In our penultimate review of business tropes – helping you identify which one your company triggers with potential investors – we’re looking at the situation where “My shareholders don’t understand me…it’s you I want!” (MSDUM).
Changes to shareholder structure can be problematic but often beneficial for those firms who haven’t been able to grow the company the way they want to, due to conflicting ideas and requirements between the existing shareholders and the board.
With the MSDUM trope, investor behavior can occasionally be an excuse for the management team to not do its job. Often by either not creating a good business plan, or not executing the plan aggressively enough.
Generally, these kinds of companies have a management team that’s controlled, or swayed very much by ‘old’ shareholders. New shareholders of the business often buy significant stakes from the existing shareholders and can also inject working capital at the same time. In turn the revamped board, including the new shareholders, then decide on the right strategy and financial plan for the business.
European Telemedicine Clinic
Founded in Barcelona in 2002, European Telemedicine Clinic (ETC) provides image-based, medical diagnostic services to hospitals. ETC demonstrates how business ownership can vary considerably over the course of a company’s lifetime.
ETC has received various rounds of funding since 2005, including a €7 million injection led by Kennet Partners. Prior to this investment, ETC couldn’t grow the business the way it would have liked.
By the time of a recapitalization in 2013 from a Swiss family office, resulting in ownership of 40% in ETC, many of ETC’s original investors had exited the business. By bringing in Kennet and new external shareholders – that effectively took control of the firm – ETC were only then able to grow and expand into UK & Germany.
Market opportunity
There is often a good market opportunity at the heart of the MSDUM story, but the company’s financial objectives can be inappropriate. A mismatch between founder and shareholder ambitions can cause delays and conflicts, not only in developing the business but agreeing an appropriate level of investment to achieve more ambitious financial goals.
In order to raise the necessary capital it might need, firms fitting this trope need to find a new shareholder who can buy out a significant percentage of the existing shareholders, in order to change the dynamics of the discussion between founders and shareholders. The new shareholder also needs to be willing to finance the working capital required.
Investor expectations
Investors in MSDUM companies can contribute by challenging assumptions about investment performance. Their expectations about what is achievable may be much higher than what was previously predicted.
Ensuring you select the right business partners to bolster your own strengths, and weaknesses, is paramount in deciding who you choose to work with to develop your business. Success for MSDUM companies is a product of the relationship between shareholders and the management team; a lot of work is required to provide positive returns.
Financial fixes for founders
If your firm fits the MSDUM trope, be mindful that strong financial performance fixes a lot of problems. Good financial performance is necessary to facilitate any changes to your shareholder structure.
A ‘recapitalization’ or ‘secondary transaction’ can be useful in allowing founders to sell some of their equity in the company to new shareholders. This helps negate some of their personal risk, while maintaining enough of a stake to benefit from any future business growth.
Vie Carratt can listen to and understand both sides of your company’s story. We can help you establish if a change in shareholder structure is necessary and whether it’s viable and valuable. If you’d like to find out more, please get in touch.