This was both unfortunate and fortunate. It was unfortunate that the union refused to work with management to improve the work environment for its membership. But it was fortunate for management’s oversight committee because it clarified the union’s position regarding their relationship. Since t
Some so-called partnerships are more like forced marriages. The organizations find themselves in a situation that requires them to deal with each other even though their relationships may be more adversarial than mutually beneficial. I recently had an opportunity to work with a huge quasi-governmental agency. As one of the largest employers in the world, it had many different unions and professional organizations representing its employees. One area vice president was trying hard to improve the workplace environment. To accomplish this monumental task, he wanted to form a partnership with the unions. Management understood that the best way to get to the root causes of employee unrest in the workplace was to get the employee unions to help them make improvements. But one of the most powerful unions—the one representing the bulk of this agency’s employees— was so mistrustful of management that it refused to participate.
During an exploratory meeting, the union came right out and said it did not believe management would address the problems fairly. Moreover, the union felt there was uneven power between management and employees. Then the union walked out of the discussion.
I have worked with all sorts of external partnerships, from auto manufacturers and their suppliers to telephone companies and their unions. I have been involved in multipartner ventures on large construction jobs—partnerships involving building contractors, architects, trade unions, and building owners. All these efforts have one thing in common. They are all trying to achieve a task while developing a healthy and mutually beneficial partnership.
External partnerships can be extraordinarily rewarding. The Northwest–KLM partnership brought over $50 million worth of additional business to KLM at Schipol Airport alone in 1997. When the largest mall in the United States was built in suburban Minneapolis in 1993, thanks to partnerships it was finished three months ahead of schedule and $25 million under budget. A Minnesotan telephone company and its union were at odds over how to settle the scheduling of vacations. The two organizations sat down together and formed a partnership to figure out how to get the work orders completed during a busy summer season and still allow employees time off to enjoy the warm weather. Their partnership headed off a rash of “sick days” for the company and a huge backlog of grievances for the union. These are examples of the power of forming mutually beneficial partnerships.
More and more, people today are finding themselves alienated from each other and lacking in serious relationships—especially in the workplace. They are gravitating to companies where they can meet these needs. Businesses with an orientation to the past are finding themselves increasingly alone, struggling to find loyal employees and fighting for their economic existence. Businesses with partnerships all over town, all over the country, and all over the world threaten those companies that can’t sustain relationships. The good news is that globally companies are changing, workforces are changing, and successful businesses are the ones that have figured out what partnering is all about. These are the companies people want to work for.
Gary Wilson, chairman of Northwest Airlines, speaking to the Press Club in Washington, D.C., described a shift in thought about what constitutes a partnership:“Mergers are out and alliances are in.” He was referring to the proliferation of alliances recently announced by airline companies.While conventional wisdom may once have dictated that airlines compete with one another, in fact they are also some of each other’s most important partners. The nature of the industry allows airlines to compete as well as cooperate in ways that benefit everyone, including the flying public.
In the first quarter of 1998 Northwest Airlines (already allied with KLM) declared alliances with Continental Airlines, Air Italia, Air France, and Cathay Pacific. In the same period, Delta allied itself with AeroPeru, and Nippon Airways formed alliances with United Airlines and Lufthansa.Wilson observed: “The airline industry is on a path to the future different from that followed by other industries. It is a path wary of mergers and acquisitions that make glittering projections about synergies and efficiencies. All too often these projections prove overly optimistic and difficult to achieve.”
We discussed earlier the fact that vendors often over price their businesses. Another major difficulty vendors have is that they do not understand what purchasers or investors are looking for in a business. For example:
Purchasers are primarily interested in a business’s future and not in its past. You may have achieved great things with your business and it may have taken up the best years of your life, but purchasers are only interested in what profits it will make for them in the future.
You should try to understand the different motivations of, say, an institutional investor in an MBO and a private buyer in a trade sale. The most obvious one will be that the institutional investor will have a hard-nosed commercial approach to his investment which he wishes to realise through a reasonably quick exit (perhaps by a public listing or a secondary buy-out), whilst the private buyer might be looking at a long-term business that he will work in until he retires and then transfers to an heir.
Although it appears obvious that all owners should agree to sell before the business is offered for sale, and that they should all be working in unison once the business is put on the market, many businesses are put up for disposal where some of the owners are lukewarm, at best, about the idea of selling, or disagree on the selling price. Often, the result is that these owners refuse to negotiate on any offers, or are so difficult in their negotiations that the sale falls through. Another reason for this problem could be that there is no shareholders’ agreement in place that smoothes the way for an exit by establishing that all owners will agree to an exit subject to certain conditions.
Where an owner has become tired and disillusioned with his business, trading results can suffer, employees will lack motivation and brand and customer loyalty will be eroded. Staying on too long is an impediment that is difficult to fix once it has occurred: a perfect example of prevention being better than cure. The answer is to plan for an exit in advance to ensure you do not get into this state. If you are already in this position, probably the best you can do is to postpone your disposal whilst you rejuvenate the business either through your own efforts, or through bringing in and training fresh management, or with the help of a business mentor, or a non-executive director.
Owners who have an unrealistic view of the market value of their businesses are, probably, the biggest reason why SMEs are not sold at the first time of asking. Where a business is over-priced and owners will not negotiate its price, the business will usually not sell. Alternatively, if the owner insists on offering the business at an unrealistically high price and is serious about selling it, he will have to reduce the price to achieve a sale.
This price reduction is often implemented in stages over a long period, which gives the worst possible signal to potential buyers and puts an unbearable strain on the business, its owners and its key employees. The sensible approach is to ensure that the business is offered for a reasonable price from the outset. By reasonable price I mean one based on a realistic valuation using acceptable valuation methods. The price at which the business is offered need not be the same as the valuation nor the lowest price that you will take, but it must be within a reasonable negotiating distance of your lowest price and should be base on a realistic valuation.
Business premises can be the cause of several problems, such as being located in a remote area that might not suit the purchaser, or having unfavourable lease conditions, or environmental or health and safety problems. Again, these impediments are difficult to fix if left to the last minute. An exit plan that recognises the need to address premises problems and allows sufficient time to do so, should suffice.
Depending on the type of business this can be critical; in other cases it can be a serious problem, but one that can be fixed with planning. Alternatively, it could be a fairly minor issue of updating office computer equipment.
This can cover many areas, but of particular interest to buyers is how responsibilities have been allocated among owners, managers and staff. Part of this should be covered in your review of management’s ability to assist the new owners, but issues of management to staff ratios, costs and savings could be equally important, as could employee contracts. Other issues, such as the need for branches and how they are managed, should also be reviewed. In brief, buyers wish to purchase a business in which these reviews and the necessary clean ups have been completed prior to sale, rather than after it.
A business’s published profits can be distorted because of excessive owners’ drawings. These drawings are usually removed from the ‘adjusted’ profit statements that are presented to potential purchasers. The impediment I am talking about here is different and arises because current profit is depressed by unusually large expenditure on items not essential for the production of profits in the current accounting period. This expenditure could have been legitimately incurred for the longer-term benefit of the business: an example being an expensive marketing campaign.
The solution to this distortion of current profits is to revert to a normal spending pattern for at least three years before exit, or to amortise this expenditure in the accounts in a way that is more positive for current profits. (Note, if you are a potential purchaser you should be wary of a business that in the accounting period immediately before sale stops spending on things that are essential to maintain profits and, thus, boosts its current profits.)
How serious an impediment this is could depend on the type of exit option you choose and the type of buyer that is interested. It will be least serious in a trade sale where the purchaser intends to merge your operation with his own and already employs the staff necessary to undertake all the key functions in your business. But, it could be a fatal impediment where an institution thinking of backing an MBO will be relying entirely on your staff to run the business. Why staff leave any particular business can be a complex issue, but if this is a problem in your business, you should examine all the circumstances involved and try to put permanent solutions in place.