowland, who had been running the business since 2003. Woodroffe stepped away from the running of the group, settling for a 1% royalty of UK turnover in perpetuity.
Rowland and Woodroffe retain respect and even affection for one another but Woodroffe is quick to confess that his love of style, spectacle and creativity just didn’t fit with the day-to-day chores of business. “My advice is to find out what you are good at, do it, then hand it on. If you feel hurt and bitter, get over it. This business exists in its own right.”
Woodroffe is very possessive about the brand though, and it could be argued that by holding on to it he has kept ownership of the really hot property whatever happens to the original business. Certainly he would like the YO! prefix to be as puissant as Virgin or Easy, something to be licensed or traded in its own right. “In the world of rock ‘n’ roll they say that the second album is the hardest. YO! Sushi was our first hit, if you like, but we haven’t really had a follow-up number one until now.” He’s referring to Yotel, inspired by Japanese ‘pod’ hotels, which he has established at Heathrow, Gatwick and Schiphol, Amsterdam.
Dust yourself off – and get back in the game
Trust is a precious commodity, as the experiences of Higginson and Gosling show: sentimentality is altogether riskier. Hanging on to something that has gone, whether it has been taken away by machinating colleagues or simple market force majeure, is not for the entrepreneur, who is always looking forward. Semler shook off her frustration, and as soon as her six month non-competition period was over started Charlotte & Co, selling ‘luxury home clothes’.
And chagrin did not trouble Mark Mills after he was ousted by the board of his fifth and most ambitious business, AIM-listed Cardpoint, in 2006. “We had a bid for the company which my co-shareholders did not want to take because they thought they could squeeze even more value out of it. Perhaps we should have managed people’s expectations differently. We could probably have sold for a similar price a year before,” he reflects. Though it reached its own targets, the analysts had predicted Cardpoint would perform better than it did. Mills agreed to step down as CEO, sold his shares on the market and devoted his time to companies that were keen to have him on their boards as a non-executive director until 2009, when he launched Genwat to generate electricity from waste.
Despite his experience at Cardpoint, he hopes to float Genwat on AIM as soon as it has enough sites and market conditions are right. “Raising money on AIM was absolutely the right thing to do. Once we were on AIM with 300 shareholders I became dispensable: If I had been knocked over by a bus there were enough people to carry on.” Before Cardpoint, Mills made a lot of money from a company that placed letterboxes in garage forecourts (later sold to a startled Royal Mail and closed down by them). All his businesses have been very different, so little wonder he distinguishes between entrepreneurs and entrepreneurial people – the former can run anything, the latter only the product that obsessed them originally.
He has been sitting on company boards as a non-executive director since he was 28 and says he has learnt that there are only four elements to a company: employees, suppliers, customers, and stakeholders. “You haven’t got enough customers; your suppliers are too expensive; there are people issues; or the bank is on your back. These have to be kept in a similar state because any one of them can bring the business down.” This, he says, is the formula for business success.
Don’t look back in anger
Learn the lessons but don’t look back, says Semler. “Most business people have run into trouble at some point – I have yet to meet anyone who has not! You may feel you have failed but that’s not how the business world sees it. They see the success of the brand, the size of the business you have built, the time you have done it in, how little money you did it on; and they respect that.”
To say that entrepreneurs are unemployable may be an exaggeration, but in many cases that is why they had to create their own structures. That creates inevitable tensions when the growing business is sold or merged, says Andrew Garner, chairman of top level executive placement company Norman Broadbent. “A small business is built around the founder, for their own benefit. How long is it since that person had a boss? What is his relationship with his bank?”
The acquirer needs to understand these tensions, he insists. “I have seen private equity firms buy a business then immediately fire the person round whom that business was supposed to revolve. Why? They did not think enough about the personality that shapes the company but regarded it as a financial instrument.”
Their due diligence, rigorous where it comes to looking at the historical earnings of the business, its market share, its supplier base and where cash can be saved, fails altogether to consider the human capital in the business – or as Garner puts it: “They forget to ask: ‘I wonder if John and I are going to get on together?'”
Battle-scarred entrepreneurs: their advice for you
Ask people where you went wrong. Believe me they love to tell you! Much of it may not be relevant but you can be guaranteed one crystal clear lesson, with implications for what you should do differently, from each conversation you have. Charlotte Semler
Don’t become blinded by the productand your love of it – if you can be objective about it you are a genuine entrepreneur Mark Mills
Try to do things differently and learn from your mistakes. All my success are born out of my failures Martin Higginson
You can’t stand still with businesses. A lot of entrepreneurs make the mistake of holding onto their baby too long. Let it go when the time is right (but I will always own YO!) Simon Woodroffe
Don’t be isolated. So many people in a crisis get caught in the headlights and do nothing. Move quickly and decisively Al Gosling