Rachel Elnaugh: On Red Letter Days’ demise

She reveals why it all went wrong for Red Letter Days

In her most revealing interview yet Rachel Elnaugh returns fire on her critics and gives her version of why it all went wrong for Red Letter Days.
How is your business life moving on since leaving Red Letter Days?

After I left Red Letter Days I received the most public media bashing any female entrepreneur has ever had to endure in this country. So I was in no immediate hurry to jump back into the business world. I wanted to pick my moment. I was introduced to the easyart.com opportunity and it immediately seemed the perfect fit. I love art and it's a business that has already enjoyed significant inward investment and the infrastructure is phenomenal. It just needs a marketer to drive its growth. To any entrepreneur, when your gut tells you something is right, that's a very good sign.

What ventures are you involved in – including Dragons' Den investments

I am not actively involved in any Dragons' Den investments at the moment. I am a great believer in focus in business – it's vital. My focus right now is easyart.com. I will move the company toward a successful AIM flotation, then move on.

You're planning a book – how keen have you been to put the record straight? 

More than anything I believe it's a fascinating story. I hope that entrepreneurs reading the book will learn a huge amount about what to do – and what not to do – in business.

When did you know Red Letter Days was in trouble?

On December 20 2002 to be precise. But it took a further six months to establish the extent of the trouble was a £4.7m loss.

What exactly were the things you feel went wrong?

Hiring a professional CEO to step change the business in March 2002. It is a mistake many entrepreneurs make. I did not put in sufficient reporting and controls and I also had a weak FD who did not alert the board to what was going on.

What action did you take?

I removed the CEO and the FD, returned to the business fulltime and brought in an interim CFO to help me refinance the business.

In hindsight, what mistakes do you think you made and what would you have done differently?

By 2001 the company was generating £1m profit on £10m turnover. I should have just kept the business running at that level rather than being greedy and trying to go for gold. I had also allowed the board to become too big and unwieldy – at one point we had eight directors and it was costing over £1m a year. Yet most of them were ‘yes' men and not adding any real value to the business. Small teams are far better.

You've publicly said the CEO you hired wasted £4M. Presumably you had too much faith in him. But as chairman, you sanctioned the spend and how the money would be allocated.

The £4m of exceptional one-off costs that year related to systems/infrastructure as well as the brand re-launch. There were budgets in place but not sufficient financial controls. When we eventually assessed the damage it was way more than anyone had anticipated. I gave far too much leeway and signing authority to too many people.

Aa a signigcant amount of the companys cash reserves, didnt you think there was too much at risk?

When we set the budgets and sanctioned the spend it was on the basis of the draft accounts to July 31 2002 which showed a £1.8m profit. By the time Ernst & Young had been through the numbers in December 2002 they were showing a £400,000 loss. Had we known that the company was not making the profits we thought it was, we would never have sanctioned the spend.

What do people in general, and fellow entrepreneurs perhaps, not understand about the vicissitudes of running a business?

When you start out in business you can easily control everything because you are close to every function. As a business grows you need to delegate authority and that is where the problems begin. I simply hadn't built in the procedures and controls to monitor the business effectively. It is very easy for direct reports to fall into the trap of telling the CEO what she wants to hear and to cover up the real issues and potential problems. It is very difficult to get the information if people don't want you to know about it

It was also suggested the company failed in part because you were more interested in self-promotion and that you spent more time on your investiments from the programme than on sorting out the problems closer to home. How would you respond?

Those who suggest that do not understand the benefits a high profile can bring. Red Letter Days was a brand that was built almost entirely on PR and word of mouth. In fact the company's £100m-plus turnover was generated on a marketing spend of less than £10m. Every piece of TV and PR I did was aimed at getting the Red Letter Days brand out there at little or no cost. Saying I should not have done Dragons' Den is a bit like telling Richard Branson he should be behind a desk working instead of flying a balloon across the Atlantic.

Suppliers werent paid. Why Didn't the infrastructure you put in place ensure such things where taken care of?

The re-financing that we had put in place in 2003 carried with it the bonding of our credit card takings. This strangled our cashflow and is the reason the company had £3.3m cash in the bank when it went into administration. Yet Barclays refused to relax the bonding even when they knew it would take the company over the edge. We knew we needed more equity in the business – that was why we planned to go to AIM. It is cashflow that puts companies out of business every time.

Some former staff have criticised the way you managed them – do you think that played any part in the problems?

A lot of what was published was simply fabricated, based on the tittle-tattle of a few disgruntled ex-employees taking their revenge. I knew the PR risks involved through having a higher public profile. That's the game in this country.

Is it true Peter Jones was already a shareholder and that he chose not to invest further to save the business, instead waiting for it to fail?


What did you do to stem the flow of money out of the business?

In 2003 we simply called a halt on all expenditure that did not directly contribute to the bottom line. But when we took the decision to take the company to AIM we realised we had to invest in more, higher calibre, business development executives to drive margin and B2B sales. I was criticised for taking on those staff but every one would have brought in significantly more profit than their cost to the firm.

How close did you come to saving the business?

We put the company into administration on a Monday and I received offers of emergency funding from five separate parties following articles that had appeared in the press at the weekend. However, the fact a windingup order had been entered the previous Friday meant we had no alternative but to use the bank's powers to appoint an administrator. We had to do this to protect the company from its creditors so it could be sold as a going concern. I simply ran out of time.

What Rumours and purported facts that have been bandied about are incorrect, and what was the reality? 

A lot has been made of the fact that the company went down on August 1 with debts of £15m. But the amount we actually owed to creditors was £4.9m, much of which was not due until August 31. Against that we had £5.1m in assets including £3.3m cash in the bank. The remaining £10m stated as liabilities in the administrators report were actually accruals plus an estimate of the contingent liability in respect of vouchers in issue (not all of which had actually been sold) of £8m. These numbers were very much round sum provisions and not debts that had crystallised – and we knew the refinancing would cover them. So the position was not nearly as bad as was reported.

What do you think of Jones and Paphitis and the way they've dealt with the situation and your business? 

It's great Peter and Theo stepped in to take on the business. They have invested substantial sums to refinance the company including funds to honour the majority of vouchers in circulation. I'm also pleased staff kept their jobs. NOW

The Programme is going out again, what qualifies you to judge other peoples businesses?

Every person on the Dragons' Den panel has had at least one business failure in their background – it's just that theirs were not played out so publicly in the press. All the original Dragons were selected because they had created a business from nothing and grown it into a multimillion pound enterprise. That is still a very rare talent.

What can owner-managers learn from your experience?

Stay in control and keep your eye on the ball.

How did it feel to lose your business so publicly, see it ‘rescued' by two colleagues, and recieve brutal press criticism?

Publicity is a double-edged sword. The higher your press profile the better your business can fly. But it's a risk, because anyone who offers themselves to the media has to understand it can turn round and bite you. The coverage hurt, but if anything it's made me more resolute to succeed again. And ironically, the nastier the media got, the more support I received.

What criticism hurt most?

I think it was the betrayal by people who I thought of as friends. I have learned I need to be much more selective in those people I allow into my inner circle in future.

How did it feel on a personl level to see your compnay end up in the hand of two colleagues?

I can think of far worse people whose hands it could have ended up in – those, for instance, that I trusted but who tried to profit out of my misfortune in the months leading up to the collapse. There are a lot of unethical and unscrupulous people in the world of business. When your business is in trouble you are like an animal staggering around in the desert and the vultures start to appear. It was a real eye-opener.

Did you jabe an inkling that they would get involved?

It seemed obvious to get my co-Dragons involved.

Peter Jones told me thart you spoke on a few occastions following the deal. Have you spoken recently?

Peter and I have sat in a hot television studio together for literally weeks on end, so of course he rings from time to time. I saw him at the BBC last week – he was there doing Radio 5 Live and I was on News24. We still exchange emails and are on good terms. Everyone in business knows that sometimes trouble happens and you have to move on. Usually the new thing is a hundred times better than the old.

For more information on Elnaugh, visit www.rachelelnaugh.com


(will not be published)