TURNING THE BUSINESS AROUND

Recently I got interested in a business turn around situation. Up to that point the business was being run as a lifestyle business, the income from the business was being used to sustain the owner.

Long story short, the need had arisen to  grow revenues and expand the business. The business had several underdeveloped revenue streams, a huge asset base whose potential had not begun to be tapped, no surprises there as it was being run very casually. Which was understandable because how much can one man eat?

The first suggestion was obvious, an audit of the business was required to establish what the business owned, its income and expenses.

The next thing was to clarify the ownership, the rights and obligation of the owners – existing and potential.

 This last part was as crucial if not more crucial than the audit.

"Our businesses fail more for lack of organisation than for lack of money. To the extent that businesses are organised in their set up, how they participate in the market and how they relate to their various stakeholders determines whether they are well funded or not....

Negotiating the shareholder agreement proved harder than initially thought. What share would each shareholder get? The issue of how much equity each would contribute to the deal? And how would the business be financed going forward, when its needs extended beyond the initial owner’s needs? How would the business be managed going forward and finally, the elephant in the room, how would each be paid by the business for their interest?

They say that in setting up a business the initial fifteen percent effort will determine the destiny of the business.   That the way you start the business may lock you into a path way into the future for better or for worse.

By insisting on the shareholder agreement at the beginning would clarify a lot of things down the road – how decisions are made, how owners can fund the business and get paid by the business. These three components alone are what determine the long term viability of the business.

For instance if the business need a capital injection of a million shillings how is it decided that the money is needed? If the all the shareholders can not afford their share but some of them can foot the full bill how do we handle that, especially how the rich ones get paid in the future? And when and how do the shareholders start to see a return from the business? 

The shareholder agreement and adherence to it is the beginning of formalisation of the business.

What happens with our average business? Mostly they are sole proprietorships, which are most likely to fail to grow beyond the founders needs. But if they are limited companies, with several people coming together to pursue opportunity the thinking at set up doesn’t not go far beyond what the business will be and what each owners rights and obligations to the business are.  Trouble starts when they become successful, the money starts flowing in and disagreements  begin about how much of the money each is entitled to. Never mind that the business may not have even broken even.

Taken a little bit further a time comes when the owners and the business can not keep up with the capital demands of the business, how do they fund it? By borrowing or inviting new shareholders or selling the business altogether.

The question often comes up, why should we want to expand at all, we are happy at our current size. For starters growth is a survival mechanism. If your business does not grow it is only a matter of time before a bigger business with larger economies of scale comes and runs you out of the market...

We have seen it in our own time. Trading centres are giving way to malls; Fruit juice companies have given way to bigger beverage companies; cottage industries are giving way to bigger manufacturing concerns.

Back to my friends who were hoping to turn around their business. We are hoping to move from informality to formality not only in the way the business works but in the way the owners think about their business. 

By getting organised not only can they maximise the existing revenues streams, but they can tap into the business latent potential through borrowing, inviting new shareholders or selling it off all together, most likely using a combination of the all of the above.

"The business may very well fail in the future, but the owners are determined that it will not be because they were disorganised and confused....