Get Off Your High Horse: 15 Ideas to Develop a Merit-Based, Results-Oriented Company Culture

“Executives and owners are simply employees of the company and therefore subject to the same policy and procedure endured by any associate.”
Sometimes the Bull Wins

The Lead Up to the First All-Hands Meeting
Once my eyes adjusted to the change from a Fortune 50 firm to a small regional business, I quickly recognized there was a solid list of apparent and overlooked positives. The company had many strong client relationships. The team was deep with talent; the top tier of associates could have played at any level of the industry. It was a lot of fun being around the employees; there was a natural camaraderie and a rich jocular style that comes with a young demographic mix. And beyond their doubts and concerns, I sensed the associates were ready to commit.

The real central question was the one on their minds: Was their employer viable, well-led, and worth a career commitment? The associates were right to have been harboring concerns about the company’s future. Cash had not been generated for two-plus years. The last audited financial for FY1988 indicated the losses had exceeded $1.2M. There had been a number of layoffs. Job security and the company’s survival was on every associate’s mind.

The root cause of most business failure is found somewhere in the mix of strategy, structure, and business process. The final symptom of failure is a working capital collapse. However, for employees the impression is less academic. Serious financial stress in a company is experienced by the rank and file associates as a values crisis. Commitments that had been made are not met; which calls into question the credibility of key executives. While budgets are slashed, and jobs are disappearing all around, employees are no longer sure what the organization stands for or believes in. Long-term office alliances and relationships are strained while associates compete for job security. In an organization in decline, it is easy to personify problems that find real root in business fundamentals. This is especially the case for young people who have not experienced the ups and downs of a business cycle.

To reverse the decline, an organization needs (1) a transfusion of working capital, (2) an effective strategy and viable model, and (3) reestablishment of a merit-based, results-oriented culture. A week into my new role, Jon and I were starting to wade into that sequence. That is when I scheduled my first all-hands meeting.

The objective of the meeting was not to make my introduction — we instead wanted to organize my comments around their interest — “security”, “career” and “opportunity”. With this group I knew my tone needed to be both light and serious. One objective for that meeting was to shift focus from the past. I wanted to legitimize how they were feeling, while challenging the team to move forward. Unfortunately, a sequence of former executives had made a practice of disparaging predecessors. I had never seen the value in judging predecessors. Beyond poor taste, there are at least three reasons why this is a bad idea: The criticism is usually inaccurate and out of context; there is no gain – in fact predecessor blame is counterproductive; and it is bad karma — since we will all eventually be part of the emeriti. It was important for me to get the associates’ energy out of the past — and I thought I may be able to have fun expressing that view.

The First All-Hands Meeting
At the beginning of my comments, I made a few lead-in points:
• It is a privilege to be part of the team. I know good talent. It is obvious to me the culture is rich with tradition, and the team is deep in ability. I have worked in award-winning Fortune 50 branch offices my entire career and this organization could compete with any of them.
• Their sacrifice has been crucial to our survival, and hasn’t gone unnoticed. All should be proud indeed of the collective efforts.
• Our firm has made it nearly to the end of the recession because of those efforts. There is tremendous opportunity for the firms that will make it through. If we push to the other side, with this talent we have a chance to go on a run that this team, our competitors, and the market would not soon forget.

I knew the audience was curious about my management style, so I let the group know I had a cautionary tale to share about my viewpoints on management. With a smile, I leapt right into the tale:

“An executive had been recruited to be the new president of a regional high tech product and service company. As he walked into his new office, his predecessor was just leaving holding a box of personal possessions. Startled, they exchanged strained cordialities. The outgoing exec broke the ice and said, “Listen, I wish you the best of luck. I know you probably don’t need any advice from me, but just in case it helps, I have left three envelopes marked “#1”, “#2” and “#3”. I placed these out of the way in a hanging Pendaflex folder in the credenza drawer. If you want — open these one at a time when you confront a crisis.” He quickly ducked around the corner and exited the business.

The honeymoon went along smoothly for the new president, but four months into his role, revenue plummeted unexpectedly. Working late that evening, with a slight bead of sweat pouring off his brow, the president came across those numbered envelopes. He took out the envelope marked “#1” and opened it. The message read, “Blame it on your predecessor.”

The president acted. He called his managers together, and with nuanced cleverness, he laid the entire blame on the previous president. From this point forward, things were going to change. The old style was out — things were going to be different. Old meetings were cancelled and new meetings defined. Team building, rope courses and performance coaches were introduced. People learned about each other’s communication preferences. Favorite business books were distributed. Revenue cycled up, and the crisis passed.

All went along well. However, about a year later, the company was again experiencing a revenue decline. Yet the crisis was compounded with a serious expense control problem. Late one night in his office, in a deep state of panic, the president recalled those envelopes. He hurriedly ripped open envelope “#2”. The message simply read, “Reorganize.”

The president jumped into the task. He brought the team together, announced he was moving the managers around to new roles. He renamed all the departments, changed all management titles, and “sales representatives” became “territory managers”. Fast-trackers were identified, and company mentors were assigned to them. The president then developed a presentation with the new org charts and visited every team to tell the story. The chairman and the board congratulated the president for his insightful efforts. Revenue cycled up, expenses fell back into line, and the crisis passed.

After several consecutive profitable quarters, the company faced a third crisis. Revenue declined, expense increased out of control, clients were concerned with delivery and quality, fast-trackers — fed up with “being mentored” — resigned, and projects were neither on-time nor at budget. The president went to his office late that evening in a cold sweat, closed the door and opened envelope “#3”. The note said, “Prepare three envelopes.”

The crowd burst out in laughter. The story was good therapy. The team appreciated the self-deprecating message about my station, and by synching up with their doubts, I was developing credibility. Most importantly, my message inferred we were going on an altogether different journey.

It was time to introduce the ownership structure of the soon to be carved-out entity. I started by asking if any in the group knew the difference between the words “committed” and “involved”. A number of hands went up, and someone spoke out, “The hen was involved in the ham and egg breakfast, but the pig was committed!” Then I announced, “The revolving door of leadership has stopped. Jon and I signed over everything we own, and executed agreements to buy 50% of the firm each. We are all the way in – we bet the farms on your success.” I emphasized that Jon Peacock was not just the other 50% shareholder, but an individual I admired more than any I had met in my career. I was proud to call him my friend and partner. His reputation across the community was stellar and it was his leadership that kept the creditors and vendors positioned to support our new business. “We are committed to your security and careers and this firm’s future.”

In the interest of drawing their attention to the future, two far-fetched goals were identified. I said, “As you walk to your cars after our meeting, look down Old Seward Highway and spot the top of British Petroleum’s building through the trees. BP and the others like it are the type of accounts we are going to pursue and capture. We are definitely heading up-market.” In addition to an “up-market” focus, I followed with the point that our top line mix was going to emphasize higher levels of service revenue content. We were going to chase large-scale, long term service projects in corporate and institutional accounts. A five sentence version of our new business positioning was handed out to make it easy for all to understand and explain.

To begin the wrap-up, I emphasized to the group that their expressed concerns were appreciated and understandable. We would be making critical changes in the next 90 days that they could count on, including: Leasing a new upscale office within three months, and securing substantial financial commitments from the largest bank and the fastest growing telecom company in the state. I asked that they write those promises down and hold us accountable to the commitment.

I finished my first meeting by saying, “We will need a little more of your indulgence — we won’t fix all the problems tomorrow. You will see profound change in the coming weeks and months. But don’t take long to buy in — as much as you have already given, I have to ask more from each of you. Your support, confidence, and attention to the little things are needed in extraordinary measure. Your collective commitment will create the critical momentum. You can trust that it will pay off in better job security for all, interesting career paths in the future, and a professional journey you won’t forget.”

We got a great response from the associates. Now it was time to meet our list of promises. We were not taking a chance on our credibility. Jon had been architecting the credit relationships, the stock purchase agreements, leases and floor plans. We had a high confidence we would get all of these objectives accomplished.

15 Ideas for Small and Mid-Sized Businesses to Impact Culture
Jon and I collected a number of values, recommended acts, and insights from our conversations and readings that we intended to embrace in the new “corporate culture”. Listed below are 15 of those ideas.

1. Owners and executives are simply employees of the company and therefore subject to the same policy and procedure endured by any associate.
2. Principal’s intent on building shareholder value should take conservative salaries, and reinvest earnings in the company.
3. Avoid the appearance of privilege. Principals of emerging enterprises should look conservative. New cars, fancy offices, Rolex watches, and Armani suits produce unintended consequences.
4. People notice hypocrisy. Principals should set the standard for work ethic; at least collectively, principals should be at work the earliest and stay the latest.
5. Executives don’t really need a big office. The manager with the most direct reports should get the largest office, along with a table and chairs. Conference room usage will be more efficient that way. And get rid of the stuffed blue marlin on your office wall. It sends the wrong message.
6. Vendor benefits, gifts, and prizes are not for the ownership team or salesperson. These SPIFs (i.e. special product incentive fund) are best applied to the company and/or for the employee reward and recognition programs and distributed based on merit. SPIFs should not be distributed to the principals for their personal use.
7. Culture is the collective of what the organization stands for and what it believes in; the central beliefs and attitudes. A practical definition of company culture is how employees act when management is not around.
8. Cultural health can be gauged in part by each employee’s understanding of their purpose in the context of the plan; their self-confidence to act to achieve that purpose; and belief that good performance will be recognized.
9. Eliminate bottlenecks and increase the degree of freedom. Performance happens if associates who know their jobs – and have the freedom to do the job – are matched with an intelligent plan that has room for innovation. In this environment, the business will grow, job security will improve, careers will advance, and associate confidence in leadership will be earned.
10. A motto, business principles, and mission statement will produce widespread cynicism if there are significant differences from common perceptions. What may work better is to lay out the strategic positioning and the tenants of the business plan in five or less simple sentences. Once everyone buys in — delegate.
11. Organize the company around recognition events. Hold regular meetings for the employee workforce. Reward and recognize associates publicly and often. Create ritual around reward and recognition. Also reward employees for telling you what is broken; then think of ways to have fun with the discoveries. Fix the processes causing issues.
12. “Egalitarian” and “more” recognition will work well. “Inner-circle” and “less” recognition will not work at all. If you are a principle or key executive, tell your direct reports that unfortunately their positions will have to be public recognition enough.
13. Take a sincere interest in the employees. Be approachable. It is more enjoyable to be involved at this level.
14. Get the organization involved in the community and in charitable organizations. It brings meaning to work, creates opportunity for camaraderie, and good community association.
15. Have informal non-business gatherings including picnics, potlucks, and holiday parties. Dispense with speeches about the business at these events – and make sure you thank the spouses and their loved ones for their indulgence and understanding.

Please add your own ideas to the list and share your comments.

©2009 Ancala Equity Partners / Timothy P. Fargo all rights reserved
Next Week: The tactics of strategy.

Back from the Brink: 7 Steps to Business Recovery

“For Heaven’s sake heave out the ballast!” “There! the last sack is empty!” “Does the balloon rise?” “No!” “I hear a noise like the dashing of waves! …”
Jules Verne, Mysterious Island

For the first decade of my career, I had worked in branch offices of a growing, “Fortune 50” information technology company. I was not prepared for the transition I was about to experience. The moment I decided to take on the new entrepreneurial opportunity, the exhilaration of being recruited was suddenly over. On the appointed morning, I resigned and left a multi-storied, concrete, steel and glass office building, and drove out of my heated underground parking garage for the last time. Five minutes later I arrived at a lot next to the Fireweed Theater. My new business was located in what only could be described as a run-down strip mall.

Well before I met an employee, I knew that there was little enthusiasm left in the workforce. As I walked across the parking area to enter the store, I picked up a crushed coke cup and popcorn tub discarded by a theater patron. Then I noticed the retail stores’ 20 foot high outdoor changeable-letter sign; there was no message on the sign for the passing traffic. I opened the door and could see computers on display that were obviously not demonstrable. I didn’t know much about the retail computer business, but I knew that these were not indications of esprit de corp.

My partner introduced me to the sales team leader as simply “our new president” — we skipped the ownership description for later. Jon quickly headed back to our corporate office, and the sales manager took care of the rest of the introductions. I spent most of the first day in one-on-one meetings with our associates. I could tell that energy had to be mustered by most associates for a conversation with the “new guy”. Eye contact was hard to come by; employee attitudes seemed to range from deeply pessimistic to cynical. This was no surprise; those remaining on the payroll had endured a multi-quarter cash crisis, a sequence of layoffs, pay freezes and reductions, and a number of executive transitions. The more imaginative staff members were working on theories to explain why I had left such a fine career to join this organization, and whispering about how long I might last. The same thought may have crossed my mind.

Jon Peacock and I met late that afternoon at the TransAlaska Data Systems corporate offices – which I had learned that day was nicknamed the “Death Star” by our employees. Jon greeted me and asked, “How did the day go?” I smiled and let Jon know that my impression was some of the employee attitudes seemed like they “would have to get better to be bad.” After a good laugh, we sat down for the next few hours with a stack of interview notes, and a well-worn Scott McMurren article from Alaska Business Monthly on survival. We exchanged views gathered from our ten years of experience and opinions on the current state. We then outlined the seven steps we would follow to get the business back on track.

Step 1 – Establish familiarity with the turnaround process by defining a plan.
We were going to make sure everyone knew that we were unusually committed to the organization – we had literally bet everything we owned on the companies’ success. Most importantly we wanted to communicate that Jon and I, and our new board of directors, were experienced with business cycles, turnaround efforts, and confident in the future.

Step 2 – Recognize reality.
Just like many organization that had missed multiple quarterly performance expectations, we needed to do our laundry and fully disclose to stakeholders the true status of the books. We knew the first sign of an impending turnaround was recognition or write-down of all:
• Under-performing initiatives,
• Over-valued assets, and
• Hidden unreported expenses.

Our borrowing base formulas with the bank posed a logical barrier to an overzealous effort at marking our assets to value. Notwithstanding borrowing base management concerns, a very large asset write-down and full disclosure to all concerned was the right start at establishing credibility with our new board, financial stake-holders, and employees. And an accelerated depreciation schedule would take care of the rest. One additional benefit would be that our true performance would be reflected in each new financial report going forward.

Step 3 – Most importantly, get control of cash.
We had to stop the hemorrhaging of cash. Bold action was needed immediately. Jon and I decided on three principles to our cash control program.
• The reduction of our salaries and the elimination our management bonuses would precede any further reductions in staff.
• Any reductions in staff would be deep and one-time, and when possible the changes would focus on performance and those with unsalvageable attitudes.
• A comprehensive expense reduction plan would be put into place.

To establish the reduction objective, all programs and locations, including “sacred cows”, were to be reviewed carefully. Expense reductions were going to require:
• Combining accounting and administration into one department for all locations,
• Consolidating warehouse locations,
• Renegotiating all leases,
• Review of all contracts and discussions with all vendors,
• Restructuring the benefits programs,
• Collapsing management levels,
• Merging, centralizing, or eliminating some practices, and
• Once we were fully engaged up-market, getting out of the retail business altogether.

We knew that unless the hemorrhaging of cash was stopped, the firm was still heading to the brink.

Step 4 – Raise cash.
We were making every effort to quickly put the 1.1M bank line of credit in place and execute the GCI loan for 400K. Together these loans would improve the borrowing base and cash on hand, and support our sales objectives.

Moreover, we were going to work our internal sources and uses equations by:
• Improved billing and A/R disciplines to correct the 75 day DSO condition (i.e. Collect early),
• Increase trade credit (i.e. Gain terms to pay vendors late and put more on trade credit),
• Explore sale-lease backs to produce a capital infusion on internally deployed assets, and
• Outsource sales process to consume less working capital (for example – PC manufacturer and reseller programs would soon emerge that would reduce working capital requirements in Higher Ed and K-12, and other institutional accounts).

We further planned, if necessary, to approach a list of investors on a secondary offering. We knew our firm would remain on the edge of failure unless adequate cash was raised and solid creditor agreements produced an effective level of working capital.

Step 5 – Recover credibility with associates, investors and creditors.
We were intent on accomplishing everything we said we would when we said we would. This started with the discipline to make only commitments we could keep. One objective was to deliver on time the aging reports, financial reports, ratio stats and payments to creditors. Another was to drive A/R and inventory down. We also knew of two slam-dunk initiatives we could promote to establish a pattern of promises made and met: loan agreements and a new office location.
• Loan Agreements
Since we were within a few months of executing new credit agreements, we would state to our associates we were making every effort to close these loan agreements. Once these were closed, we knew there was value in the announcements of our success to the workforce. The dourest of our business partners, the banker, and a savvy telecom company were expressing confidence in our business plan with these loans. That would make a powerful statement to even our most skeptical associates.
• New Office Location
We were 120 days from relocating to new office facilities. We would announce our intent to find and execute a new 10,000 square foot office lease in a highly desirable section of the city. Leases of this nature would only be provided to a creditable firm. An impressive new office would be a tangible statement to clients and competitors that we were committed for the long term and planning to grow. An upscale lease would significantly impact employee esprit de corp. All of our Anchorage associates would soon be under one roof. An outdoor changeable-letter sign would not be part of the new image.

And we identified two far-fetched goals that would motivate our associates and disclose our primary strategic objectives. We were moving our focus up-market, and we intended to emphasize IT service revenue.
• Our target market was going to shift to corporate and institutional accounts —
We intended to pursue and capture the largest and most prestigious client relationships in Alaska, including British Petroleum, Arco, the State of Alaska, the Department of Transportation, and the University of Alaska. Our first step would be to put every bit of our effort into the State of Alaska and University of Alaska bids. And we would express confidence we were going to be highly competitive in enterprise and institutional accounts, and would win our share.
• Our emphasis was going to change to IT service delivery —
We were going to get organized around selling and delivering IT services to large accounts. We were confident we could show progress on both of these objectives.

Step 6 – Work to show a profit.
We began to identify the overlooked positives in our organization. We looked for programs that competitors and peers had successfully implemented. And we immediately began to take these steps:
• Recruit back key associates we had lost that would drive revenue,
• Retain the key associates who were considering departure,
• Add new practice opportunities,
• Create more effective business process, and
• Focus management’s attention on closing the largest accounts.

Step 7 – Execute. Execute. Execute.
Jon and I knew we needed to produce action and measurable results on a short set of priorities. It was our job to communicate, allocate limited resources, deliver our attention to these high profile objectives, and close the gap between early and late adapters of announced change with personal promotion. On achievement of measurable results, we were committed to rewarding those that made the difference. We wanted to make execution an organizational habit, ensuring implementation predictably followed announced change.

These seven steps were not invented by the two of us. We were following a process that corporate managers are trained to apply to underperforming entities, and any number of business authors had described. This sequence of action is so predictably employed that it is the basis for investor models that are used to pick value investments such as the “Dogs of the Dow” or “Dow-Dividend” approach. The “value opportunities” in the Dow 30 are obvious; as the share price declines, the dividend will grow as a percentage of the share price. Calculate the five or six highest dividend yields in the Dow 30 to identify the value stock picks. Investors know these under-performing firms will face unrelenting pressure for management action from shareholders and directors, and follow a very similar sequence to improve the firm’s performance. If not, the directors will eventually replace the leadership, or the shareholders the directors, or the market the firm.

The obligation is the same for the principals and executives of smaller enterprises. Instead of public shareholders and bondholders, the requirement to act emanates from the stake-holders of the small enterprise:
• The principals, investors, and board members,
• The vendors,
• The bank and other lenders, and
• Career minded employees.

Jon and I understood that if we did not take action, less familiar business professionals would do so on a “post-petition” basis. However, then it would be accomplished with less understanding of the circumstances, less experience with the firm, and less empathy for the employees. We had to step up, get the job done, and by doing so earn the confidence of the team.

We stepped back from the brink by: (1) Assembling an experienced team, (2) Disclosing to stakeholders the true status of the books and getting the accounting corrected, (3) Gaining control of cash, (4) Raising cash, (5) Recovering credibility with associates, investors and creditors, (6) Working to show a profit, and (7) Executing our plan. The economy soon recovered, and the key employees regained confidence in the organization and each other. This core group of associates was instrumental in building the company from a firm on the brink into the regional leader. Their efforts produced the critical funding source and business model used to develop a profitable, fast growth national enterprise.

©2009 Ancala Equity Partners / Timothy P. Fargo all rights reserved
Next Week: Egalitarian Ownership.

Design the Company for the Long Term

“Nothing truly worth doing in business can be achieved in a quarter, a year, five years, or even a decade. Design your company for the long term.”
Mike Rice, dean of UAF School of Management

Mike Rice’s many gifts include an extraordinary intellect, a disciplined understanding of risk management, and an ability to look deep into the unknown. Mike built from a kit and piloted an aerobatic plane, reconditioned and piloted his Cessna L-19 “Bird Dog” (an Oshkosh award winner), and is a recognized astronomer and deep space photographer. In the 1980s, Mike’s day-job was dean of the University of Alaska Fairbanks’ School of Management. In that role, he led the school to its first AACSB accreditation. Mike also served for nine years on our firm’s board of directors.

In March, 1989, I called Mike and explained that I had all but decided to leave Unisys for an entrepreneurial opportunity. I was hoping I could get his feedback before I took the final step. Mike replied, “Tim, let’s not do this over the phone; catch the first flight up to Fairbanks tomorrow and we can visit at length here on campus.”

The next morning, I arrived at the dean’s office well before 8 am. Mike greeted me enthusiastically, but he didn’t extend a hand to shake; his sleeves were rolled-up and his hands were deep into his bleeding-edge color printer. This early color technology used a heat transfer method that had left his office with a scent of melted crayons. While he tinkered, we quickly discussed the impact that color had in a world of grayscale. “I am suffering the inconveniences of early color adoption,” Mike said, “because it is my job to be persuasive. Color differentiates, and in business or a budget competition, differentiation matters.”

As Mike wiped his hands with a towel, he asked, “Tell me all about this idea of yours.” I stayed at a high level, “Jon Peacock extended an offer; 50% ownership of a business with $9M in annual revenue. I have put some of the details in this document, but the analysis only goes so far when there are many unknowable variables. Emotionally, it is hard to leave Unisys after a decade. Yet, I’m not sure I can refuse the offer.”

Mike thumbed through my supporting documents, and then laid the package down. “We may find more in conversation than in this hard copy. Give me some background on the transaction.”

I explained the long-distance telephone company, GCI, had settled their legal case against Alascom, which produced an infusion of cash. The GCI leadership was using their proceeds to expand their communications services, and they made an offer to buy TransAlaska Data Systems. However, they were not interested in TDS’s computer store division. As a result, Peacock structured a three-party deal to acquire the carved-out MicroAge stores. The working capital seemed in order. National Bank of Alaska agreed to provide a $1.1M borrowing base using AR and inventory as collateral; and GCI agreed to extend a $400K loan. Jon and I would soon execute the stock purchase and loan agreements, and personally guarantee up to $1.5M in debt. Mike listened, and waited for me to come up for air.

“Tim, recap your high-level plan, but in your thumbnail description answer these three questions: What business are you going to be in? What type of clients will you engage? And what is it that those clients value?”

With a level of enthusiasm, I summarized our intent was simply to provide IT hardware, software and managed services to businesses and institutions in Alaska. Our plan was to rapidly de-emphasize our retail presence. We were convinced that connected, open architected IT solutions were going to supersede proprietary IT systems. We were determined to focus our efforts up-market, and emphasize IT service delivery. The target market, I asserted, valued the process improvement and productivity gains that were enabled by technology. Our firm would be positioned as an extension of our client’s IT resources, and therefore we would provide faster access to process improvements and productivity gains. I added that our cost structure would allow our price to undercut the proprietary solutions vendors.

Mike nodded his understanding, and added, “I sense your enthusiasm – and frankly, I think you have already decided to take the leap. What stands out about your description is you have selected an industry that has the potential for a decade or more of high double-digit growth.”

“Now” Mike said, “Let’s talk about more important details than your current business plan. What kind of business do you want to build? Are you building a small business that is intrinsic to your lifestyle? Or are you focused on developing a scalable business model and increasing shareholder value? A lifestyle business focuses on absolute principal control, is built around and dependent on the personas of the principals, and the objective is income maximization. Alternatively, building share value through development of a highly scalable model is an entirely different journey. For instance, that type of business will not be advantaged by absolute control. Before you start developing a plan to build your business, you have to decide what you intend to build.”

I responded that I assumed Jon and I both intended to optimize share value and build a scalable model.

Mike suggested, “You two need to spend time exploring the virtues of each alternative, and then make a choice.”

Then we discussed the structure and leadership. Mike knew both Jon Peacock and I very well. Yet, he asked me, “How well do you know Jon?”

I started by saying that I knew Jon only briefly, but it seemed recently we were bumping into and hearing about each other everywhere we went.

Mike smiled and said, “Despite the efforts of many, it took you guys long enough.” Apparently our meetings were not happenstance — Allan Johnston of Wedbush Morgan, Marv Andresen of UAF, and Mike had been trying to get us connected for some time.

I went on to say I knew Jon’s background and met his family.

Mike let me know his question was trying to get to a different matter altogether. Mike explained, “The principals of a start-up are much better off if they are each experienced, competent, well-networked, and have common principles, work ethics, and values. You both bring that to the mix. What is interesting about you two is your distinct, complementary skills will lead to a natural division of roles and responsibilities. As critical, you must have the discipline to avoid the partner conflicts that destabilize a business.” Mike shared that he knew many businesses destroyed by the principal’s inability to manage differences. Mike finished, “Give each other lots of space on insignificant issues. And remember, most issues are insignificant.”

The subject changed. “Tim, it must feel pretty good to think that you may soon be your own boss?”

I agreed whole heartedly.

“Well then.” Mike said, “You may not much like my next recommendation. To paraphrase an old legal bromide, ‘A principal that elects himself as the sole board member has a fool for a director.’ Now that you two have achieved a position of controlling ownership of a small enterprise, vote your shares and constitute a board of directors. And I would not add your paid professionals to the board. Find well-networked board candidates who have experience and distinct areas of expertise – who will express their opinion. The benefit is you and Jon will leave the day-to-day tactics once a quarter, and consider the strategic issues that will better ground the tactical execution. The process of preparing for your quarterly board meeting will be an advantage; knowing that you will be vetting material issues and ideas to a group of directors will clarify the mind. The board meetings will add a healthy level of accountability to the performance objectives outlined in the prior meeting.”

We turned our attention to the importance of articles of incorporation and bylaws. “Tim, nothing truly worth doing in business can be achieved in a quarter, a year, five years, or even a decade. Design your company for the long term. Common principles, work ethic, values along with distinctively different skills and separate but coordinated areas of focus can create a long honeymoon, but these are no substitute for a well “constituted” corporation. Two principals each owning 50% of the common stock with an unadulterated set of articles and non-cumulative voting means you will reach consensus on material decision. When minority shareholders are introduced, super-minority rights in the articles of incorporation are the next step to maintaining an apolitical leadership environment. A good constitution will keep everyone constructively focused on the market; success in part will come from time over market. Longevity happens by design.” As Mike talked, I took a lot of notes.

Finally, we discussed capital requirements. Mike started by saying, “I was glad to hear that you guys believe there is adequate working capital. That is most critical. The business is highly leveraged, and the AR portion of your borrowing base will programmatically fluctuate with sales. There will inevitably be sales disappointment curves that affect working capital. Here is just a small piece of advice: a small enterprise runs on the sources and uses of funds statement, not the P&L statement. At this juncture — cash is much more important than profits. Cash is king. Get a good handle on what preserves liquidity – what causes cash to flow in faster and flow out only when necessary. Get rid of assets that convert to cash, unless these serve a better purpose on your borrowing base equation. And see if the bank minds if you are a week early or a few weeks late with the aging report. In humor and borrowing base management, timing can be everything.

I flew back that evening and met with Jon Peacock the next day. We covered a list of items ranging from (1) lifestyle versus shareholder value, (2) division of responsibility, (3) structuring a board, (4) designing the corporate constitution, and (5) working capital and cash preservation. Jon Peacock had a similar list, and we quickly realized we were already in full agreement before our conversation started. I left Unisys, and we soon closed the stock purchase and loan agreement with GCI/TransAlaska, and the loan agreements with National Bank of Alaska. I immediately called the first name on our board candidate list, and Mike Rice accepted Jon and my invitation to be our first director.

©2009 Ancala Equity Partners / Timothy P. Fargo all rights reserved
Next Week: Recovery from the brink.