A relevant case study

A very successful family business in the North of England, which had been established for many years was focusing primarily on software development / highly-advanced and very top-end-of-the-market website planning and development / DVD-based sales video design and implementation / IT support / IT planning services, with all of that being for mainly large company clients

It was enjoying an approx £1.5m and rising annual fee income, and with a very handsome (indeed) net profitability record over many years, but it got itself in to all sorts of most unpleasant difficulties, well before the current recession / depression, this because the directors / shareholders were unaware completely of some of the most key and relevant Intellectual Property issues (and opportunities as well, for that matter) which were (without their knowledge) facing their business

The said directors / shareholders had done an absolutely amazing job in effectively starting up and then building and developing this significant and very successful enterprise over many years, and with their having put in to place during that time the most excellent and absolutely state-of-the-art technologies, in terms of both equipment and people, but they had become stuck in a complete time-warp as regards their appreciation of the IP issues relating to their business 

The prevailing situation was that the (most excellent) service provision which was being offered by the company to its blue-chip clients was being generated internally almost entirely by retained / contracted freelance specialist people, some of whom were full-time and some of whom were part-time, and this type of arrangement had worked well for many years, for the company and its “employees”, and with no problems whatsoever   

What the directors / shareholders had though failed to appreciate and to take seriously on board, at any time or at any level of consciousness was, without the very specific written agreement of each and every individual such in-house freelance specialist to be transferring the totality of their relevant intellectual property copyright to the business, that the (limited company) business then did not own that intellectual property copyright, and that this effect was putting at extremely serious risk the future survival and prosperity of the business

The directors / shareholders only woke up to the critical importance of this state of affairs when they came to be thinking initially but seriously about their maybe planning to be exiting their business in maybe three years thence, and to be doing so most probably via a Trade Sale – and this waking up being forthcoming from the moment when they appointed a highly-experienced OMSG Group Non Exec to assist them in the planning and implementation over the said three years approx of an appropriate and max productive Trade Sale / Exit strategy 

Stage one – On the advice of the said OMSG Group Non Exec, who had spotted immediately the potential Intellectual Property implications vis-à-vis the status of the in-house freelance “employees”, and the lack of the relevant rights-transferring written agreements between them and the company, there was put in to place some highly-specialist and max up-to-date professional opinion from a highly-respected local specialist IP Law Firm, but which opinion and advice confirmed sadly all the worst fears of the OMSG Group Non Exec, ie that effectively all of the relevant Intellectual Property within the business belonged to the individual freelancers, and NOT to the company !

Thus the potential realisation value of their shares in the business, as perceived by the Directors / Shareholders to be in the range of approx £1.5 / 2.0m, maybe more on a good day, had plummeted overnight to a minute fraction of that, and effectively to zero - It was clear that something had to be done !      

Stage two – To meet the monster challenge of this new vastly-lower level of perceived and real valuation of their business, the Directors / Shareholders spent many, MANY half day sessions with their OMSG Group Non Exec, over more than two months trying to decide how best to deal with this very VERY tricky problem  !

The outcome - To their credit, the directors / shareholders bit the bullet, and a very challenging bullet it was too, in terms of considerable courage, a commitment to pay whatever was realistically-necessary, much initial flak from some of their freelancers, huge numbers of soothing and explanatory and re-assuring (but assertive and bold) discussions and negotiations with the said freelancers, individually and collectively on occasion, often with the OMSG Group Non Exec sitting in and being involved actively, primarily to assure both sides that max fair play was that which was in play at all times , ,,,,,,,,,,,,,,,,,,,,,,,,,,,   but the Directors / Shareholders went strongly for it, and just as fast as they could, practically and sensibly, and with their being guided and hand-held at all times, by the OMSG Group Non Exec

Eventually after many very tricky months, all of the relevant rights-transferring written agreements (as drafted extremely carefully by the IP lawyers in close consultation with the Directors and the OMSG Group Non Exec), had been negotiated and agreed (and at a not insubstantial overall £ cost), and had been received and filed safely, with original copies of all of those documents having been fired over to the IP Lawyers for safe keeping, ,,,,,,,,,, and sweet harmony restored itself once again to the workforce !  

At the end of the three years approx runtime to the re-scheduled Trade Sale / Exit, the business, with fee income of now well over £2m, and moving towards £2.5m, was offered at first, on the advice of the OMSG Group Non Exec, as an MBO opportunity to the senior people in the firm, but that in the event got nowhere, not unsurprisingly really, but at least much goodwill was generated as a result of the owners at least having made that effort

So thence onwards to the Trade Sale option, and with that involving a highly-expertised local firm of Corporate Finance lawyers, as suggested, briefed and guided by the OMSG Non Exec, and after a few up’s and down’s, and a couple of false dawns, eventually the real deal came to pass, and one which most definitely did NOT involve any Purchaser-shares, nor Earn-Out clauses, nor any kind of deferred payments, ,,,,,,,,,,,,,,,,, and which was set finally at just over £3m in cash for 100% of the shares, ie RESULT !

And all of that from a business which was deemed, not unrealistically, three years earlier to be effectively worthless, and having then spent relatively modest sums in the interim, on paying for the relevant rights-transferring written agreements for its “employees”, and having paid OMSG Group for their Non Exec provision for three years = a HUGE Return on Investment, apart from anything else  !
 
The moral– Having a strong-minded, independent detached objective and highly-experienced and expertised Non Executive Non Exec on board made all the difference to the Directors / Shareholders and to the senior management team as well for that matter, in order to be able to be analysing clearly the problem, and to be discussing examining - and validating and proving appropriately - the relevant and workable alternative strategies and tactics with which to deal successfully with that problem – and for the said Non Exec to be willing to commit to stay with and support the client firm and all of its people throughout the whole of the three or four years involved / required - and Yes, we would say that wouldn’t we ! – but it’s true, nonetheless

More next month, on another topical issue for SME businesses

September 2010