Illustration by Dan Brown
Inspired by true events.
There was once a very successful food manufacturing company.
It was founded by three highly talented people who had complementary skills.
Sarah was a natural leader, a visionary. She was CEO.
Ben was a brilliant salesman.
Mark was a master of manufacturing and operations.
Over 15 years, they built up a company that had 800 employees, an efficient factory and a swanky head office in central London.
They sold ‘own label’ and branded products to leading UK supermarket chains.
The business enjoyed healthy sales and profits, and it had a strong balance sheet.
The culture was well managed too — there was a palpable sense of ownership and self-responsibility throughout the team.
Over the years, the company had become a recognised leader in its field. Sarah, Ben and Mark were justifiably proud of what they had achieved.
One day, Ben found out that one of their main competitors was in serious financial trouble, and was looking for a buyer.
At their next board meeting, he told Sarah and Mark about it. “This is an amazing opportunity. Many of their products complement ours, and they’ve got a really talented R&D team. We should go for it.”
They all agreed it was indeed a golden opportunity, but they realised they’d have to dig deep financially to make it happen.
Mark was particularly concerned. He said, “Look, I get it, I can see the potential upside but, as you both know, I’ve got three kids in private school, a huge mortgage on the beautiful house we bought last year, and my wife gave up work to get a degree. If this goes wrong, my family will be in serious trouble.”
Ben, on the other hand, was the most bullish. He said “Think about the value of our shares. After a few years absorbing their business into ours, the value of our company will skyrocket.”
Unlike Mark, Ben and his wife were ‘DINK’ (Double Income No Kids).
Sarah said, “I agree this is a fantastic opportunity. My worry is that, in order to do a deal, we’re going to have to dilute our shares, which we’ve never done before. I know John Kelly, their Founder/MD, very well. He’s a control freak. He’ll insist on a seat on our board. We could lose control of the business we’ve worked so hard to build.”
A long discussion ensued.
Unfortunately it became heated, and turned into a full-blown argument; there was no way they’d reach a consensus.
So they decided to seek outside help.
Ring a bell?
Irrespective of the size of your business and what it produces, can you relate to the situation Sarah, Ben and Mark found themselves in?
I certainly could when I met them.
I remembered a furious argument many years ago with my then two business partners about whether to replace the carpet in our office. I’m not joking. The argument seriously damaged our working relationship.
What do these situations have in common?
I’ve found that most SME owners conflate three separate driving forces: Income, Equity and Control, meaning:
Income: salaries and dividends, i.e. take most cash out, pay yourself first, the brand has little/no value.
Equity: ownership of shares, which are worth something only when they’re sold, i.e. invest as much profits as possible back into the business, build a brand and eventually sell.
Control: functional, i.e. must have the final word and never give up having a say on decisions.
For example, if there are four founders, they tend to split their shareholding 25 per cent each, together with salaries and decision-making. If three, 33⅓% each, if two, 50% / 50%.
This sounds and feels fair in principle but, in my experience, it leaves the door open to serious conflict.
I explained the definitions of ‘Income, Equity and Control’ to Sarah, Ben and Mark and asked them to prioritise them. Ben asked if he could have an equal first. I said no, the rule is there can only be one primary driving force.
Once they understood their own and their partners’ primary driving forces, they were able to have a calm, objective conversation, which dealt with all of their wishes and concerns.
It turned out that Sarah’s primary driving force was Control, Mark’s was Income, and Ben’s was Equity.
They then put together a plan to buy their competitor in a way that worked for the company and suited them individually.
Mark was given a legally-binding guarantee of a minimum level of income for five years, which included ways for Ben and Sarah to be compensated if their income dropped below Mark’s.
Sarah led the negotiations with John Kelly. As expected, he insisted on having a seat on the main board, but Sarah was steadfast about who would be in ultimate control going forward. With the help of an excellent corporate lawyer, they structured the deal so that John’s influence was limited.
The combined businesses went on to achieve tremendous success to this day. If I revealed the brand name, you would almost certainly have heard of it.
Whether or not your board discussions are about whether to replace the carpet or buy another company, I recommend you work out your own and your fellow board members’/partners' primary driving force.
Every time I’ve facilitated this process, eyes light up, because it explains a large part of the reason why each individual approaches decision making the way they do.
Ideally, run this exercise as part of your interviewing process for new Directors or active shareholders.
It’s something you can do yourself or, if you feel that outside, objective help would be useful, contact me if you would like me to run the exercise for you.
Are You Running Your Company For Income, Equity Or Control, by John Hittler
Income Equity Control framework, by Shirlaws Group