Electronic Supplementary Material: Data and Analysis relating to

Becoming a ‘Proper Company’: Professionalization Waves, Family Firms and Management Buyouts

Table A: Professionalization, controls and processes prior to the MBO/I

Lack of management controls
Example of low level of accounting controls pre MBO / “[Owner] did his accounts once a year, he used to put everything in boxes, take it to this accountant and his accountant spent 9 months sorting them all out and everything and then doing them. But [owner] was very meticulous, very good, very thorough, everything was kept right and proper and it was good” (BOXES, CD, 2001). “It was done by hand, it was a nightmare. They had, the sales were quite good and that was working. And [owner] said, Oh computers, I don’t want to know. (BOXES CD 2001).
“I had never touched a computer and I confess I had a reluctance to start” (BOXES VENDOR 2001).
Example of ad hoc owner-centric stock control / “What used to happen because [family owners] had loads of money in the old days, they’d go down see an empty bin and they’d order a crate or a pallet load…and [family owner] would just wander round the warehouse, if the bin was empty he’d just go away and order a pallet load of those fittings and then he could forget about it for six months which was nice and easy when we had plenty of cash to do it so we are sort of struggling to come to terms with that now. We have to be a bit more conscious…probably using more paperwork” (PIPES ACC, 2001).
Non-participatory leadership style / “The previous finance director worked very much with the owner and the information that they produced they kept, remarkably, they tended to keep to themselves, they didn’t believe in letting the management know too much about how much money they were making” (DUMPS MD 2001).
“There was a leadership vacuum within the business. So the guy who ran the business knew everything, could do everybody’s job better than they could, or that was the sort of culture” (PLANTS MD 2001).
“I was chairman and MD…I’d tried to bring in senior people and through one reason or another it hadn’t really worked and I put it to the other three directors …did they feel they were capable of running the business… I was ready to override the existing directors if necessary…It was a one man band in a way” (PLANTS VENDOR 2001).
“We delegated… I thought I was reasonably good at delegating, you are never brilliant at it because it’s your business and you know best… you believe you know best. This is why we had an open plan office because I liked to keep my ears wagging all the time” (TROLLEYS VENDOR 2001).
Decision-making controlled centrally / “The problem is that the people before were not managers… [vendor] would intervene and he’d push in a different direction and they’d become frightened to make a decision. Whereas I’m only interested in people who can make decisions” (TROLLEYS MD 2001).
“If I was on holiday they were competent to deal with everything…So for the last twenty years of the business life I was the one who made all the decisions… I did assume that they would need me to keep popping in and out to help them in the months after the buyout… I expected to spend days down there saying, well this is how I did this, that, but they didn’t, no, they did it all on their own” (BOXES VENDOR 2001).
“I wouldn’t say you were a dictator but you certainly were more of a decision maker than you made it out to be” (BOXES VENDOR WIFE 2001).
Low value placed on business and management expertise / “It was a business prior to me coming in that overvalued industry knowledge. So if you knew the name of every plant you’re a good guy, if you didn’t know the name of any plants you were a bad guy. Rather than the business recognizing that in certain disciplines we needed product knowledge and in other disciplines we needed business acumen and skills. So the team was changed” (PLANTS MD 2006, looking back to 1999).
Existing management controls
Performance related rewards / “He [vendor] had a number of contractor directors, he had four, each of whom led contracting teams and they were highly incentivized, big bonuses based on results, to drive the business forward, and that’s how he had grown the business” (DUMPS MD 2001).
Accounting systems / “We’ve always had monthly [management accounts], since I’ve been here…annual forecasting” (TROLLEYS MD 2001).
“Actually the business had pretty good controls and systems, the one strength of it before I came in was the systems were good…I’ve tweaked that…on the management accounting side it’s more about cosmetics, how we present information, the sort of information we are getting out, that was pretty good” (PLANTS MD 2001).
“We’ve got very good financial and management controls in place [which] we’ve built up anyway over the years and we’ve all been involved in running it, it’s not like coming into a company you didn’t know…No there wasn’t a lot of additional things…the main engineering business is split into three…each of them have their own operating budgets and their own financial targets and controls” (LOCKS MD 2001).

Table B: Professionalization, controls and processes introduced in preparation for MBO/I

Window dressing / “Well he had a team in place, he dressed it up a little bit, for example, did he have a business development manager? Yes he did but only just, he’d just appointed him, probably after he’d started speaking to me. Did he have a personnel and health and safety quality manager? Well yes he sort of did but he made damn sure that he did by the time I started” (DUMPS, MBI 2001).
Externally influenced / “His son formed part of a management buyout team which bought the business… There were a number of fairly serious problems so I was brought in as a turnaround MD in March 1999 to try and sort the whole thing out and bring some professional management to get it back on the right track” (PLANTS MD 2001).
“We started putting the business plan together and we got some guidance from [accountant] who produced quite a nice little booklet on putting business plans together…So we actually set about, on weekends and evenings scurrilously going round the company, the six of us [MBO team] and we put a business plan together” (LOCKS MD 2001).
Change in culture based on previous experience in large companies / “What they wanted was a more professional management approach and much more structured…the big challenge was changing it from a family culture to a, what I wanted, which was a professional culture, which I had been used to because my previous corporate background was big large professional companies…we were able to instill in people that they were part of the team. Their job wasn’t to do what [family owner] said, their job was to offer their skills, their intelligence to do the best job they could” (PLANTS MD 2006 looking back to 1999).
No change during process
Lack of experience / “We wasn’t running the company [pre-MBO] but we knew how it ran… We were all used to how everything works and we just wanted to carry on basically and safeguard the company as a whole” (BOXES CD 2001).
Owner-centric / “So I said, No you all get the same stake because you are all going to be equal…I’m not going to be equal but that was the deal and I was very clear about it to them… one of them felt it was a take it or leave it deal” (LOCKS MD 2001).

Table C: Professionalization, controls and process changes following MBO/I

Accounting and Operations
Monthly management accounts / “We wanted to do it [professionalization], it’s the way [partner] and I operate and the VC they want management accounts every month anyway” (DUMPS, MD, 2001).
“Basically what we’ve had to do is just tighten up a little bit by having it on a computer so that the accounts are accessible every month. And we do a full set of accounts every month. And …These are little things that we sort of picked up along the way” (BOXES CD 2001).
“Now certainly [PE] need a copy of management accounts every month, we are developing a system, we are getting a better handle on what the margin is so the management accounts are being produced hopefully more accurately” (PIPES, ACC, 2001).
“What we said is we are going to have proper management accounts every month and share that information with our management team, good and bad, they’ve had some difficulty this last year when there’s been some losses” (DUMPS MD 2001).
“We have computerized accounts but we couldn’t produce a full consolidated statement of the group accounts on a monthly basis, management accounts, so we actually strengthened that up and we got the software people in and we got them to implement a consolidation for us…But we’ve got very well defined and well structured accounting practices…We’ve always produced monthly management accounts…cash flow…we do a budgeting exercise every year…you’ve got to meet particular dates for the bank for everything now so you can’t let things slip” (LOCKS MD 2001).
Accounting control systems / “We had to get it all up and running quite quickly and [accountant] came for a week to help us set up all this purchase ledger and everything. Obviously I had to learn how to use the thing then but it’s absolutely great now it’s all in place it works so, so well… the bank didn’t like how the accounts came out they wanted a year to date and budget and everything to compare it against so we had to get all this written…” (BOXES, CD, 2001).
“Only been using a computer to invoice for just under two years now [since MBO], previously it was all typed on manual typewriters…we did an analysis not so long ago because we were looking at the size of customers… We never used to have a credit controller, it used to be one of the old directors, he sort of stayed on for two years after the MBI…we are sort of in the process of developing the system because again stock control isn’t on the system” (PIPES ACC 2001).
“It’s quite a complicated business and the accounting systems were not great and we’ve certainly improved them, my colleague has put in much better systems” (DUMPS MD 2001).
Cash flow management / “Cash that we have has to equate to paying the loan back, we can do it but we, here we go, it’s got to be two times, it’s just little things they put in, little safeguards,” (BOXES, CD, 2001).
“The business was [is] sort of tightly run and well run in terms of stock was monitored, debtors were controlled” (PIPES ACC 2001).
“He’s [MD] really got to take seriously the company’s ability to generate cash, whereas in the past 30 years… we were able to be a bit more relaxed” (LOCKS VENDOR 2001).
“We manage our cash very, very well.” (TROLLEYS MD 2001).
Operational controls / “We are all computerized as well with the internet. …We’ve got certain things in place where we check where we are… We’ve made great strides in sort of making us more professional in what we do, the set up is very good, the way everything is, is very good, the systems we use are very good. They were good before but we just tightened everything up… [Stock control] yes we know how important it is, our stock should be around…[MD] is fully aware of that now and he tries to sort of see what we are holding onto and everything…and I deal with all the cash, I say who we pay and what we do with everything and I used to juggle it” (BOXES, CD, 2001).
“So there hasn’t been really a lot of changes I think if you talk to people there’s some procedure changes, the management is much more active…we are very tight on spending controls, we are much tighter on spending controls, it’s harder to get things through. But you know people will have seen the changes.” (LOCKS MD 2001).
“What we’ve tried to do, and to be fair we’ve been allowed to do, the profitability that we’ve had, and we’ve trained all the sales staff, trained the admin staff, a bit more discipline in terms of administration, rules and regulations, health and safety, to try and help develop the people we’ve got [more controls and systems] because you try to manage it.” (TROLLEYS MD 2001).
Strategic
Strategic planning / “The two guys put together the business plan which gave us the backing of [PE] and [bank]…grow turnover and grow profits and therefore repay the bank and repay [PE]” (PIPES ACC 2001).
“What we’ve said is look guys this is the plan isn’t it? We agreed the plan as a team, that’s what we’re trying to do for this year, in the context of the next three years, okay, it’s very simple, you know, you deliver the plan, everyone’s happy. And every month we monitor what the progress is, I mean every week we have an element of progress but certainly once a month…no ifs or buts…and they know I’m not going to be interfering” (DUMPS MD 2001).
“We’d forecast, because we had a lot of good information on this, we’d forecast that this [part of the] business would cease in ... around about the end of 2005” (LOCKS MD 2001).
“So we are all of a similar age so by the time it comes to we want to retire or whatever, [IT Director] will probably be the next one that will take it on, and we think that’s important the continuity” (BOXES CD in 2001, correctly predicting secondary MBO).
“Strategically we’ve laid plans to develop that business, now that we’ve got our hands on it…and we’ve just put together a three year plan for the business…We are looking at export markets which we never did before…we are much more outward looking…forge more business plans…I think that’s just the business, how we were driving the business anyway…under the ownership of [vendor] we really were left, given our heads to run and develop the business in the way that we wanted to” (LOCKS MD 2001).
“After the reorganization and buyout we started to target small to medium sized companies and on a wider sector basis as well” (TROLLEYS MD 2001).
Focus on Profit / “A part of what we do with these prices and everything is profitability. We do it all the time, I mean [NED] does it, the day he comes he spends all day looking at figures…we are trying to go as much direct as we can because you get a better margin on that which would improve everything else. Profitability, we are always looking at efficiency, we are doing an awful lot of overtime and what we have found is that we are using agency workers…it’s just something that’s helped us get the wage bill down which improves, everything improves” (BOXES CD 2001).
[MD] works it out, profitability by the hours that we work in the factory…£50 is about okay but we got up to £60 per person I think per hour” (BOXES CD 2001).
“We have a much better handle on margins” (DUMPS MD 2001).
“We had a sort of a high level of reporting each month in terms of customer product profitability etc and it got to a stage where you know it was growing every year and as I say profits last year were just over £2million and sort of that tied in with the chairman and the [PE]’s objective sort of selling the business” (PIPES ACC 2001).
“We’ll make a profit this year, at the operating profit level which is where we’re, everybody measures us at that level” (PLANTS MD 2001).
“The most profitable is the rental side… so the only thing that really has changed is that we’ve pushed hard on that side to try and give us a bit more stability and a bit more growth” (TROLLEYS MD 2001).
“Lost some very profitable business…indeed the most profitable…our first ten months we made a profit…sold a landfill site which we made £1million profit…We are hell bent on making a profit” (DUMPS MD 2001).
Participative or consultative leadership style / “We sort of said, right we can get this team and manage it professionally, we can give people more authority, you know, we are used to running business that way, we can bring these managers on… we can give them more freedom in which to operate, we can have them running businesses within a business. And that’s what we’ve done” (DUMPS MD 2001).
“I’ve come in from another industry and I don’t, you know, I’m very open with people, I know nothing other than I’ve got management skills to bring to the business, hopefully leadership skills, so my style and my culture is one of empowerment and results is what I’m after. Whereas the old style was very much do what I say and, you know, when I tell you to jump it’s just how high you jump is your only question” (PLANTS MD 2001).
“On the other hand I would hope it’s slightly more informal…the management style is, you know, less telling and more consultation and trying to get everybody contributing to what the solution might be…the more contributions you have the better hopefully the final solution might be” (PLANTS MD 2001).
“I think a lot of decisions now are taken at the management meeting between [MD] and his five man team and they are then put up to the Board for endorsement…whereas previously I think that most of the decisions were made by [MD] and myself simply getting our heads together or [MD] would decide something and tell me afterwards” (LOCKS VENDOR 2001).
“[Vendor] was more domineering, he liked to control things. The difference is, the big difference between myself and [vendor] is he knows the industry inside out and he could tell anybody in the company what they were doing wrong” (TROLLEYS MD 2001).