Facing Up to Difficult Issues

A particularly interesting recent assignment was a review I carried out of an underperforming joint venture of a client company. The joint venture was a specialist manufacturer, and exposure to utility prices meant costs were fluctuating and significant losses had been made over a number of years. In addition, there was the potential for conflict between the two shareholders due to their different interests. One shareholder had founded the business, and was owed significant sums due to funding  losses, but was also receiving rent for use of its site. The other shareholder was the company’s major customer and benefiting from sales made at a negative margin. We were asked to give our views on the current position and future of the business.

We worked with management on their revised forecasts, but also examined their historic ability to meet budgets, which was very poor. We assessed the future options within a number of principal scenarios, from increased investment through to mothball / closure, and reported our opinions to the board, comprising management and representatives of both shareholders.

The discussion of our report brought into the open issues which had been present for some time but had never been properly discussed or resolved. The differing interests of the two shareholders were causing tension as there was a perception that they were not sharing the burden of the company’s problems equally and our report was a significant step in moving towards a conclusion. We were forthright in our opinion that the business had no ongoing value for the founders as it stood, and that they should look for an exit.

The founders effected an exit by taking on a small part of the business which fitted into their wider activities and writing off their debts. The customer shareholder took 100% ownership of the remainder to continue to guarantee its supply of material, albeit with responsibility for any future losses. This meant that the company could move forward with clearer goals and with a board and management team fully focussed on common objectives.

As is often the case in these situations, it was only once the problem had been dealt with that it became apparent how much of a distraction it had been and how much time and effort had been diverted from dealing with the real issues facing the business.

Neil Grimmond
About the author

Neil joined Craig Corporate in 2005 and has been involved with both corporate finance and business management assignments. Corporate finance projects have ranged from diligence to...
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by Neil Grimmond