How to Hang On When Things Go Bad
In the investment business, you learn to recognize the early warning signs that something is wrong with a company. During quarterly conference calls, there is sometimes a moment when the investor’s voice changes or their normally positive view shifts. The investor almost always asks about two things:
- What can be done about the problem?
- Is this a management issue?
For an entrepreneur, the second question is usually the more alarming one!
Because private-equity backed companies usually have a board of investors who effectively control the company, they can make changes to management. This happens more often than most investors care to admit.
A change in management can be triggered by all kinds of things, but the most common is financial underperformance. The investors have to figure out if this underperformance is market-driven, strategy-driven, or a management problem. Investors know that it’s hard to make changes to a market, and changing strategy isn’t easy, either. Changing management is difficult, but of the three options, it’s often the one in which the investor feels he or she has the most control.
In this situation, what can an entrepreneur do?
- Disclose More, Not Less It is human nature to downplay the gravity of a problem when it first arises. Don’t do that. In this situation you want to disclose more, not less. The investors realize there’s a problem, so they will want more information. A simple summary of what went wrong is not going to cut it. Laying out the information, so investors can see the problem alongside you, helps build trust. A corollary to this is speeding up information flow. As the situation gets worse, information about the problem needs to get to decision-makers faster in order to avoid a really bad outcome, such as a liquidity crisis.
- Don’t Fall Back on Muscle Memory. Analyze Many long-time managers and company owners will say that they have seen similar dips before, and will point out that they persevered last time. Well, sure, you survived the last time around - but this threat is new, and the world changes. If you have private-equity backers, you are likely managing a more leveraged company, which gives you less room to maneuver.
- Come Up With a Plan The best entrepreneurs and managers analyze the problem, come up with the options, and then recommend the best solution. Don’t just dump the problem on your board. They are looking to you to manage, which means you need to diagnose, analyze, and come up with a solution. Disclosing the problem is not the same as solving it.
- Ask For Help The best investors offer more than money-;they bring expertise, relationships and judgment. They want to get the company back on plan, just like you do. Don’t be afraid to ask them for help--that’s part of what they are there for.
- Go Faster No investor has ever said, “We should have changed management more slowly.” The option of making a change is always in the investor’s toolbox. If a problem is significant enough that you are talking about it in multiple board meetings, don’t be surprised if investors are asking themselves (and each other) off-line if this is truly a management problem. You need to move faster to stay ahead of that conversation.
The most difficult situations get worse when trust breaks down between a company’s investors and its management. It is almost impossible to come back from that precipice. Don’t let things get to that point.
ED POWERS | Columnist | Head of Capital Access Funds, Bank of America
Based in New York, Ed Powers is a managing director and head of the Capital Access Funds team at Bank of America Merrill Lynch. Capital Access Funds is an experienced, returns-driven private equity fund-of-funds.