Using a cornerstone
shareholder to
avert failure


Over the past decade we’ve witnessed more volatility and swings in national economies than we’ve ever seen before. In hindsight this probably hasn’t been overly detrimental to the business community as its demanded more robust business practises with investors and directors’ becoming more attuned to ensuring business governance is robust in the extreme and certainly matched with an increased focus on strategic direction and managing current and future market and financial risk.

However over recent times I’ve noticed that a number of the smaller mainly privately owned companies with revenues in the $20 to $30m range have either been put into receivership or forced into liquidation. Some of these companies had been on steady growth curves for years with reasonably high public profiles. So what went wrong?

Using information available I decided to examine a selected few of these failures to see if I could find a common thread which might be either a definitive cause or at least a significant influencing factor in the demise of these businesses.

Finding a common thread wasn’t at all difficult. All had overload debt equity ratios and the burden of debt was such that even the smallest down turn in revenue or competitive pressure influencing margins produced a negative cash position forcing even more debt onto the balance sheet until the foreclosure of the business was inevitable.

However my inquisitive mind then turned to the question of how did these businesses get themselves into this position?They were growth companies with reasonable turnovers had market place presence and appeared on the surface to be reasonably well managed.  So I began searching to determine if I could isolate one dominant factor that was common (apart from obviously poor leadership) that contributed to their financial demise?

What I found needs to be considered totally subjective as it’s based on very limited detailed information and certainly with no empirical evidence to back my conclusions but never the less is interesting.

The companies still had their founders as the major shareholders although over the years as growth capital was required they had taken in a range of small minor shareholders who simply invested in the hope of a future financial return. In most cases these were family members, business associates and or friends who invested but who were silent shareholders contributing nothing strategically to the business model.

Then as the business continued to grow the founding shareholders didn’t want to dilute their shareholding through new share issues and possible control of their company’s so they turned to a combination of bank and financial house loans to support their company’s growth scenario. Slowly but surely their debt equity ratio became unbalanced and they were then on the slippery path to the point where the debt and interest burden became too great and the bank or other major creditors moved in.

What I’ve described is a sad picture of a founding father not understanding the economics of managing financial security through the prudent management and use of the market value of their shares. In other words there comes a time in every business where additional capital is required to capture and stabilise the growth already achieved and at the same time provide for future growth providing increased shareholder wealth.

The answer to this requirement is not to continue to take in a multitude of small shareholders who provide capital without adding any strategic value to the business but to find a cornerstone shareholder who will commit to not only initial but also future funding and who will add experience and strategic grunt to the business decision making process. Naturally the trade off for the founding father is a certain loss of control as new shares are issued to the cornerstone shareholder verses the ability to stabilise the business and use the corner shareholders strategic knowhow and grunt to increase future share values.

Without any doubt the companies which I’ve looked at would have benefited considerably from bringing in a cornerstone shareholder who would have added strategic value to the business rather than relying on the addition of smaller shareholders and then resorting to banks and financial houses to prop up their business models. However this raises an interesting question and that is,

At what stage of a business life cycle and or what are the triggering factors which signal that a cornerstone shareholder is the best option for securing business stability, supporting growth ambitions and increasing shareholder wealth?

Appreciating that each business is different and founding shareholders have different aspirations in their personal lives there must a number of common factors which are identifiable and can be applied to most business cases. The trick is to educate the founding fathers to understand that bringing in cornerstone shareholders who inject both capital and provide strategic direction and input is both a protective mechanism as well as a major enabler to increasing their share wealth profile.

"...However my inquisitive mind then turned to the question of how did these businesses get themselves into this position?"

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