CMR's Intellectual Property Licensing ProgrammeTypes of IPR 81How CMR handles an IPR/Licensing project 84
Corporate RecoverySummary of insolvency procedures 87How CMR handles corporate recovery projects 88How does CMR obtain corporate recovery clients? 89The link between corporate recovery and M&A 90
CMR Company Sales Programme 92CMR MBI Programme 100CMR Catalyst Group Formation 110CMR Mergers & Acquisitions 115CMR's Progressive Company Sale Programme 117CMR Management Support & Consultancy 123CMR Fee Sharing Rules & Administration 125CMR Mentoring Programmes 129CMR’s Never Say Die Programme 130
APPENDICIES: 1311 Sample Proposition Review Form (PR1) 2 CMR's Standard Funding Assistance Agreement 3 CMR's Standard IPR/Licensing Agreement (clients) 4 Standard 'omnibus' Funding, M&A, Co. sale agreement 5 CMR's Standard Confidentiality Agreement 6 The History, Philosophy & Objectives of CMR 7 Virtual Organization' - case study on CMR 8 CMR Membership - a personal summary
SUPPLEMENT: Handling Client Projects – Case Studies 158
CMR is a global organisation comprising a large number of executive members with an experience base that covers all major business areas and disciplines. CMR's members have shared values not only concerning the professionalism and integrity with which CMR serves its clients, but also in the manner in which the organisation operates internally and between members. CMR's recruitment policy is designed to maintain the high ethical standards to which the organisation adheres.CMR was created with two primary objectives:
1) To provide SMEs and entrepreneurs with the help and resources they need, but often cannot find/don’t have access to – i.e. real management expertise from senior executives with experience in their own field of business activity, plus support from a variety of essential resources including funding possibilities.2) To provide experienced executives with the infrastructure, facilities, resources and network to enable each to fully develop their own career or business potential in the most beneficial way for the individual AND to provide all those facilities with the utmost flexibility and at a minimal cost to the member.
CMR receives a continuous stream of potential clients from all over the world and from all industry and commercial sectors. Some arrive directly into CMR, some as a result of alliances formed by CMR and some from introductions through CMR’s own executives. The vast majority of these potential clients are SMEs and entrepreneurs who are seeking inward investment for their businesses – funding is the main, primary door-opener to new clients. It would be great to imagine that most of these businesses will quickly acquire the funding they need and will then pay the success fees due to CMR, without the necessity of too much effort being expended. Sadly, that is not generally the case, and a far wider degree of involvement and understanding with each client will often be required to achieve a satisfactory and successful outcome. There will be few easy, no-effort-required projects that do not involve real endeavour and expertise. It is important for CMR Executive Members to understand that ubiquitous fact of life.
Having said that, there is in fact a plethora of opportunities on offer where CMR Executive Members who are involved, can both help clients to move forward and enjoy the prospect of substantial fee income. This Operations Manual addresses some of the ways in which those successes can be achieved. It is important to recognize that most clients will actually not attain the inward investment they seek – and that other solutions and alternative routes will need to be developed to achieve a successful outcome. A CMR executive’s first contact with a potential client is their opportunity to assess the client’s situation, strengths and weaknesses, marketability and all the other essential parameters, and start to pull together the strategy and action plan that will be successful for the client. Sometimes the CMR executive will decide that obtaining external inward investment is indeed a viable way forward – in which case they will look at all the issues covered by the ‘Funding’ section of this operations manual – BUT always - they should also look at the alternative routes forward (as a Plan B) in the event that inward investment is not achieved. In other cases, the CMR executive may decide at the outset that funding is a non-starter for this client – and move onto to developing the alternative ways forward.
Any CMR executive who simply looks at a potential client purely as a funding client is doing both the client and themselves a disservice – and will almost certainly be disappointed and unsuccessful as a result. Please read this manual fully and carefully – it contains much wisdom acquired over the 30+
years of CMR’s operations on how to deal with clients and their business situations. It also has details of many CMR-specific products and ideas that can and should be employed when considering how to achieve a successful outcome for the client.
This introduction started by stating that funding was a very important door-opener to new clients. That is true, but it is also important to understand why most new clients will not achieve the inward investment they initially seek. As anyone who has watched the UK’s Dragon’s Den or USA’s Shark Tank on the TV will know – it is really difficult to attract investors – especially when you know that many of the on-screen ‘successes’ do not actually come to fruition after the show, when due diligence is done and terms, conditions and other impediments are discovered. The Funding section of this operations manual deals with all the issues concerning how to make the presentation of propositions to investors appealing and inviting.
The BBAA (British Business Angels Association) undertook a professional survey some years ago to determine the overall success rate for SMEs & entrepreneurs who are trying to attract inward investment. They found that the success rate was only 2.8% - meaning that 97.2% of all applications for funding were unsuccessful. That is actually good news for CMR, because it means that, to become successful, many of that 97.2% will require the management and executive expertise that CMR has. The fact that a business has failed to attract inward investment does not mean that it is no good. Many will have a business that is capable of achieving success but in a different way than just getting someone to give it money. It is also encouraging to note that most of CMR’s ‘competitors’ in the funding market do not have the ability to help in other directions. They lack the depth and experience of the CMR executive base as many are simply brokers and cannot help their clients in any other way. This effectively means that many of the 97.2% can only be helped by CMR and that represents an enormous marketplace for our skills and experience.
The other aspect that is addressed in this introduction, concerns the evolution of the funding market itself over the years. When CMR first started in 1984, we were almost the only source of investor funds for the SME/ entrepreneur market and as such attracted many investors and clients alike, mainly through local networking by CMR’s executive members. Since that time, the number of investment sources has exploded into literally thousands of organizations throughout the world – a lot of which are public-sector or city-supported. CMR no longer has the edge that it once had – it’s a fact of life that cannot be reversed however much wishful thinking there is. CMR has had to adapt to the situation – which means that when we have a client project that we truly believe deserves to get funded, that we introduce the proposition to a wider audience than just CMR’s own investor base, so that the client has the best possible chances of securing the inward investment they seek. Part of the skill base we are able to offer clients enable them to structure and present their business proposition in the most attractive way to potential investors. It obviously makes a great deal of sense to then present that proposition to the widest range of possible investors.
So, in conclusion in this introductory section – CMR is not for the faint-hearted or those who just hope to make good easy money without too much effort. It is for those who possess the personal skills and experience needed and who have the drive and motivation to seek and develop the right ways for a client to prosper. The rewards for doing this are both the personal satisfaction of helping to guide clients through the minefields that await them plus importantly the financial returns that can be substantial and continuing. This Operations Manual has been compiled to provide CMR executive members with the keys they will need to open all the doors.
Finally it is very important that you thoroughly read the CMR Operations Manual before you make any contact with clients. When meeting or talking to a client for the first time, it is imperative that
you do not initially give the impression of being a consultant that can ‘help them’ – many of these client companies will already have been plagued with ‘ordinary’ consultants trying extract fees for ‘helping’ them.
Clients usually come to us because they are looking for inward investment – they are not looking initially for any other help and would probably show you the door if they get the feeling that you are just another money-seeking consultant. It is crucial that you only initially approach these clients to discuss their need for funding – you are effectively pre-vetting them on behalf of our investors. As a result of those discussions, you may see changes or improvements that are needed in order to attract investors or move the company in a different direction – and then it is perfectly in order to move those conversations forward.
We can guarantee you a good night’s sleep after reading a few chapters of this Operations Manual!
HOW TO USE CMR MEMBERSHIP
CMR was created to be a most flexible organisation for its members, enabling each to derive the maximum benefit in whatever way is best for the individual. There are few rules within CMR, apart from the ethical and confidentiality undertaking each member signs upon joining. However, it is up to each member to make their own use of the facilities provided. Whilst some aspects of CMR are automated, without effort from members, CMR was primarily designed for those with the motivation and ability to make things happen! CMR provides many standard products and the organisational infrastructure and executive network to help those that can, to do just that!
The most successful CMR members are those who are really proactive in terms of their integral involvement within CMR and perhaps also in tandem with developing their own private business interests (whilst respecting CMR rules). We hope that all members will want to be active in dealing with CMR clients, but how you spend your time is entirely your decision – the only thing we ask is that you will allocate sufficient time to those CMR clients you are handling and of course, to deal with them in a thoroughly professional and ethical way.
You can acquire clients either by becoming involved with the continuous inflow of CMR clients received by the organisation (all members get email-notified as new potential clients arrive), and by using CMR’s resources to obtain new clients directly yourself – from your own network contacts or from those that arise from attending networking functions as a representative of CMR. The fact that CMR is always looking for new investment-capable clients can be used by you as a valuable marketing tool in terms of making new contacts.
As stated in the above introduction, most clients initially come to CMR because they seek inward investment. However, the reality of life is that the majority of them will find that attracting an investor is much harder than they think – and for many clients this will not be a viable way forward. Nevertheless, an approach to CMR for funding is an excellent door-opener for us. You as a CMR Consultant Director will be viewed by new clients in the same (usually deferential) way as investors generally are. You will be able to ask all the questions and see all the things that an investor would expect. From this you will be able to use your extensive senior executive experience to assess the client’s true situation, their strengths and weaknesses, their problems and opportunities – and of course, if you think that continuing to look for inward investment is viable for them – and/or if there are other routes forward for them. In short, you should be able to quite rapidly assess whether or not
they have the right strategy and plans for moving forward – and if there are other alternatives that should be considered.
As a result of how you first met the prospective client (i.e. as an investor – or at least the gateway to investors) your views will be considered seriously. If you have established through your personal gravitas and great business experience, that you are someone the client can respect and trust, then there is an excellent probability that the client will not only listen to your views, but also be keen to follow-up on your ideas. This non-selling method of client handling means that you are an important influence. It also puts you on the inside-track for developing a worthwhile business relationship with the client that could even result in a long-term association for continuing future help too. It is very important to note that these contacts with prospective clients are not selling expeditions -in fact, quite the opposite. Our research findings tell us that if the client feels he/she is being ‘sold-to’ it will destroy the relationship and trust will have been broken. It is vital that the client forms the view that you have their best interests at heart, that you can be totally trusted, and that you have the level of business experience and knowledge that could greatly benefit their company through having an association with you/CMR.How you approach the subject of chargeable fees is a significant part of this relationship-building exercise. If you appear to be over-keen/desperate to charge fees, then no relationship will be built – clients are usually super-sensitive about this, as many will have met sub-standard consultants in the past who have tried to extract money from them. All clients are very happy to pay success fees (for a successful result) and will also be prepared to pay consultancy fees if they perceive there to be a good reason. It is your job as a CMR executive to talk this through with the client, so they understand what they are being offered and are happy. Under no circumstances must you over-promise - especially not by suggesting that the funding sought will be forthcoming. We can never guarantee that and we never want to be in the position where a client demands a refund of fees paid because they were over-sold to.
If you do decide that trying to attract inward investment is a viable route forward for the client, then follow the guidelines in the ‘Funding’ section of this Ops Manual. BUT – always recognise that the funding might not be achieved as intended – so make sure you develop a Plan B. This could include different forms of external investment – trade investor, JV’s, mergers, acquisitions, licensing, company sale, or perhaps other routes like CMR’s Catalyst Groups, CMR’s Progressive Company Sale Programme, CMR’s Self-financing Loan Scheme. Or if the business has reached a very difficult stage, then CMR’s Corporate Recovery programme may be applicable. It may also be that the client should change their strategic direction – this alone can often dramatically change the need for funding. Or it may be that changing operational or finance arrangements may be beneficial. For the majority of clients there will be many other ways forward for them, instead of just hoping/ wishing an investor will stump up pots of money! It will be your job as a CMR executive to advise the client on these issues as is appropriate for them.
This Operations Manual contains details on all the services and resources provided by CMR. Please use the manual to not only understand how these work, but also to help you generate ideas when dealing with client situations. A hallmark of CMR has always been the innovative ways in which we help and advise clients. I hope that having read to this point, it is crystal clear that only viewing clients in simplistic funding terms will not result in a successful outcome for them or you. It is imperative to think laterally, outside every box on the table. It should be encouraging to recognise that in many cases there will be a way forward for (the majority of) clients who fail to attract investment.
The following sections give guidance on the ways to get the best from CMR membership
CMR provides many different types of facilities and resources for all its members, which will help to generate opportunities in addition to providing the support needed in developing consultancy and other business activities, both within CMR and privately. The following is a summarised list of the benefits and facilities that ALL CMR members have access to:
1) Facilities and resources to help members be successful in building business . These facilities include all the various services and 'products' CMR provides, including funding, IPR Licensing, Corporate Recovery, M&A, and all the other facilities provided, plus access to the CMR network. These can significantly enhance the value of services an individual CMR Member can provide to clients. All CMR members have complete access to all of CMR's facilities and resources, and this enables the individual CMR member to have a resource and network base that is vastly greater than could ever be achieved individually. This gives each member the ability to project themselves in a far wider way, and with the confidence of being able to call-in the specialised skills or resources needed to satisfy client or customer needs whenever this is appropriate. Details on each of the CMR facilities are shown later in this manual.
2) Facilities that help members to expand career options and horizons through the continuous marketing of their skills on CMR's Website. Many career opportunities are not advertised in the Press and these facilities will help CMR members to access both the external unadvertised career opportunities, plus have access to those opportunities that arise within CMR or with its affiliates. The use of CMR's Website to recruit both permanent and interim staff is directly promoted to HR directors and others - who will be able to find the skilled executives they need both quickly and inexpensively from the Website. We want to create the situation where recruiters will routinely search the CMR Website before going down more traditional recruitment routes.
As you join CMR you will upload your details, CV/Resume and photo to the CMR Website, which is regularly searched by those wishing to recruit experienced executives. You need do nothing more - as companies wishing to discuss an employment or consultancy position with you, will contact CMR Centre, and you will be notified directly. Please see separate section on Recruitment and Interim Management later in this manual. As your details are uploaded to the website, you will be given the url/ login/ password enabling you to update or change any of your details.
3) Networking facilities helping all members to greatly increase their contact base of like-minded individuals with a very wide skill and experience base. This can be of invaluable help in both career and business terms. Contacts and relationships made through the CMR network can and do open many new opportunities for employment and business generation, many of which will not be available to non-CMR members. The network also provides each member with access to a bank of expertise that is unequalled in its scope and depth of knowledge. Use the network to generate more opportunities and to help you with projects or problems you may have.
TO ACCESS THE CMR NETWORK: There are a number of networking channels you can use:
i) If you have a specific skills need, then access the CMR Website at www.cmrworld.com and go to the overall CMR Intranet, which is password-protected (you will be given the current password on joining CMR). There you will see many useful facilities, including the entire CMR Executive Database, which can be searched in several different ways. Also shown in different format are the alphabetic and membership number listings for all members. Having found
the CMR members who fit your search criteria, you can then find the contact details for each member. They will be pleased to receive your call (just as you would be), and you will be able to discuss your project or situation directly with them. This can often help to expand your own knowledge or thoughts on the subject, and you may wish to bring one or more of the members into the project to help. Remember that if you do this, on a fee charging basis for any private business you have, that a commission of 10% of the fees earned by the other CMR members you have co-opted are payable to CMR. You must notify CMR of this - failure to do so is a 'capital' offence!
ii) You can use the Bulletin Board in CMR's Website to exchange ideas and promote business & project opportunities to all other CMR members. The Bulletin Board is arranged so that comments from all CMR members relating to particular subjects are grouped together, and so can be easily reviewed and added to. The Bulletin Board is probably the most useful facility for networking or finding the person you need, especially where the experience/ skill is not directly covered in the executive database. There is an overall CMR Bulletin Board on the overall CMR Intranet, and there are separate regional Bulletin Boards on each CMR Regional Intranet (password protected so only members of that Region can access) – both are accessed from the website front page (bottom right-hand corner). The first message of a new Bulletin Board entry is auto-emailed to all CMR Members, but further entries on the same subject are accessed only on the website.
iv) As a CMR Executive you will be sent by email details of all new clients (we get a regular stream of these) and information about other opportunities and developments. These come with a request that you contact the CMR Executive who is handling that business if you have special skills or connections that could be useful in handling that client’s business (please do not contact if you only have a general interest). This will both help the client and the CMR Executive handling the project – and of course, could also get you involved and earning fees from a client that could be the other side of the world.
As a policy we keep on the website Project Database a record of all CMR projects handled over the years – so we would suggest that you rely on the current projects promulgation by email, rather than the historical project database for current opportunities.
One of the important aspects of being a CMR Consultant Director – is that it puts you in the position of being viewed by the client as a potential investor in businesses. You are effectively representing CMR’s investors in looking for suitable investment propositions. That single fact allows you to talk as if you were the investor and to gain access to many potential clients as a result. Of course, you do have to put in some effort – but there are literally thousands and thousands of companies looking for funding support. If you do put the effort in and are good/credible when dealing with people – you will find yourself inundated with prospective clients wanting to speak with you.
This is how CMR originally started – and was very successful. Also this technique works in every global country. You should be proactive and ‘put yourself about’ – especially in starting to network by joining or attending business functions – including presentation meetings for companies to connect with investors. If you do this and are ‘good’ – success will be almost guaranteed!
4) Earning commission by introducing new business to CMR . The simple act of introducing a project earns the introducer a commission of 10% (50% for first interim management projects) of the gross fees or equity charged by CMR to the client. This commission is paid as CMR receives the fees or equity, and requires no further effort from the CMR member who introduced the project - this means
it is equally applicable to those in full time employment who probably will not be able to contribute to the handling of the project. Commission payments will normally relate to fees and equity charged to the client in the first twelve months from the date of introduction, unless specifically agreed otherwise.
As you will see from the CMR Website at www.cmrworld.com/BusinessReferralScheme.asp - we encourage external parties to introduce both projects and new investors into CMR. We pay external parties a commission of 7.5%. If, as a CMR Member, you encourage external parties to input projects or investors – then at your sole prerogative you can arrange with CMR Centre to pay them 7.5% and have 2.5% for yourself, or 10% and nothing for you, or 0% and keep the whole 10% for yourself!
TO INPUT NEW PROJECTS FOR COMMISSION: To input new projects, please contact CMR Centre. The project will be logged-on to the CMR Project Database with you identified as the introducer, eligible for the 10% commission (or proportion decided as above) paid on gross fees charged to the client, or of the CMR equity share taken in the project where this is appropriate. The commission paid on first interim management/ recruitment business introduced is 50% of gross fees (CMR's success fees on this type of business is usually 17.5%). If the member has obtained this business through an intermediary, it will be for him/her to agree how the 50% commission is split with the intermediary.
TO INPUT NEW INVESTORS TO CMR’s INVESTOR DATABASE FOR COMMISSION
By introducing new investors to CMR you can earn a 10% commission on the success fees charged by CMR when ‘your’ investor invests into a CMR project. The commission payable is unlimited by size and time – whilst you remain a CMR member. Whenever you introduce an investor (there is no charge made to them) simply notify CMR Centre of your introduction – this will be acknowledged and your name will be placed alongside the investor’s on the CMR investor database. For legal & statutory reasons, it is important that the investor personally enters and signs-through the short legal agreement on the website. Whenever ‘your’ investor invests and success fees are received – you will be paid the commission.
5) Access other opportunities from the CMR Website. Visiting the 'CMR Message Board' section on the private, password-protected site will keep you informed on the up-to-date news and of any new opportunities for CMR members. There are always new developments happening within CMR, many of which will open new opportunities for all members.
6) Ability to save considerable money through CMR's Corporate Healthcare Scheme with AXA-PPP.
For reasons never properly understood, private health insurers charge individuals a very high premium, whilst the same person, covered under a corporate scheme pays a significantly lower premium. CMR's Corporate Scheme is open to all UK-based CMR members, and gives top quality health cover for a fraction of the normal cost. Members can select the level of cover they require. Many CMR members and their families are covered in this way, and each saves more money every month than it actually costs to belong to CMR! Current terms and rates (which include a 20% administration loading) are:
2) No medical required. CMR members already having private health cover can transfer to the CMR Scheme maintaining their cover for pre-existing illnesses. New members to private health have the usual two year moratorium for pre-existing problems.3) Full cover scheme (i.e. no waiting period) at AXA-PPP’s Hospital 'Cover 1' or 'Cover 2'.
Note re CMR Affinity & Special Business Groups (covered below)
Many years ago, CMR created Affinity and Special Business Groups (SBGs). They enable motivated CMR executive members to combine their skills and experience, together with CMR’s overall resources, to provide valuable specialised services. In the now long history of CMR these groups have waxed and waned in a cycle that has repeated several times. The cycle each time starts with a keen, motivated CMR executive member who decides to start a new group – through the CMR system, they notify all members about the new group and usually a number of also keen members will join the group and get things going. Generally, these groups have been a success – often so much so, that the leader becomes totally absorbed with business that has spun-off that they no longer have the time available or inclination to continue acquiring further new business. As the leader’s time gradually reduces, so does the enthusiasm of the followers and eventually the group subsides – until the next ‘spark’ arrives. There are always many more followers than leaders – as in the rest of life.
CMR AFFINITY GROUP OPERATIONS
CMR Affinity Groups are created by bringing together all active CMR members who share a common background and expertise. CMR Affinity Groups are by industry group, and by functional discipline. CMR Affinity Groups represent a powerful force including as they do, multi-discipline teams of senior executives with specific knowledge of that industry area. The Affinity Groups can address business opportunities and problems within a specific industry area in a way that more disparate groupings of consultants will not be able to. CMR Affinity Groups are effectively ready-made task forces able to tackle virtually any business situation within the industry area, and if the members are entrepreneurially motivated will be able to develop new business opportunities from the potential client base.
As with CMR's regional operations, the ultimate success of Affinity Groups will be primarily dependent on the motivation and ability of the CMR Full Members comprising each Group. If that motivation/ ability is lacking, then the Affinity Group will fail to realise its potential, with a consequent loss of revenue opportunity for its members. Current membership of each CMR Affinity Group is shown on the CMR Website. If you would like to join an existing Affinity Group, please let CMR Centre know. Also If you are interested in an Affinity Group that is not yet existing.
The Benefits and Activities of CMR Affinity Groups
CMR Affinity Groups allow members sharing a similar background to co-operate in developing new business and consultancy opportunities. Apart from providing personal networking capabilities for members on a cross-regional basis, Affinity Groups have a number of specific uses to CMR as an organisation:
1) Each active Affinity Group represents CMR's pool of industry-specific expertise, and is used by CMR Centre and by CMR Regions where they have need for a multi-discipline approach on a specific project.
2) CMR Affinity Groups are also used to help handle CMR IPR/Licensing projects. In many cases an invention will be specific to a particular industry area, and who better to handle the project than those who know the industry from the inside?
3) For CMR's Catalyst Group Programme and CMR's Progressive Company Sale Programme, the members of a CMR Affinity Group will often be those possessing the special knowledge skills needed to work with and handle the client's business requirements.
We expect CMR Affinity Groups to continue to grow in importance within the organisation, and would certainly encourage CMR Full Members to become involved wherever possible.
Specific Business Areas for Affinity Groups
Because of their specialist resource base, Affinity Groups can address a wide range of business and consultancy opportunities within their industry sector. Examples of the type of business activity open to Affinity Groups are:
1) Providing consultancy and interim management services within their industry sector, to both large and small companies.
2) Providing multi-discipline, industry-specific 'task forces' to help solve problems for venture capital companies, banks, investors, etc., who have interests in the industry sector.
3) Developing CMR's IPR/Licensing opportunities within the industry sector.4) Promoting CMR's funding services within the industry sector, with a view to developing ongoing
relationships, producing further business opportunities.5) Developing MBI and Progressive Company Sale opportunities, in conjunction with CMR's MBI
Group.6) Promoting CMR's Company Sale services, in conjunction with CMR's Company Sale Group.7) Helping overseas companies in the industry sector to find the UK partners or distributors needed
to develop their business in this country.8) Helping to develop the market for mergers and acquisitions, and strategic alliances within the
industry sector. Also to develop CMR's Catalyst Group activity, by bringing together marginal companies operating in the same market sector.
Note Concerning Affinity Group Management
Affinity Groups are autonomous groups within CMR. Whereas CMR Regions and Special Business Groups are ultimately managed by CMR Centre, a laissez-faire approach is adopted for Affinity Groups. This means that the motivational ‘push’ to make a particular Affinity Group successful needs to come from the members concerned. If that motivation does not exist, then that Affinity Group will wither on the vine, until one or more members take the necessary steps to activate it.
It has always been a surprise that not all Affinity Groups are active, as in many ways they represent a superb opportunity for members with a particular industry or functional expertise or focus, to link together with others on an international basis to develop business and revenue based on their
specialised experience. It is often said that success comes from ‘sticking with one’s knitting’, and Affinity Groups give the ability to do that in conjunction with others around the globe.
Affinity Groups are structured such that it only takes one person with the necessary personal motivation to activate and manage the process. Affinity Groups of course have access to all of CMR’s resources, including funding, and so the Group’s special skills can be combined with those resources to create powerful business propositions.
So, if you find that a particular Affinity Group you are interested in, is not as active as you would like – then take the lead yourself. Experience has shown that nothing happens unless someone makes it happen! The Affinity Groups retain 90% of revenue generated (for self-introduced business).
CMR SPECIAL BUSINESS GROUPS
Special Business Groups within CMR provide the specialist, high-level services required by clients where expert knowledge and experience is required. Each SBG is a separate division within CMR, with its own board of directors and operating as a separate business within the overall CMR infrastructure. Each SBG is responsible for their own quality and training standards, and for the recruitment of suitably qualified and experienced CMR members into the SBG.
SBG’s often work alongside CMR’s regional operations, although they are also able to generate and manage business directly themselves. It is very important that SBG’s are involved from the beginning with any client project that is going to need their specialist skills and knowledge. Do not try to handle a client yourself unless you have all the skills needed. SBG’s exist to help you bring clients on board even though you do not have the skillbase yourself to handle it. If you do try to do it yourself, you will almost certainly lose the client (they can usually sense when someone is not an expert) and could damage CMR’s reputation as well. SBG’s will work with you in bringing the client on-board, and of course in handling the resulting project. You will not be excluded from the project.
REGIONAL OPERATIONS
CMR’s Regional Operations were originally established in the UK and adopted for CMR’s International Operations where a sufficient critical size of membership base exists. The advice given here is also relevant for individual CMR executive members and for the ad hoc specialised teams often pulled-together on an international basis to handle a client.
1) CMR REGIONAL OPERATIONS
CMR Regional Operations are central in providing CMR's help to SME's throughout the Region. A CMR Region is the CMR business unit responsible for developing and managing CMR's business within its geographic area. CMR Regions are semi-autonomous, but operate under the network and resources umbrella of CMR nationally. Each CMR Region is under the control of its CMR Regional Director.
Each CMR Region is responsible for undertaking its own local 'indirect' marketing to build awareness and contacts, also to manage and handle the propositions that come into CMR (wherever they enter CMR, the proposition will be sent to the CMR Region in which the client is located), also to deal with investors introduced into their projects.
The success of CMR and its full members in each Region will largely be dependent on how active the Region is in developing local business sources, and in how it handles the proposition flow coming both from local and central CMR routes. Each CMR Region is very dependent on the motivation, ability and work of new members joining. This is because many members after they have joined CMR, often start picking-up new clients and business projects, so that after a period many gradually become less active and less able to commit time to new CMR projects as they come on-board. They have become what the academics call 'portfolio executives' - working for themselves, but with a portfolio of many separate consultancy and business activities. It is a process that happens to most CMR members - in fact the more active and better you are, the more likely and quicker it happens! It does however place a special emphasis upon the organisation making maximum use of new members joining, before they become too successful and too busy! So, we need to encourage all new CMR full members to become as active as possible, and to help us build business levels and then help to manage it properly!
Working within a CMR Region should be all about teamwork. Very few people are good at everything, and best results will be achieved by CMR members doing what they are good at, but not trying to do those things that they are not so good at. The real strength of CMR is in the network of skills and experience we have, and we should use that resource to make sure we always have the right people on the job, at whatever stage it is at. In the past, some CMR Regions have been less effective than others - often because the members regarded themselves as individuals rather than as part of a cohesive team. Opportunities have been squandered through one person trying to handle it by themselves rather than by calling-in the help or expertise that is needed. That will also help to enhance CMR’s reputation, and our service to the client.
Being active and involved in CMR regional operations means being part of the various activities and management processes happening at regional level. Broadly speaking, these fall into a number of different categories:
a) Regional Marketing; developing CMR's local business marketing presence.
b) Regional Proposition Management; managing and assessing the flow of propositions received (from either local or CMR central sources).
c) Negotiating with and handling clients;
d) Project Handling; becoming involved in working on CMR projects being handled by the Region.
e) Becoming involved in the proactive operations of the Region, using the CMR e-appointments system, and regional attendance at local networking functions - to develop contacts with SME's who could need financial and management support.
f) Where appropriate, becoming involved with the general management processes of the Region - as CMR expands we need to increase the level of management control exercised.
CMR's Regions are responsible for developing CMR's business within that geographical area in all its respects. There are two primary business activities that happen within a CMR Region:
a) Reactive businessb) Proactive business
a) REACTIVE business is so called because it is business that comes to CMR and we react accordingly. The business will come to us as a result of indirect marketing work done previously by either CMR Centre or by the local CMR Region. Examples are:
CMR Centre initiated marketing: Publications & Directories, Google adwords advertising, CMR's Website, International PR, Links with associated companies and networks.
CMR Region initiated marketing: Presentations to local business groups, local PR, local relationship building with banks, accountancy firms, etc., local networking.
As a result of this indirect marketing a stream of propositions is generated as SME clients or their advisers/bankers approach CMR for help - often, but not exclusively, for funding assistance. Each proposition is handled as outlined below in 'CMR Region Project Handling'
CMR Members wishing to become involved in Regional Marketing activities are actively encouraged. Regional marketing is controlled by the Regional Director, and can take a number of forms:
a) Giving presentations/speeches to local business groups (e.g. Chambers of Commerce, local societies of accountants, banks, solicitors, local branches of professional bodies, etc.). To be successful at this the CMR Full Member obviously needs to be good at public speaking and needs to know enough about CMR's operations to answer any questions that arise. Giving a presentation can be very effective in building relationships and business at local level - often producing results and business many months and even years afterwards. CMR does have standard presentation material and slides, which can be adapted for local purposes (these are downloadable from the regional intranet). Many secretaries of regional professional associations are 'desperate' to fill their speaker slots for the year ahead - and will greatly welcome an offer from CMR to speak.
b) Using the CMR e-appointments Service.
c) Building relations with local professional firms and banks. This is best done at a personal level, and will be most effective for those who already have contacts or can build through attending local networking functions. Direct approaches can work but are less likely to be successful, especially if there is any hint that we are trying to sell something. In most cases, CMR's operations are complementary rather than competitive, to the professional firm. CMR will work with them in providing help for their client.
d) Developing local PR exposure. This can be very important for generating local awareness about CMR and what it can do to help local businesses. The Regional Director will co-ordinate work in this area, which usually involves dealing with local newspapers and regional trade publications.
e) Generally building awareness levels for CMR and our services. This can be best achieved through joining local networking functions, of which there are usually many, and through developing whatever local connections the member already has. Membership of the local
Chamber of Commerce, Institute of Directors branch, Institute of Management, BNI lunches or other professional/business group, can be a very efficient way to expand your personal networking base, and CMR awareness levels.
There is a 10% allowance for introductory commission built into CMR's fee arrangements, and therefore successfully working on business development can be a lucrative activity! Each CMR Region will have their own system for rewarding those undertaking regionally organised marketing activities.
b) PROACTIVE business is where CMR makes direct contact with local SME's
CMR e-APPOINTMENTS SERVICE
The free e-Appointments Service is available to all CMR Members. To take advantage of this, you need to provide CMR Centre with the email addresses of the potential clients you would like to have appointments set-up for you. Preferably there should also be the name of the person you want (like the CEO or FD) so the contact can be personalised.
Note on appointment set-up:
The prospective client is approached by CMR Centre using personally addressed emails. The appointment is ostensibly set-up to discuss CMR’s investor base or other CMR resource. The client is agreeing to the meeting either because they have an immediate need, or are interested for future reference. The email correspondence with the client will recommend that they visit CMR’s website prior to the meeting – which will of course then allow them to see all the other things we do, in addition to our normal funding services. Advice on how to handle an appointment is given below.
Normally, CMR Centre will aim to set-up a meeting for about three weeks ahead from the initial contact with the client – which should give between one to two weeks notice from the date the client agrees to a meeting. When they have agreed, they are told that the CMR executive who will handle the meeting will be in touch to confirm (or change) the date/time
ADVICE ON HANDLING THE APPOINTMENT (applies for all client contacts).
The following is general advice - the best way forward is for the CMR executive handling the appointment to build a personal rapport with the client and to deal with the client interface in the way that's most natural for them and the client's circumstances.
The appointment will have been set-up (unless advised differently) to discuss the possibilities (either now or in the future) for CMR's investors to invest into or perhaps buy the company. The client should be told how CMR's investors operate, plus what is needed (business plans, etc.), plus a discussion on the way investors think and the sort of barriers that might prevent an investment or company purchase from proceeding. See below for more advice on these topics.
You will of course, be effectively judging which category the company falls into:
Category A: Company in apple-pie order, with no problems or barriers to investment or sale (NB: You won't find too many companies in this category!).
Category B: Company has got problems/ barriers, but which can be overcome or minimised with CMR's help.
Category C: No hope for investment even with CMR's expertise. NB: Even hopeless companies might be suitable for a company sale or Catalyst Group solution – see later in Ops Manual.
Discussions on the above will lead into identifying problem areas and gives an opportunity to discuss how we might be able to help. The CMR process will have already encouraged the client to look at CMR's website, so he/she may already have some knowledge on the wide range of resources and services provided by CMR. Now would be a good time to start talking about these - particularly those that are pertinent to the company's situation either now or in the future. Even if there is no immediate need for our services, the knowledge imparted and the continuing opportunity there now is to maintain contact, gives a high probability that the next time the company has a problem, they will reach for the telephone to CMR.
Once contact is established with the client, it will be worthwhile maintaining communications, perhaps with an email every three months enquiring if there is anything we can do to help. Sooner or later, the client will have a problem or something that needs doing, where we can help - if you are still in contact there will be a good chance that business will result. A business connection should never be allowed to wither away, even if there was zero interest from the initial meeting. The fact that you are still keen on getting their business will be a positive point in your favour - many will not bother.
EXPLAINING HOW CMR’s INVESTORS WORK
The prospective client can be told that CMR has access to many thousands of registered private investors, plus probably many thousands more investors who look at propositions on the CMR’s Fundex - Business Exchange & Bourse on our website. Because of the number of potential investors, there are not really any investment areas that are completely out of the question, although of course, some areas will attract far more interest than others – but there could always be someone who is interested in way-out projects.
We should then tell the prospective client that CMR pre-vets propositions that are going to be specially introduced to our registered investors as CMR-managed propositions, to make sure the quality of the proposition itself and the way it is presented, is likely to be attractive to investors. In this respect please read the CMR Ops Manual on funding – and especially the articles by James Wigzell and Brian Wood on what turns investors on and off. If appropriate you might want to mention direct public listings on the CMR Business Exchange, which are not pre-vetted by CMR in that way.
The discussion of this, and the sort of things that can act as a barrier to funding or company sale, opens the opportunity for the CMR executive handling this meeting to start exploring possible weaknesses in the company or its business plan that could give rise to business for CMR in helping the company.
An Important Internal Note for CMR Members. It is essential to note that ‘funding’ is primarily a door-opener for us into a client’s general business, rather than being the sole reason we have for making contact. It is a reality that the majority of investment propositions introduced to private investors (business angels) will not get the funding they seek. In the UK the bbaa – British Business Angels Association, of which CMR are members, undertook a research survey to discover the overall success rates for attracting investment. The result was a surprising figure of 2.8% - which means that 97.2% of all people who went searching for private investor/ business angel investment actually did not get it. Whilst that statistic included start-ups, which are notoriously difficult, it does mean that we will often have to look for other ways forward for the client – and other ways for us to benefit from fees, etc.
For many companies, especially established ones, there are nearly always other routes forward for them. It is important that we look at the whole picture for a client and have an open mind when looking at their business and the problems they have. There are always many opportunities for both the client and ourselves.
EXPLAINING THE COMPANY SALE OPTION
It may be that the potential client’s main interest is to eventually sell their business. If so, you should point out that CMR has a specialist Division that handles such work.
The process involved in selling a company has several stages:
1) The succession planning stage – working out how to structure and plan the sale to maximise the attractiveness to investors/buyers and to optimise the eventual net returns for the sellers. Hopefully this will be done well before the date of intended sale.
2) The maximisation of profits stage – not all companies will do this, but looking at efficiencies and costs within the business to be sold, can result in higher profits and a more attractive sale price for the sellers.
3) The sales process itself – there may be many different options to be evaluated – outright trade sale, sale to investors or VC’s, MBI’s, MBO’s, flotation, or CMR’s Progressive Company Sale Programme. Having decided which of these is appropriate, the next stage is to target all possible buyers and approach those discreetly. Advertising the sale is also a possibility.
CMR can handle and advise on all these issues. A particular strength CMR has, that many company sale brokers will not have, is the size, spread and expertise of our executive base and therefore the knowledge and connections we have with their market area – this allows us to research and make contact with many possible buyers. We also of course, have our investor base that could also have potential buyers and our MBI Programme.
If the client is interested in moving forward, please make contact with David Staveley (CMR Director) – he will be able to advise on the next steps to take with that client and on the likely fee structure.
B) CMR REGIONAL PROPOSITION MANAGEMENT
One of the very important functions undertaken by each CMR Region is the review and handling of the proposition and opportunity flow - from whatever source it originates. This is one of the most crucial activities at regional level, because not only does it determine the strategy/tactics of how we are going to handle the specific needs of the client, but it is also our opportunity to review the other possibilities for helping the client over both the short and long term. Rarely will the opportunity be single-stranded, there will often be other opportunities for CMR to help, but this does mean that we need to be open-minded and sometimes innovative in thinking through the options and routes forward for the client. In CMR we have very many ways in which we can help clients and it is important that we consider all the alternatives in handling each client's situation.
It is not possible or desirable to attempt to produce directions or a list of possibilities for all the types of client contact we will have. Much of what happens in the CMR/client interface will be drawing on the personal business skills and experience of the CMR members involved. However a general
checklist can be useful, and a sample list (PR1) is shown in Appendix 1. Each CMR Region will have their own particular way of reviewing and assessing projects, to suit their local circumstances, but the end result should always be that all options for handling the client's business or needs have been examined, and the best of those selected for subsequent discussion and hopefully agreement with the client.
Each of the sections in this manual dealing with the various services and facilities provided by CMR also examines the alternative options available for client companies in each case. The manual will provide some useful guidelines to follow - but at the end of the day, it will the personal skill/experience of the CMR members involved that will determine the success or otherwise of the project.
In summary, proposition review and handling is a skilled activity - those involved in the process must be fully aware of all the facilities and resources that CMR has, and they must be able to think creatively about the client's situation - often the best solution or route forward will not be the most obvious.
C) NEGOTIATIONS WITH THE CLIENT
Having decided at CMR Regional level what course of action should be taken, the next stage of the process is to agree this with the client, and importantly also agree the basis of our remuneration.
As our views on the client's business will have been carefully thought-through and there will be a good rational reason for proposing the way forward, then discussing this and convincing the client should be straightforward! You will need good management consulting skills to handle this properly - the major difference that marks-out a good management consultant will be his/her ability to work through and get agreed by the client the solution to the situation, whatever that may be.
It can sometimes help to develop a 'Plan A and Plan B' approach, especially where you know the client has a desire to go one particular route, but we do not share their enthusiasm. This can happen for example on funding projects where the chances of the client getting the funding he seeks is remote, but he does not want to deflect from the search. In those circumstances we would say to him that whilst continuing to search for funding, we should also be preparing Plan B - so that when he accepts that funding is not achievable, we are ready to move forward on developing the other routes forward that are open to them.
FEES
Having convinced the client that the proposed way forward is the best, and having got his verbal agreement to this, the only next hurdle is to agree the fee structure!
For some CMR services we have a standard tariff, which we will normally stick with, although they are negotiable in special circumstances. Services for which CMR charges a standard fee are:
i) Equity Funding; CMR will charge a success fee of 5% of the amount invested up to the first GBP500K (or equivalent in other currencies), thereafter reducing by 1% per GBP500K, to a minimum of 2%. It is normal for CMR to charge a minimum fee of GBP7500, although this is sometimes reduced if there are special circumstances. We will also attempt to have included an option for us to subscribe for 5% of the issued share capital at par. Sometimes the client
will object to this, in which case we will consider withdrawing the requirement. An example of the standard CMR Funding Assistance Agreement is shown in Appendix 2.
In many cases, it will be necessary for work to be done in respect of the client’s business or their presentation/ business plan before they can be introduced to investors. Many of the companies/ entrepreneurs that come looking for funding are actually unfundable in the state we first get to see them. The work we do is sometimes referred to as ‘getting the client investment-read’. We will normally agree a fee (often payable upfront) for undertaking the review work, the advice given re changes to be made, and in the actual work involved. Sometimes this will be rolled-up into an Initial Fee often between GBP700 and GBP5,000 depending on the size and scope of the work to be done.
As a CMR Policy / Principle we will not usually charge any element of a success fee upfront, but we will charge for ‘deliverables’ – which means tangible work in preparing the client, business plans, presentational work, etc., etc. ii) IPR Licensing; CMR charges no time-based fees for IPR Licensing work undertaken, but does take a success fee in the form of a share in the invention - usually 1/3rd of the equity in the special 'Newco' company we set-up to own the patents or other Intellectual Property involved. An example of the standard CMR agreement for IPR work is shown in Appendix 3.
iii) Mergers & Acquisitions and Company Sales; Fees are on the same general basis as for funding, except that provision has to be made for obtaining notional values where non-monetary compensation is involved. An example of the standard CMR agreement for M&A, Company Sales, is shown in Appendix 4.
For other work, not covered by a CMR standard agreement the fees and the fee structure will be determined and negotiated by the local CMR Region. In all cases the task is to find the formula that is right both for the CMR members involved, and of course the client. Sometimes we will need to be imaginative in structuring the fee base, because it is a fact of life in the small company sector that not all the companies will be able to immediately pay in cash the fees we would like to charge.
What fees to charge? This is always a difficult/variable judgement to make, especially when not directly involved with the client or CMR executive. A great deal depends on the perception by the client of the CMR execs involved. As a generality, smaller companies are not usually ready to pay the very high consultancy fees that larger companies and public bodies will accept – and of course, there are wide differences between different parts of the world. Smaller companies are usually more prepared to pay large fees if a satisfactory result is obtained (especially if it gives them the investment/sale money to pay it!). We have always found it a good route forward to charge a relatively high fee, but with a substantial proportion of that being deferred to a satisfactory outcome. That way they recognise that real skill and experience does cost money, but they are being given a substantial discount if success is not forthcoming.
We always need to be aware of the fact that clients who are paying an upfront fee, are doing so with at least a partial expectation that a successful outcome will be obtained. As we can never guarantee that, we have to be particularly careful not to over-sell to the client. Also whenever we have charged upfront fees to a client for a funding proposition, we need to be aware of the need to have presented the investment proposition to a reasonably wide range of potential investors – not just to CMR’s own investor base. We never want to be in the position where the client has paid upfront on the expectation of a successful funding, only to start demanding a refund if no investor interest is
forthcoming (despite the disclaimer in our terms & conditions). It is okay if we can demonstrate that a reasonable number of non-CMR investors also rejected investing in the client’s business. It also helps if there are ‘deliverables’ involved – i.e. where we have done significant work for the client (for example – preparing the business presentation/plan).
If we are ever in doubt about this, we will need to hold the upfront fees in escrow until there is no reasonable possibility of a refund being demanded.
The general principles suggested for fee fixing are:
i) Charge on the high side, butii) Defer part of the fee onto a success or performance basis.iii) Be prepared to consider taking equity in lieu of some fees - but only of course, if you think the equity could be worth something in the future!iv) Don't forget the bad debt risk - if the company goes down, we all lose!
Fixing of fees for non-standard work is really decided by the CMR members involved at regional level, and does not normally require CMR Centre approval. The normal way of formalising the agreement with the client is to write a letter to the client stating the work that we will undertake and the basis for payment, and any other conditions that are to apply. The Agreement must be agreed by the CMR Regional Director and a copy sent to CMR Centre prior to signing with the client.
All fees charged to clients must be invoiced through CMR. The procedure to follow is to request by email for CMR Centre to raise an invoice – by giving the address details and the text and amount for the invoice. CMR Centre will create the invoice and will then email it to the managing CMR executive for checking and the usually for the CMR exec to check it and email it onwards to the client (in virtually all cases, we email invoices rather than post them). When to client has paid CMR, the CMR executive members will be informed, and as appropriate, they will email their invoices to CMR Centre – payment will then follow in normal circumstances.
D) CMR REGIONAL PROJECT HANDLING
Every CMR Project is under the control of the relevant Regional Director, although he may delegate management responsibility to others as appropriate. In all cases the work we carry out must be of a high professional standard and must avoid circumstances that could result in any conflicts of interest arising. It is most important that we are perceived to operate with the highest level of integrity and to always have the best interests of our clients to heart.
In CMR we always try to bring specific expertise to bear on a client's business - in that way we can provide our clients with the best possible help, whilst also helping to build a long term relationship. One of the great advantages of CMR is the tremendous network of skills we have, and the use we make of this in bringing the appropriate special skills into projects as required. It is important that CMR members do not 'hang on' to a client's work exclusively, where it is more appropriate that some special expertise is brought-in. Similarly, if you have a private client, and need extra help or specialised skills - just use the CMR Skills Database on the Website to find the person you need (there is a 10% commission payable to CMR for work done by a co-opted CMR Member working on a private project).
If you want to be an active CMR Full Member then you will certainly become involved with many propositions as they come into your CMR Region. Each one of these represents an opportunity to
build a relationship with that company, which if handled correctly should result in a revenue stream for many years to come. Most successful management consultants earn much of their revenue from clients with whom they have built a relationship over a long period.
At this point it is worth noting that CMR projects cannot be 'privatised' without the specific agreement of CMR Centre. There have been cases where a CMR member has obtained funding independently for a CMR project, where the CMR investors so far introduced have turned the project down. This is good news and the member's initiative is to be congratulated in keeping the project on-board and the client satisfied - but the project remains a CMR project and subject to the normal fee sharing rules.
In fact, when we have a client looking for funding and where we consider the proposition to be good, we should always look at other funding sources (like VC’s, VCT’s, trade investors, etc.) rather than solely rely on CMR’s own investors
CMR REGIONAL MANAGEMENT
CMR has an amazing array of skills, resources, facilities and products, especially aimed at the small to medium-sized company sector. To be successful, all of these need to be brought to life by CMR members operating at Regional and Affinity Group level. This involves thinking 'entrepreneurially' about our business, and to use the resources in the best possible way and with the spark of innovative thought, to develop the real potential we have.
To develop business in this way, there are a few key issues we need to get right. They are:
To get our regional marketing right - to generate a good inward proposition flow. To get our project handling right - to have happy clients and many referrals. To foster relations with regional investors.
A) OBJECTIVES
The objective of this section of the CMR Operations Manual is to examine the philosophies and fundamental concepts relating to CMR regional operations and to provide a blueprint of the marketing and management action to be taken. It is also to provide an operational framework to allow each CMR member to see how he or she can fit into and become active in the business acquisition and processing activities in their Region.
CMR Regions should follow the guidelines contained in this manual. The action plans are based on what we know works, and any major deviations from this path must be cleared by the appropriate Divisional Director. In particular, the integrity standards and branding positions must be adhered to at all times.
The action plans that follow are based on the recognition of the realities of business life as they affect CMR and its markets. It is important that all those actively involved in CMR's regional operations both recognise and agree that these realities exist - otherwise the action and decisions taken will be mis-directed. In the past many in CMR have thought or hoped differently, with the result that inappropriate action has been taken and success has been elusive.
The following is the list of the truisms, in no particular order, (and with apologies for the obvious ones):
1) Business doesn't grow on trees - we have to work to make it happen. We have to 'put ourselves about' and put effort into what we do.
2) CMR's business cannot be 'sold', it has to be 'developed' - sensitively and professionally – many prospective clients will turn-off if they think they are being sold to.
3) We only get business when we have gained the client's confidence and trust. We only keep the business and get referrals by doing a good job.
4) The primary 'product' the client sees is the CMR member sitting opposite them.
5) Business has to be won through a process that involves:
a) Opening the doorb) Handling the first meeting well.c) Developing a personal relationship and turning it into projects.d) Handling the project well
6) CMR members are not good at everything. Only some are good at:
a) Opening doorsb) Handling first meetings.c) Developing relationships and 'closing sales'.
7) CMR Regions will not be successful unless they ONLY use people who are good at each particular stage of the process. It is a complete waste of everything if inappropriate members are allowed to handle opportunities by themselves. People management and teamwork are the keys to success.
8) The majority of companies looking for funding are unfundable. Nationally, less than 5% of companies will get the funding they seek. Also many 'business angels' are fickle and unreliable, with quite a number being time-wasters.
9) Funding is therefore primarily a 'door-opener' for CMR, often giving us the opportunity to turn the initial contact into something more useful - for both the client and us. Failure to recognise this fact can lead to much abortive work and missed opportunities.
10) The majority of companies that are unfundable, have elements of a worthwhile business, but often lack size and infrastructure to achieve profitable growth. By themselves they face many difficulties, but by merging in some way with other companies, they can develop.
11) Advertising for business does not work and is expensive. Building personal contacts does work, and is inexpensive. Successful CMR marketing does not depend on spending large sums of money.
12) Any business, CMR's included, does better if it markets its strengths and unique products, rather than trying to push 'me too' products. Too often in the past some CMR Regions have concentrated on the 'ordinary' consultancy-based products that everyone else in the market is trying to 'peddle'. CMR's (almost unique) product strengths are:
Private investor funding CMFC Procurement-backed 'Interest-free' funding Company Sales/MBI IPR/Licensing Business Lifeline & Catalyst Groups
13) Greater returns can be achieved by arranging deals and 'doing things', rather than through conventional consultancy-type services. Also there are only 24 hours in a day, which somewhat limits the earning potential of the latter.
CMR REGIONAL MARKETING ACTION
The objective of the following action programme is to create a healthy flow of opportunities involving face-to-face meetings with owners and managing directors of SME's, which when handled properly will translate into revenue-earning business. There are many different channels for developing CMR business:
SUMMARY OF REGIONAL MARKETING ACTION:
a) Building local awareness of CMR through:i) Giving presentations and speeches to local business and professional groupsii) Networking with Chambers of Commerce and other local business groups.iii) Obtaining local PR exposure
b) Building relationships with local professional firms, banks, etc., who can act as introducers of business. Firms of accountants are particularly important in this respect - both for the introduction of propositions and the intake of new private investors.
c) Undertaking the direct contacting of local businesses - NOT to sell anything, but to start the relationship-building process.
d) Using one client to leapfrog to many others – particularly using the Catalyst Group concept.
e) Using our M&A capabilities to generate ‘catalyst’ group-building opportunities, which in turn provides many other possibilities for relationship building.
f) Using Sales Closer Group
The following pages include detailed action plans for the above items.
a) Identify those active members able to give good presentations and project the 'right' image for CMR, and able to field all likely questions competently.
b) Create fee-sharing arrangements to reward those giving presentations from which business results.
c) Establish the titles of each presentation to be offered to local business groups. Suggestions:
Funding problems & solutions for SME's Revolutionary New Interest-free Loan Capital Scheme for SME's How to fund and commercially develop innovation. How to handle financial and solvency problems How to minimise costs by using interim managers. How to retire profitably from your own business.
a) Contact the Secretary for each appropriate professional and business group in the region, offering to provide a CMR speaker for whichever subject is offered or selected. NB. Most Programme Secretaries are desperate for speakers - they usually have to arrange these over the year ahead. Suggested organisations to contact are:
Institute of Chartered AccountantsAssociation of Chartered Certified AccountantsInstitute of DirectorsLocal Chambers of CommerceInstitute of BankersInstitute of Management
This contact can be made by telephone or letter. If by letter, the following format is suggested:
Dear xx, CMR would be pleased to provide a speaker for one of your forthcoming meetings. You probably already know of CMR - we are a venture capital and management group helping small to medium-sized business to obtain the help they needed to grow and prosper. I enclose some information about us, together with some press articles that will help to give a flavour for our activities.
We are able to provide speakers on the following subjects: a) Funding problems & solutions for SME'sb) Revolutionary New Interest-free Loan Capital Scheme for SME's c) How to fund and commercially develop innovation.d) How to handle financial and solvency problemse) How to minimise costs by using interim managers.f) How to retire profitably from your own business.
Our speaker will give an informative presentation covering the fundamental issues involved. The talk will not be a selling exercise, although we may make some comment on the role that CMR plays in helping the company or business concerned. Whilst we prefer to schedule speaker appointments well in advance, we can sometimes accommodate short notice 'panic' situations - so if you do find yourself 'embarrassed' or let-down at the last minute, please give me a call.
Best wishes....
2) BUILD LOCAL NETWORKING CONNECTIONS
Encourage regional members to partake in local networking events. Most professional bodies have local associations meeting monthly or quarterly, and bodies such as the local Chambers of Commerce (CCi), Institute of Directors, Business Links and many more, hold regular networking meetings. This networking will also be personally valuable for CMR members individually.
3) BUILD RELATIONS WITH LOCAL PROFESSIONAL FIRMS
Arrange to bring local accountants, solicitors, IFA’s up-to-speed on how CMR can help their clients, and how we can help them. This can be done by a separate meeting with one of the partners - or better still, why not offer to talk to all partners and senior staff in their premises, over a sandwich lunch or after close of business?
Again the offer can be made by phone or letter, or both. Suggested letter:
Dear xx, You have probably already heard of CMR - we are a venture capital and management group, operating globally - we are in CMR's xxx Region. I am enclosing some information about us, together with some press articles, which will help to give a flavour of our activities.
Our operations are particularly relevant for professional firms - not only are we able to provide substantial help for your clients, we will also generate opportunities and revenues for your firm.
I would like to bring you up to date on these activities with a view to perhaps working together in the future. This could be achieved in a personal meeting (takes less than 30 minutes to cover most aspects), or perhaps by giving a short presentation to all relevant partners and senior staff, either during the lunch break or after close of business.
The particular aspects of CMR's operations that will be of greatest interest are:
a) Our ability to provide equity funding through our own private investor bank. CMR has access to a large reservoir of business angel investors. In addition, CMR has alliances with many venture capital and trade-related finance sources, and can provide capital in many situations.
b) Our new revolutionary ‘Procurement-backed Interest-free’ Loan Scheme supported by our associated major banks.
c) Our special funding and licensing resources for companies with innovative products and intellectual property.
d) Our ability to provide very high quality consultants and interim managers from every industry and discipline to help solve problems or deal with a crisis.
e) Our Progressive Company Sale & MBI Programme, which helps owners of companies to retire to their own schedule, and maximise financial returns.
In addition, we would be happy to grant free investor-membership of CMR to any of your clients who are interested in SME investment. After a simple registration process we will let them know of investment opportunities as they arise that meet their stated investment preferences. This invaluable service is free of charge, and can be handled direct or through yourselves to the clients involved. Investors will be advised to seek professional advice (through you) before committing to any investment.
I look forward to talking with you further ..............
Working with firms of accountants can be particularly valuable for both sides (see also our Business Referral Scheme). CMR’s services are almost entirely complementary and not competitive for most firms. In fact a linkage between CMR and the firm will almost certainly generate extra fee income for them, whilst allowing them to provide valuable extra facilities for their clients. For example:
1) If the Firm introduces clients into the CMFC ‘Interest-free’ Funding Scheme, we will be happy to appoint them as the administration Chartered Accountants for that project – from which they will earn good fees (to be negotiated). This is subject to agreement by the lending bank. This arrangement will also help to make the client more comfortable with the Scheme.
2) If the Firm introduces clients to us for private investor funding, their client will almost certainly look to them for advice when negotiations with potential investors start (bearing in mind that CMR steps back at that time).
3) If the Firm introduces clients to join our private investor bank (see Section 10 below), they will similarly look to the Firm for help in the due diligence process when considering an investment.
4) If the Firm introduces clients for our Progressive Company Sale Programme, we will be happy to work with them in ensuring that the financial aspects of the Programme are managed properly, and not to the disadvantage of the client. This will not only create revenue for the Firm, but also will also give confidence and comfort for the client.
4) RELATIONS WITH LOCAL BANKS
Whilst banks still represent the main line of finance for SME's, and are therefore of interest to CMR, they will be difficult to deal with unless a personal relationship exists.
Most banks now operate away from branch level, and therefore relations need to be established at regional level. Final problem with banks are that they will not want to put their necks on the line, so will be super-cautious about recommending anything or anybody to their customers that could rebound on them. However, that said, we do get referrals from banks.
At this time, it will not normally be worthwhile marketing to banks unless a prior personal relationship exists.
5) DEVELOP AND USE LOCAL PR
The purpose is to build awareness for the CMR Region generally, and to encourage contact in respect of the services offered by CMR.
REGIONAL ACTION:
a) Identify and list all relevant local newspapers within the Region.b) Where possible, aim to establish a personal contact with each.c) Use CMR's national press releases and articles - send them to each newspaper, preferably
with a local flavour added.d) Create the Region's own press releases, preferably with newsworthy items relating to the
local Region.e) Use all suitable press articles (both national & local) to build and maintain relations with all
important regional contacts; Dear Fred, Thought you would like to see the enclosed press cutting concerning CMR's activities on xxx. Look forward to meeting you on xyz. Best wishes, Jim.
Aim to have some reference to CMR in each local newspaper at least every 3 months. Of course, local successes achieved by the Region can make good newspaper copy.
6) DIRECTLY CONTACT LOCAL SME's FOR FUNDING DISCUSSIONS
The objective is to obtain 'informal' meetings between suitably qualified CMR members and the owners or managing directors of SME's in the region. The arranged, subsequent meeting should be low-key, primarily to introduce the concept of using our private investor funding/ company sale/ IPR or other resources sometime in the future. Also to briefly talk through the way the process works (previewing and recommendation of any changes needed by CMR, the introduction of several possible investors, negotiations between company and investor directly, etc., etc.). The meeting should be viewed by the client as a friendly briefing for his future reference, without any pressure from us. Of course, a skilful CMR executive will be able to engage the client in conversation and start
to talk casually about the other things that CMR does - picking-up on any expressions of interest from the client - and developing an ongoing relationship and business.
7) USING ONE CLIENT TO LEAPFROG TO MANY OTHERS
Most businesses operating in the Region will have some use for the services provided by CMR at sometime in the future - if not right now. We can only get that business if they are aware of CMR and have a favourable view of us. We can only achieve that awareness if we are in 'contact' with them, either indirectly or directly. Of course, we can always use the cold telephone contact method as described above, but there is another way - we can also use one client (or prospective client) to enable us to make contact with many other possible clients.
For example; when we are in contact with a small company that we consider to be unfundable, or has financial problems, one of the routes forward for that company is to 'merge' in some way with another company in the same area of business. This can be a larger company, or perhaps another company of the same size where together they can achieve the critical size and infrastructure that possibly both lack today. When dealing with an unfundable company, it is always worthwhile suggesting that CMR could help them to examine the possibilities for this - on a confidential basis of course. This is something that companies cannot really do for themselves - it needs an independent body, like CMR, to handle this in the sensitive and confidential way that's needed.
With the client's approval (or even without!), we now have the ability to directly contact the managing directors of potentially suitable companies in a 50 mile or so radius to discuss the possibilities for merging, acquiring, or coming to some other arrangement with our first client. From past experience we know that every managing director (properly) approached in this way will want to have a meeting - even if it is only out of curiosity! Providing again, that the contact with the managing director is by a CMR member good at handling such meetings, it is almost certain that interest can be created for other aspects of CMR's services - in addition to perhaps enabling us to tie-up a relationship between them and our first client.
Frankly, for many of the smaller, marginal companies that populate each Region's territory, linking with other companies in this way is the route forward. The reality is that many small companies are sub-critical in size and lack both the business volume and infrastructure needed to grow profitably into the future. Many will just scratch a living, and are financially vulnerable especially when recession looms.
ACTION FOR THE CMR REGION
1) Be continually on the look-out for clients in this position.
2) Involve the CMR Corporate Recovery Group (CMR Business Lifeline) if solvency is a problem.
3) Suggest that CMR, operating on a confidential basis, investigates the possibilities for them to 'merge', acquire or whatever, with another synergistic company. It can also be mentioned that we may have private investors who might be interested if a viable 'merger' resulted. At the Region's option this work can be undertaken on a success fee basis, or for a retainer fee, or both.
4) Identify all the local companies who could be possible 'partners'.
5) Using the ‘right’ CMR members only, make direct contact with the Managing Director of each. We have found from past experience, this is best done by telephone on a personal basis between the ‘senior’ CMR executive and the MD. Again, it is vital that this is not seen as a ‘selling’ approach from CMR.
6) At the meeting, the ‘right’ CMR member will both talk about the ‘merger’ possibilities, and will move into ‘relationship building’ mode to develop further business.
7) Be prepared to consider other opportunities. We have found in the past that contacts made in this way (and in other ways, as above) can open-up surprising new business opportunities that could not have been foreseen.
8) DEVELOP 'CATALYST' GROUP OPPORTUNITIES
There will be many opportunities in every CMR Region to build 'Catalyst Groups' from marginal companies operating in the same niche market area. However, this is a skilled operation requiring specialised experience from CMR's M&A Special Business Group, and should not be attempted by a CMR Region by itself. Direct contact will be made by the CMR M&A Group to each CMR Regional Director to discuss this further. More details on Catalyst Groups are in this Ops Manual – see index.9) DEVELOP A LOCAL INVESTOR BASE
In addition to the action above of developing contacts with possible corporate investors, the CMR Region should also be building a local private investor listing - which will be part of the overall CMR Private Investor Bank.
Many private investors like to invest in companies that are not too far away from where they live - often for the very sensible reason of wanting to keep an eye on their investment. Of course, one of the 'horse and cart' problems of maintaining an adequate investor base is that there needs to be a sufficient flow of good quality investment propositions - there is absolutely no point in going out to build a massive investor base, if there are insufficient projects to keep the investor base interested. Since CMR does not make a charge on its investors, there are no real impediments in obtaining new investors. The only requirements we have for new investors joining CMR are:
1) They have a personal investment capacity of at least GBP50,000
2) They sign a confidentiality agreement that also acknowledges their responsibility for investment decisions and due diligence.
3) They complete a short questionnaire enabling us to match investment propositions with their stated preferences.
4) They notify us if/when they are no longer an active investor.
New investors therefore have nothing to lose and possibly much to gain, by being associated with CMR - but because we do not make a charge, we need to be careful not to bring investors on-board who have no real intention to invest. Professional firms, particularly accountants and solicitors are a good source of new investors - particularly because any such investment activity by their clients will undoubtedly create extra fee income for the firm as their client looks to them for advice and due diligence. Our Business Referral Scheme will be of great value here.
Approaches to such professional firms should only be made once a general relationship has been established, perhaps as a result of the approach recommended in Action Point 3 above. Direct cold approaches 'touting' for new investors must not be made.
All new investors must be formally registered by CMR Centre - this is most important. Under no circumstances must CMR projects be introduced to investors who have not completed the required documents, and been registered by CMR Centre - this is also a requirement under the UK’s Financial Services & Markets Act 2000. New investors will normally register with us online, in which case all the legal requirements are covered as they register.
CMR WEBSITE - Explanation and Procedures
Overall Review of Website
The website has six main parts:1) CMR’s Services to Business2) CMR’s FundEX / Business Exchange & Bourse3) CMR’s Executive Recruitment & Interim Management Service4) CMR’s Executive Network5) CMR’s Overall & Regional Intranets6) CMR’s Investor Database & Registration Online
CMR’s FundEX / Business Exchange and the CMR Investor Database are linked, and CMR managed propositions are matched and then presented to investors having a preference for that type of investment.
The CMR Executive Recruitment Service and the CMR Executive Database are also linked.
CMR’s FundEX / BUSINESS EXCHANGE
CMR’s FundEX / Business Exchange provides some very important facilities:
1) It allows companies, entrepreneurs and inventors to present their ideas and propositions to investors and businesses on a global basis - without upfront cost, and for only a 2% success fee, which reduces by size to only 0.25%.
2) It allows investors and businesses completely free access to those propositions, with the ability to filter-out those that are unlikely to meet their investment preferences. They can also register as an investor, in which case they receive preferential notification of CMR managed propositions meeting their preferences. Corporations can also have access to the Exchange, which means that propositions will be seen by private, institutional and corporate investors.
3) Internally within CMR, all members can see all propositions posted on FundEX / Business Exchange, allowing them to make contact with the company, if they have a special input to make. If the company is geographically in an area covered by a CMR Country Operation, then all contact with the company should be routed through the CMR Regional Director, who will already have the company’s contact details. The CMR Region itself is also able to contact the company, to discuss the company upgrading from an ‘ordinary’ listing (at 2% success fee) to the full CMR Service (at 5% or at any other fee/share option level), plus of course, discuss other services CMR can provide.
4) Proposers can upload up to a 3 minute video, which can more effectively communicate their proposition to investors. Or better – can include a YouTube link.
EXPLANATION OF CMR FUNDEX/ BUSINESS EXCHANGE PROCEDURES
SECTION A - ENTRIES BY THE PUBLIC
1) The public proposer will enter their details and a top summary (max 5 lines) and a ‘more detailed’ summary (min of ½ page, max of 5 pages). The system will not allow submission if inadequate information is given. To maintain presentational standards, the system will not accept propositions with less than the ½ page of detail.
2) Upon hitting the ‘submit’ button, there is an on-screen message thanking the proposer and saying they will be notified by email when their proposition has been accepted and uploaded to the website.
3) The proposition is then transferred to a HOLD account in the CMR Centre Admin area of the website. CMR Centre will then review the proposition to ensure that no inappropriate words have been used and that the proposer remains unidentified. Usually a spelling, grammar and layout check will be done, and then the proposition is uploaded to FundEX / Business Exchange. No checks are made as to the quality, viability or presentation of the proposition.
4) The proposition is shown in Business Exchange below any entries from CMR or any other professional firm, with a top summary and a clickable ‘more detail’ section.
5) If an investor (or anyone else) clicks the ‘I’m interested’ button, they are asked to input their details, and ‘sign-through’ the legal/ statutory agreement. When done, an email is
immediately sent by the system to the proposer giving the ‘investors’ details, which would enable the proposer to make contact. The ‘investor’ cannot make direct contact other than through the CMR system. CMR Centre is also sent a copy of the system email sent to the proposer. Both the proposer and ‘investor’ acknowledge and agree, through the legal agreement they ‘sign’, that CMR will be paid a success fee. They also have legally agreed that they will not come to any arrangement without CMR’s written agreement - this is to specifically cover arrangement that do not have a readily identifiable value on which the success fee could be calculated. The system automatically sends an email to both parties after 3 months to remind them of those obligations should a deal be agreed.
SECTION B - ENTRIES BY CMR REGIONS
1) All propositions being handled by a CMR Region should be input into the system through the Region’s Intranet – this is to ensure it is shown as a CMR-managed project. This should cover all propositions either actually taken onboard (i.e., agreement signed with the client) or being seriously reviewed.
Propositions that are taken onboard by a Region will be allocated a regional reference number (e.g. ASW2456) - the system identifies a regionally managed from this and will show the project as being ‘owned’.
When input, sight of all regional projects can be obtained by all members at the main CMR Intranet - they can also find the name and contact details of the CMR Project Manager responsible for that project, who they can contact if they have a special input to make.
The CMR Region should use their Regional Intranet to control each project. If/when a project is considered by the Regional Director to be suitable for presentation to investors, he will go into the Region’s Intranet Admin control section (password protected), and will mark the project as ‘approved’. If appropriate, the project should also be marked ‘CMR Proprietary’ to indicate that it is both CMR managed and considered to be of a high enough standard to be presented to investors. If the judgement is that it is not good enough, the project should remain as non-CMR proprietary - this mean it will appear on FundEX / Business Exchange, but as a ‘public’ entry. After review by CMR Centre it will be uploaded to FundEX / Business Exchange.
Explanation: We want to ensure that investors recognise the CMR logo as a mark of reasonable quality in the standard and presentation of business propositions – we do not want to attach the CMR logo to any business proposition we regard as being of poor quality.
As soon as the ‘regionally approved’ button is hit, the proposition will be moved to CMR Centre’s Admin area. The CMR Divisional Director responsible for that Region will then review the proposition. If he agrees that it is appropriate and good enough, he will hit the ‘CMR Centre Approved’ button, and the proposition will be immediately displayed as a CMR proprietary proposition.
CMR’s FundEX / Business Exchange provides the facility for external professional firms to put their client’s projects on FundEX / Business Exchange, together with the firm’s logo (just as the CMR logo is displayed). This has the dual advantage of giving them ‘ownership’ of the project, whilst also indicating to investors, etc. that this is a professionally prepared proposition. In any search on FundEX / Business Exchange these logo’d propositions will be shown above those from the general public. We think it quite likely that many serious investors will concentrate on the professionally presented ones, rather than the ‘possibly-rubbish’ ones in the public sector.Whilst CMR members can contact those professional firms (as they can for any other proposition), this should only be done where a special input can be made that could be of particular value to the professional firm or their client. It is most certainly not to be used to hassle for business from that professional firm (this would be a ‘hanging offence’ within CMR!).
SECTION C - PROCESSING OF UPLOADED PROPOSITIONS
1) All propositions will remain on FundEX / Business Exchange for 3 months from the date of uploading. Three weeks prior to the end of the 3 months, an automatic email will be sent by the system to the person originally placing the proposition, notifying them of the automatic removal that will be happening shortly. If they wish to continue for a further three months, they can do so for the payment of US$100 (or equivalent) - the system takes them to the online credit card payment facility if they wish to opt for that. This arrangement applies to all propositions, including those that have been professionally input. CMR Regions wishing to continue a proposition should send an email to CMR Centre who will arrange for the continuation (without charge!). This process will be repeated at the end of each quarter for all current projects, so in theory a company could continuously have a proposition presented if they wanted, for a cost of $100/Qtr.
By adopting this approach, we aim to keep FundEX / Business Exchange reasonably current and up-to-date. Propositions can be removed at anytime by application to CMR Centre.
2) Investors: The moment a CMR Proprietary proposition is ‘approved’, it is uploaded to FundEX / Business Exchange, and immediately the system matches it to the CMR Investor Base. The system produces a report that lists investors in descending order of match - i.e. those with a 100% matching of stated preferences are at the top. There will be a cut-off (currently 70%) below which investors’ details will be suppressed.
The system sends an email to the relevant Regional Director (copy CMR Centre), notifying him/her of the matching and giving the url address where the details can be seen. At that location the report can be seen, giving the contact and preference details of each investor. There will be a sign-through agreement stating that the list is confidential to those CMR members directly involved in that project, and the information given is not to be used for any other purpose whatsoever. The report will already have a ticked box alongside each investor.
The Regional Director, or their appointee, will untick the box for any investor they wish to contact personally (perhaps by telephone). When that is done they will then click the ‘submit’ button - the system then immediately sends an email to the investors that have remained ‘ticked’, notifying them that this proposition appears to meet their preferences, and giving the top summary details, together with the click-through url address on FundEX / Business Exchange - if they like it, they can then click the ‘Yes I’m interested’ button, and the standard process happens (see Section D below).
Please note; this process only happens for CMR-managed propositions. Investors can only access other propositions (from either other professional firms, or the public) by searching FundEX / Business Exchange or by looking at the regular email newsletters sent to all registered investors. This preferential notification is one of the main advantages for an investor registering with CMR.
Any proposer (including professional firms) can avail themselves of this preferential treatment by signing-up with CMR at the 5% success level (this would be split 50/50 if a registered professional firm was involved).
SECTION D - PUBLIC ACCESS TO FundEX/ BUSINESS EXCHANGE
1) Anyone in the world can get free access to the CMR Business Exchange & Bourse. They all have to sign-through the legal statement and disclaimer, but apart from that there are no impediments to entry. They can search all propositions, or can filter by region/ country, by industry, and by type of deal. For any proposition they can read both the top summary and the more detailed summary.
2) If they are interested in a project they can then click the ‘Yes I’m interested’ button, which takes them to a registration form, where they have to give some personal contact details. As soon as they hit the ‘submit’ button, the system immediately sends an email to the proposer stating that this person is interested and giving the details just input by the ‘investor’. This email will be sent:
a) To the relevant CMR Regional Director if it is a CMR project.b) To the nominated email address if a registered professional firm has input the proposition.c) Or direct to the company/ individual who input a ‘public’ proposition.
In all cases, CMR Centre is copied with the email.
The non-CMR receiving party is notified in the email that the information sent to them is confidential and must only be used for the purposes of that entry in the CMR Business Exchange, and reminding them of their legal obligation to pay a fee to CMR on a successful result, and to obtain CMR’s written agreement prior to concluding any deal with any party introduced by CMR. They are then free to make direct contact with the ‘investor’ and come to any arrangement, subject to the rules.
Of course, the person interested need not be a private investor - the CMR system is open to corporations, or anyone else with an interest.
SECTION E - Fee arrangements
1) The fees for public entries to the CMR Business Exchange are 2% on the first GBP GBP500K of any single deal reducing to 0.25% in stages (see website for details). In cases where a clear value of the deal cannot be readily obtained, then CMR will agree the fee on reasonably grounds with the parties involved. Legally the parties cannot come to an arrangement without CMR’s written approval.
2) These fees are payable to CMR, but they will share them as follows:a) If the introduction came through a CMR member, they will be entitled to a commission of 10%, provided they pre-notified CMR by email and received acknowledgement from CMR (which will always be done).b) If the introduction came through a CMR Region, then the success fee will be allocated to the normal CMR fee split arrangements (15% to CMR Centre, 5% to Div Director & Regional Director, and 70% to those directly involved (must be CMR Full Members).c) If the introduction came from a pre-registered external professional firm, CMR will split the fee up to 50/50 with the firm, as negotiated by the CMR Region/Member concerned. If the introduction to the firm came via a CMR member the firm’s 50% (or whatever) share will be split in whatever way the firm and the member have agreed (and have email-notified CMR Centre).
3) Where the proposition is input by a CMR Region they will have already signed a FAA (Funding Assistance Agreement) with the client, probably having agreed a success fee of 5% plus other fees/options. This would be split to the usual CMR formula as above.
4) All public propositions entered by a company/ person located in a CMR Region’s area, will be shown in that Region’s Intranet Proposition Control - this enables the Region to make direct contact and to discuss perhaps making it a CMR managed project (to get CMR’s skills applied, and direct referral to CMR’s investors) - the Region can also discuss all the other things we can do for them. Where a previously public proposition (at the 2% level) is converted to a CMR project (at 5% or whatever), the whole fee will be split in the normal CMR formula.
CMR EXECUTIVE RECRUITMENT & INTERIM MANAGEMENT SERVICE
This unique CMR Executive Recruitment Service provides recruiters with an extremely fast, inexpensive and reliable way to recruit senior executives, for permanent, interim, part-time, non-exec, or consultancy roles.
All CMR members (all categories) are automatically registered for this programme unless they elect otherwise (members can be ‘kept off’ the public CMR website if they wish).
We want to establish the CMR system as the defacto website for all companies when considering the recruitment of an experienced executive anywhere in the world. Literally within 24 hours, and often quicker, they will know if the candidates they like the look of, are both interested and available, and they can phone-interview them immediately. If they come to the conclusion that they are unlikely to find the person they seek, then they can go the (expensive) conventional route of advertising, or using an agency, without having wasted much time.
A) PROCEDURES
1) The recruiter enters the recruitment section of the website and clicks-through the legal agreement with CMR, that amongst other aspects, involves agreeing to pay a 17.5% success fee upon a satisfactory recruitment.
2) They are then asked to input their candidate specification from various tables for personal experience, job function, industry experience, etc. They can either make a selection, or can leave it on the default setting of ‘any’. If they left all the selections at ‘any’ they will be presented with all CMR’s members.
3) Having made their selection, the system the presents them with a series of pages, with thumbnails on all CMR members meeting their specification. They can click on the thumbnail and see the member’s details, but cannot see their name (apart from first name), any contact details, nor the member’s uploaded CV.
4) The recruiter then clicks the ‘select’ box for those CMR members of interest to them When all such selections have been made, they click the appropriate button, and are then taken to a page where they can input their own details, together with a synopsis of the job to be filled. Their details are not divulged to the CMR member at this stage, but the synopsis is. If they wish, the recruiter can also upload as a file, more information about the company or job - this will be sent to the selected candidates.
5) The instant the recruiter clicks the ‘finished’ button; the system sends an email to the CMR members selected, together with the synopsis and the url address on the CMR Website where more details can be found. The CMR member is asked to indicate if they are interested in taking the opportunity further - preferably by return - they do this by clicking the appropriate button.
6) The instant that button is clicked, the system sends an email to the recruiter, informing them that this member is both interested and available, and giving the url address on the CMR website where the member’s full details, including name, contact info and uploaded personal CV, can be seen. The recruiter can of course, printout from there.
7) If the recruiter is still interested, they can then make direct contact with the CMR member, and where appropriate, make arrangements for interview, etc. All negotiations are directly between the recruiter and candidate, and if a successful recruitment happens, the recruiter will pay the agreed fee to CMR.
Full details can be seen by reading the legal agreement on the website. In summary, the recruiter agrees to pay CMR a 17.5% success fee on the payments as agreed with the candidate. For interim management assignments, this 17.5% is of all payments made, excluding any reasonable expenses reimbursed. For permanent positions the 17.5% is payable on the guaranteed payments for the first twelve months. If someone is taken-on as an interim manager, but then the recruiter subsequently wants to convert to permanent, the 17.5% on first year emoluments is payable in addition to whatever was paid during the period as an interim manager. For existing corporate clients (who have previously recruited through the CMR system) the success fee is discounted by 50% to 8.75%.
For Interim Management positions the recruiter can elect to take the person onto their own payroll, or have payments made through CMR.
C) COMMISSIONS
CMR will pay a commission of 50% of fees received for recruitment business introduced. This payment can be made entirely to the introducing member, or can be split between the member and an external introducer, as agreed by that member. Commissions will be paid within 14 days of receipt of funds by CMR.
CMR’s INTRANETS
The CMR Website sports two types of Intranet:
1) An overall CMR Intranet - accessible by all CMR members (all categories).2) Regional Intranets - accessible only by members of that Region.
SECTION A - OVERALL CMR INTRANET
This overall CMR Intranet contains much useful information about CMR from a member’s viewpoint. There are several facilities that are especially important:
1) CMR Proposition Database - listing all propositions being handled by all CMR Regions. By reviewing this database you will see all propositions and also have the name of the CMR Project Manager handling each proposition. If you consider you have a special input to make that could be of particular value to the CMR Manager, or the client, you will be able to make contact to discuss further. Your contact may be of interest to the CMR Manager, and may possibly get you involved with the project.
2) CMR Executive Database - this is a replica of the executive database available to the public as part of the CMR Executive Recruitment Service, except for three additions:a) The full name, address and contact details are shown
b) The members who have requested ‘keep me off web’ are shown.c) The member’s CV can be read.
3) CMR Overall Bulletin Board - this allows members to pin-up notices or messages for other members to read, and if they want, to respond to. It can be used for private business matters as well. Each new message (i.e. not a reply to an existing message) are email-notified to all members.
SECTION B - REGIONAL INTRANETS
Each Region has its own password-protected Intranet. This contains items of particular value to members of each Region, including:
1) The profiles of each member of the Region, including contact details, etc.
2) The database of regional propositions - not only CMR managed projects, but also those posted on the CMR Business Exchange by companies, etc. who are located within that Region’s area. This is an important facility for the Region, because it acts as a sort of radar screen - every time a company from within the area uses our Business Exchange, the Region knows about it, and can then contact the company to both discuss the advantages for the company in upgrading to the CMR full service at 5%, and of course, all the resources we can provide to help the company in other directions.
3) The facility for the Region to input propositions to the Region’s database. This should be the Region’s main control panel for managing all the propositions that come into the Region - notes can be kept on progress or otherwise, and of course, all members of that Region can be kept up-to-date on what’s happening. Also, all projects (whether ‘approved’ or not) are shown on the overall CMR Intranet, as in 2. above, and can be seen by all other members.
The Regional Director has a separate password-protected Regional Intranet admin facility that enables them to update and control the propositions. Also included in this admin facility is the ability to ‘approve’ the proposition for uploading to the public CMR Business Exchange and therefore also for presentation to CMR’s investor base provided the proposition is ticked as ‘CMR Proprietary’ (means we are sufficiently happy about it to have the CMR logo alongside, and have it presented to investors). If it is a paying client, but we do not consider it meets our standards to be acknowledged as CMR-managed, or shown specially to our investors, then the ‘CMR Proprietary’ button will be left unticked - in which case the project when uploaded to FundEX / Business Exchange as a ‘public’ project – or it can be input as a RMC proposition (see above).
When the Regional Director has ticked the ‘approved’ button, the project moves to a separate hold account at CMR Centre for the appropriate Divisional Director to indicate their approval - if they do, the project will be uploaded to FundEX / Business Exchange. If they don’t, the project will go back to the Region for further review. The Region always has the option of uploading the project with a ‘public’ tag.
4) Regional Bulletin Board - for the exclusive use of each Region’s members - for messages, notices of meetings, minutes, etc.
5) Document download facility - already has some central CMR documents, Ops Manual and some PowerPoint presentations. Each Region can also upload (thro’ CMR Centre) any documents specific to that Region.
CMR INVESTOR DATABASE & ONLINE REGISTRATION
CMR Investor registration is free, and is open to all. Investors have to register online and give details both about themselves and their investment preferences and investment capacity. These are taken at face value - a point that needs to be recognised when dealing with them - apart from those we know personally, they are of unknown provenance!
Investors have to sign-through the CMR standard legal & FSA agreement, and we aim to keep the database reasonably fresh by deleting all investors as they reach the 12 month stage. Three weeks prior to this they are sent an email from the system notifying them of that, and giving them the (free) opportunity to review their database details and re-register.
Registered CMR investors will be notified directly whenever a CMR managed proposition is uploaded, that meets their stated investment preferences. They will also receive a regular email newsletter, updating them on CMR operations, etc., and notifying them of all propositions received since the last newsletter. We shall be considering also including articles of interest written by CMR members or professional firms associated with CMR. CMR investors are encouraged to also join CMR as an executive member, particularly at Affiliate level.
Of course, CMR’s range of investors will also include those that review propositions directly on FundEX / Business Exchange.
SPECIFIC CMR PRODUCTS MANUAL
FUNDING
CMR provides five primary types of funding for small to medium-sized companies:
1) Private investor funding on a risk/equity basis through CMR's own bank of investors.
2) Conventional collateral based loans - arranged by CMR in conjunction with its affiliated companies or banks.
3) Public issues through PLUS, AIM, NASDAQ, EASDAQ, etc.
4) Special procurement-backed funding through Cavendish Management Finance Corporation Ltd.
5) Industrial funding through CMR's IPR/Licensing Programme.
The next sections of this manual will cover each of these types of funding in detail, and how each is processed within CMR.
PRIVATE INVESTOR FUNDING
This is where CMR started and it is still the major area of funding activity for us, although the other types of funding are catching up! Private investors are often called Business Angels, perhaps because they tread where others do not dare! It is certainly true, as a generalisation, that private investors are often prepared to get involved with projects that are higher risk and perhaps would not check-out in the due diligence process applied by conventional venture capital companies. Many of CMR's private investors are very wealthy individuals, and whilst they are not stupid or irrational, many will be quite prepared to accept a 100% downside risk (i.e. lose all their money), providing they believe there to be a reasonable 'sporting chance' of significant upside potential. Many sensible investors will usually have the bulk of their wealth invested in the Stock Market, Gilts, Property, etc., and the amount allocated to small company, business angel type investment will often fall into the category of 'fun money'. Other private investors will take a far more serious approach to their investments - these will either be 'professional investors' or smaller investors who seek to use their capital to obtain direct involvement for themselves in the business into which they are investing.
In virtually all cases the private investor will be looking to put his money into a business that has the potential to produce major profitable growth in the future. We have yet to meet a private investor who wants to put his money into a small company that is planning to doddle-on at a low level for the foreseeable future. An element of excitement is therefore a prerequisite for any SME funding proposition if it is to grab the attention of the private investor. This is an important aspect to remember when you are reviewing (or preparing) a SME business plan - many of the plans you will see presented by SME's or their advisers completely overlook the need to communicate clearly to the investor why it is he/she should be getting interested in the business - we call this the RTI - the Reason To Invest. If the private investor does not see the RTI and get excited within the first couple of minutes or so of reading the business plan, he or she is usually lost to the cause.
Typically a private investor will go through two stages in reviewing and deciding whether to invest or not:
Stage 1: Getting excited about the projectStage 2: Having got excited, he/she will spend the rest of their time looking for reasons why they should not invest.
These characteristics are important to CMR when we are handling potential funding projects - the way we review each proposition should follow along the same lines:
1) Firstly we must see if WE can get excited. If we can't, the project will almost certainly not be fundable. If we can get excited, then we will next need to see if that excitement and 'RTI' is being properly communicated in the business plans produced.
2) Secondly, we need to probe and ask the same sort of questions the investor is going to ask as he seeks for reason why he shouldn't invest. This analysis will highlight any weaknesses there are in the client's business and funding proposal. Before the business is presented to
investors, any weaknesses should be fully exposed, and where appropriate eliminated by using CMR's resources to provide the strength that is lacking. It is a pointless waste of time to present propositions to investors that are unfundable because of the presence of serious weaknesses.
As a generality, private investors in the SME sector do not look for any particular rate of return - they generally just hope for an 'enormous' return!
A) REVIEWING SME FUNDING PROPOSITIONS
Businesses coming to CMR fall into one of three categories:
Category 1): Those that are completely fundable as they are - we need to do nothing apart from wheeling-in some investors.
Category 2): Those businesses that are unfundable as they come to CMR, but there are things we can do to help them become fundable.
Category 3): Those businesses that are unfundable as they come to us, and it would not matter what we did with them - they would still be unfundable!
Businesses that are in category 1 are in the minority - but they do exist. When they come into CMR, they can be moved straight into the procedures we have for introducing propositions to our investors (see below).
Businesses that are in category 2 are usually suffering from one or more of the following afflictions:
a) They have an inappropriate strategic plan - the way they are planning to develop their business is unlikely to be successful, and also will not win the approval of an incoming investor. Many small businesses are being run by people who do not have great depths of management experience, and as a result they are often unaware of the other options they have and alternative routes forward. This is where the years of senior management experience possessed by CMR members can be very valuable in helping the company to find the best way forward, and in developing the strategy that will win the approval of investors.
b) They lack a proper management base - this is a common problem with many small and medium-sized companies lacking any real infrastructure or management expertise. Unless the investor is looking for a company where he can provide that missing management strength (many smaller investors are), this is a company that is unlikely to appeal to investors unless the weakness is removed. This is of course, an area where CMR is ideally placed to provide the solution through the input of one or more CMR members having the particular skills and experience that is required. Although the investor may ultimately decide that he wants to provide the management base, it is an aspect that should be incorporated in the business plan BEFORE the proposition goes to investors. That means that where we feel (and the client agrees) that CMR members should be involved with the company after the investment has been input, that fact and the associated financial costs should be included in the plans before going to the investors.
c) The company is unstable or actually insolvent. This is quite a common problem - in fact a cynic may say that the majority of small companies in the UK are probably always technically insolvent. The test of insolvency is whether a company can meet its liabilities as they fall due. If a company is insolvent, it will generally have to be 'cleaned-up' before an investor can be brought in. Most investors will not want to put money into a company only to see it taken by the company's existing creditors. Corporate recovery, turnarounds and insolvency are subjects covered in great detail later, but are an area of activity where CMR can provide much help to companies afflicted with solvency problems.
d) The company's business plan or 'prospectus' is poorly presented - there are many companies who deserve to be funded, but who will never achieve the investment input they desire, purely because of the poor way they have presented themselves! Many business plans fail to recognise the two vital actions they need to perform:
i) The plan needs to create excitement with the investor (usually in the first couple of minutes of reading). If the investor fails to get excited, it will go no further!ii) The plan needs to deal with all the concerns a rational investor is likely to have - remember that most investors having got excited, will then spend the rest of their time looking for reasons not to invest.
CMR can help companies to present themselves in a way that will improve their attractiveness to prospective investors.
e) Looking for inward investment is not the best way forward. Many small companies believe they need investment, and that if an investor would put in $$$ all their problems would be solved. In many cases there are better ways for the company to move forward - for example, merging with another business to find the market strength or infrastructure they need, or international IPR Licensing to develop an innovative new product or idea, in conjunction with major corporations around the world. CMR has expertise in all these diverse areas, and can help the client to achieve their objectives - not necessarily just through direct funding.
With all of the companies in this Category 2 section, CMR can help to convert them from being unfundable into being a company that is attractive to inward investors or into being a company that no longer needs investment in this way.
Businesses that are in Category 3, are those that will not be able to make themselves attractive to investors, no matter what they or we do! Typically, businesses in this category will fall into one of the following pigeonholes:
a) Businesses that are sub-critical - that is they have insufficient sales turnover and therefore gross profit generation to properly cover the fixed costs they need to incur to be in business. Many 'proprietorial' businesses will fall into this category - that is businesses that may just about make enough money to pay the proprietor a salary, but not enough to make a 'profit' over and above. Investors will only be interested in companies having the future ability to earn good profits AFTER having paid all reasonable costs and staff costs.
b) Many start-up businesses, where the entrepreneur has a potentially good business idea but there are perceived to be too many weaknesses in developing the business in the way the entrepreneur intends.
c) Businesses that are 'boringly' sound, but which do not appear to have any real upside potential.
The fact that these businesses are unfundable in the normal way, does not mean that they have reached the end of the track as far as CMR is concerned - in fact quite the opposite! CMR will often be able to help move such businesses ahead, in particular by bringing to bear the following CMR programmes:
i) CMR M&A - helping to find merger partners, who will bring the critical mass, the market presence and infrastructure that otherwise may be lacking.
ii) CMR Company Sale - arranging to bring the client company into a larger organisation, better able to develop the potential of the business.
iii) CMR Catalyst Group - building a cohesive group of synergistic businesses, using the initial client as the first building block.
iv) CMR IPR Licensing - arranging to develop innovative products and ideas through licensing them to major international corporations, who will bring technical, manufacturing and marketing strengths to bear, in addition to providing more protection for the intellectual property itself.
Details on all of these programmes can be found later in this manual.
Moving a Category 3 business forward in this way can be a valuable source of new business for CMR. Talking to potential 'partner' companies can in itself create the right environment for us to form a relationship with other companies, for whom we may be able to undertake revenue-producing work. Leap-frogging from one client to many others in this way, is an excellent way of building a larger client base.
B) ANALYSING FUNDING PROPOSITIONS
The simplest way of explaining the process we go through in assessing a funding proposition that has come into CMR, is to say that we ask ourselves three questions:
1) Does funding look to be an appropriate way forward for the company, or is there a better route? If there is, then we will move the company into a more appropriate CMR programme.
2) If funding is appropriate, would we put our own money into it?
3) If the answer to 2. is no we wouldn't, are there things we would like to see different in the company (e.g. strategy, management, etc.) that would make us feel better about investing?
Although one can get into detailed analysis of company situations (and many people do!), these are the simple fundamentals behind what we do. Much of what we do in CMR is based on using common sense rather than 'exotic' analysis processes - always worth remembering!
Without doubt, the only really important element in reviewing any business proposition, is embodied in the question; 'are the fundamentals of this business sound'. For the moment, forget all the figures
and market analysis and other 'facts' that will have been loaded into the company's business plan. Simply look first at the products or services being provided by the company - do they look good?, feel right?, meet a market need at the prices intended?, are there any serious factors that could diminish the value of the product/service? If the answers to these questions are favourable, then this is a business we can probably help - virtually every other aspect of the business can be corrected if there are problems or weaknesses. But if the core product of the company is deficient, then it doesn't matter what other changes one makes, the business will not be viable, at least from an investment viewpoint.
To interest a private investor, not only does the company's product have to be good, there also needs to be the potential to achieve major sales and therefore profit growth. So the market for the company's product needs to be large enough, and there needs to be a level of confidence that the market can be penetrated to a degree that is likely to produce the sales & profit figures needed to justify the investment amount sought. Questions of competitive strengths, USP's (Unique Selling Points), and protectability will come into the equation at this time. A product that addresses a niche market, without having serious competition will almost always do better than a 'commodity product' that has no clear differentiation from its competitors. In the latter case, sales figures are more likely to depend on pricing policies, and margins will be low, and as a result the company will be more vulnerable to sales fluctuations.
The question of risk also needs to be reviewed. An investor is going to feel better about a proposition if the risk he is taking is minimised or controlled. He will want to avoid the 'black pit' scenario, where he is required to continue throwing money into the pit to support failures to achieve targets or timescales. We should always therefore look at ways in which the risk element of the funding proposition can be reduced. For example, if the ultimate success of the business is going to be dependent on a new product selling in the volumes intended, are there lower cost (and therefore lower risk) ways of testing those sales predictions, rather than asking the investor to jump in with both feet, investing all his money at the beginning? The investor will often feel happier if he is able to 'dip his toe in the water' first, with the option to put in more money if he likes what he sees!
In this respect there is a misnomer many people have over investment amounts. You will often hear people say that it is easier/better to raise large sums than small - and this is translated by some into inflating the amounts of money they ask for from investors. The reason for this misnomer is that many institutional venture capital companies will not look at small funding requirements (to many, GBP5 million is considered too small) - the reason is connected to their cost and management base, and the fact that the costs/time to be spent on small propositions are more or less the same as for large projects, but the returns are much lower. It does not mean that the venture capital company wants to put GBP5 million into a company that only really needs GBP250K!
If one has become satisfied with the product and market situation, then the time has come to look at the other aspects in the company. Essentially, you need to have the same mind-set as an investor will have. He has become satisfied (and excited) about the sales & profit prospects, and he is now starting to look for any other aspects of the company and its forward plan, that could give him a red light and stop his investment. The sort of thing he (and you!) will be looking for are:
1) Does he trust/like the people involved?2) Are there management weaknesses that make the company vulnerable?3) Are there any skeletons in the cupboard?4) Are there other risks that could affect his investment.5) Is the amount of money being sought correct, and does it allow enough for reserves?
Established companies are much easier to fund than start-ups, for the obvious reason that many of the business aspects that could give cause for concern, can be seen, and many of those doubts eliminated. Start-ups are fundable, but with much greater difficulty and a much higher dropout rate. Very often the start-up will be largely dependent on the entrepreneur's business & management abilities, both of which will be unknown quantities to the investor, unless he happens to already know the entrepreneur. With start-ups it is often even more important to minimise the investor's risk, by structuring the proposition so that more of the total eventual investment can be regarded as 'working capital' (to support actual business) than as 'risk capital' (i.e. will be lost if sales fail to materialise).
Finally in this section of aspects to look for in funding propositions, comes the presentation of the business itself to potential investors. We have already mentioned above some of the problems experienced in reviewing business plans presented by the companies themselves or sometimes by their professional advisers. This aspect is very important - it is no good having all the main aspects of the proposition in apple pie order if the presentation to the investors fails to impress and get the right message across.
We have already discussed the need to communicate the excitement factor (the RTI - Reason To Invest), but it is also important to rationally explain & justify any major assumptions that have been made, and also to discuss and control any significant risks that are present, so that the business plan represents a fully worked viable blueprint from which the company can run. Too many business plans that one sees are effectively like inverted pyramids, with the downwards facing apex containing all the fundamental assumptions and predictions, upon which the whole superstructure of the rest of the plan is based, often with no real attempt made to justify why those assumptions are reasonable ones to make. The investor needs to be 'talked' through the plan in a logical way so that he also comes to the same view - that the business is viable, well-thought-through, and the expectations for major profit growth in the future are well-based.
THE CMR SUMMARY
The final stage before introducing a proposition to our investors, will be the preparation of a 'CMR Front Sheet', which gives a synopsis of the plan, plus our views on it. The page is really for orientation purposes to help the prospective investor to quickly understand the nature of the proposal, and to give some guidance on the more important issues involved. The information we give should be without rhetoric and to the point (i.e. without waffle!).
It is important that the CMR Summary gives a balanced view, covering the negatives as well as the positives. The CMR Summary should most definitely not appear to be a selling document written by an over-eager salesman! It should point out any areas which we feel should be specially examined by the investor. It is most important that the CMR Summary does not recommend investment - the furthest we can go is to say that we consider the proposition is worthy of further examination by the investor and perhaps recommend a visit.
Every CMR Summary must have prominently on it the standard CMR 'Wealth Warning' as below;
IMPORTANT NOTICE: The information is directed only at persons who have valid certification that they are ‘High Net Worth Individuals’, or ‘Sophisticated Investors’ as defined by the Financial Services & Markets Act 2000, or are non-UK residents. Any opinions and views expressed by CMR are for orientation purposes only. CMR does not endorse or recommend, and any comments made are not to be relied upon for investment or any other purpose. The content of this promotion has not been approved by an authorised person within the meaning of the Financial Services and Markets Act
2000. Reliance on this promotion for the purpose of engaging in any investment activity may expose an individual to a significant risk of losing all of the property or other assets invested. Investment in new business carries high risks as well as the possibility of high rewards. It is highly speculative and potential investors should be aware that no established market exists for the trading of shares in private companies. Before investing in a project about which information is given, potential investors are strongly advised to take advice from a person authorised under the Financial Services & Markets Act who specialises in advising on investments of this kind.
C) HANDLING THE CLIENT
It is not uncommon to have a client who has fixed views on how he wants to move his company ahead, and how he wants to fund it. In some cases, we may have differing views but will not be able to dissuade the client from going the path he wants. In these circumstances, it is recommended that the following course of action be followed:
a) If it is considered there is a possibility that he could obtain funding in the way he wants (but where we consider it either fairly unlikely, or it is not the best way for him to go), then develop a plan 'A' and plan 'B' approach. We will take the project on-board to try and help him get funding under plan 'A', but if that fails we move onto (or develop simultaneously) plan 'B' - which is the way we would have recommended in the first place.
b) If we do not consider his desired path is practical or viable, we should say so with the request that when he has failed to achieve his objectives by himself that he comes back to us so we can help him in the way we would recommend. Such situations should be followed-up after sufficient time has elapsed. It is surprising just how many projects do come back to us! In these ways we are most likely to keep the client, and achieve a satisfactory outcome - eventually!
The mindset you should have when meeting a client for the first time – is that you should think and act as if you are the potential investor who is initially interested in their proposition. Effectively of course, you are pre-vetting the client and their proposition on behalf of our investors. It is very important that you are not perceived to be a ‘consultant’ who is eager to sell your consultancy services – that can come later in a far more subtle way as you discuss some of the problems and changes needed to either attract investors, or to move the company into alternative routes forward.
D) INTRODUCING INVESTORS
When a proposition is considered good enough by the CMR Region, for presentation to investors, the plan plus other associated papers will be sent to the appropriate Divisional Director for his (quick) review, and if he is happy, it will be placed on CMR’s FundEX as a CMR-managed project. This will trigger the automatic matching of that proposition with the stated preferences of our investors. A list of selected investors in this way is then emailed to the Regional Director concerned for the investors to be approached either personally or by email, as the Region decides. The proposition will also be included in the next CMR Investor’s Newsletter which features all new propositions since the previous newsletter.
If there is interest from the investor, it will move to the next stage, arranging for him/her to be sent a full business plan. If interest remains, the next stage will be for the investor to be invited to visit the company. This visit will usually be arranged by the CMR Project Manager who will normally (but not mandatorily) accompany the investor. From that point onwards, the pace of progress will be determined by the investor and the company. CMR's role is substantially completed in respect of the funding process, unless there are moves we can make that helps to facilitate the deal going ahead.
At this point it is worth mentioning the frustrations that can be experienced in dealing with private investors. Such people are by definition wealthy, and will often be away overseas and not contactable until they return, whenever that is. Many will also be doing other things with their time and money, sometimes they will not be interested in a proposition because of these other activities, but in a month or so, could be interested again in other propositions. Sometimes they are fickle, and sometimes unreliable. When presented with a proposition they do not like, they will not always say so, but will use other excuses. Altogether, dealing with private investors can be difficult! However, they can also move very quickly if the mood and proposition takes them in that way!
The other problem with investors is that they will not always tell us if they have moved, changed phone number or email address, or have died! The only practical way for us to update our investor database is by feedback from CMR members when they are dealing with the investors. If you find an email address does not work, please try phoning them (note; not all investors give a phone number). Please let CMR Centre know of any problems and we will update the database.
In every case, the company will be our client, not the investors. To a certain extent it does not matter to CMR which of the investors actually puts the money in. CMR really only acts as an introduction agent bringing the two parties together, and leaving the parties to decide if they want to do a deal, and on what terms. It is also up to the parties to bring in their own professional advisers and to do their own due diligence as they see fit.
In the event that none of the CMR investors introduced are interested in moving forward, AND if we in CMR still think the project deserves to get funded, then further CMR investors will be introduced. If we arrive at the point where all our investors have turned it down, and we STILL think it deserves funding, then we will introduce the project to other sources of capital – these will be VC’s, VCT’s, other private investors, trade investors, or other business angel networks (note some of these networks will require a substantial share of fees earned).
CMR does have special arrangements with some other investment networks including crowd-funding. These should also be considered if we genuinely feel the client’s proposition is worthy of being taken further – our other network partners will not want to take investment propositions that have failed to attract investor interest and are not of ‘good quality’.
E) CMR FEES FOR FUNDING
There are three primary stages in the funding process for CMR:
1) The pre-investment stage; doing work to bring the company to the point where it can be funded. This may involve anything from re-writing the business plan to at the other end of the scale, to organising a major re-structuring of the company. CMR will normally charge a fee for such work, which will be negotiated at regional level. It is normal for these fees to be
partially deferred onto a successful outcome being achieved (from whatever source - i.e. we will collect our fee even if the funding eventually came from a non-CMR source).
2) The funding stage itself; we usually charge no time-based fees for this, but we do take a percentage of the funds raised. CMR takes 5% of the first GBP500,000 of investment, thereafter he fees are negotiable, but we will normally go for 4% of the next GBP500K, 3% of the next GBP500K, and 2% of the remainder. We will also normally impose a minimum fee of GBP7500, but if this were to be seen as an unreasonably high proportion of the funds being raised (we have no lower limit to funding), then either the minimum will be amended, or (preferably) some of the minimum will be deferred until the client's profitability reaches a certain level (before director's fees and expenses!). In many instances we will also ask for a 5% share option at par - which is a "kicker' that could prove to be very valuable if we have just invested in the next Microsoft! These terms are incorporated into our standard 'Funding Assistance Agreement', a copy of which is shown in Appendix 2.
There are some business angel networks who charge upfront for trying to arrange funding (sometimes called a ‘mobilisation fee’ – payable whether funding is achieved or not). Such companies often have a poor reputation in the marketplace with many disgruntled ex-clients. Whilst such up-front charges are not completely banned in CMR, it is important that either we are providing ‘deliverables’ (i.e. tangible things like business plans, detailed advice, etc.) or have made it very clear to the client (and got his acknowledgement) that funding cannot be guaranteed. We never want to be in the position of having to repay a disgruntled client.
3) The post-investment stage; this is where CMR members are helping the company. The fees for this will be negotiated at regional level.
It is worth making the comment that nobody in CMR will ever get rich from the funding fees we charge – although the highest fee earned by a member purely from a single funding was GBP83,000. First of all, the rate we charge is not high, and secondly SME's do not ask to raise enough money – they are not raising GBP100’s millions with fees to match!. This is of course why the big venture capital companies and merchant banks are not interested in the SME sector. It highlights the fact that the most important aspect for CMR members is to use the availability of funding as the introduction to enable a wider relationship to be built with the client. It is only by building these relationships on a long-term basis that long-term major revenue can be achieved.
F) HOW TO HANDLE A NON-FUNDABLE CLIENT
Sadly, the majority of SME funding propositions we get to see, are fundamentally unfundable. It is important that we recognise unfundability at an early stage, and address that problem with the client in a positive manner - there are always other routes forward other than straightforward funding.
Failure to recognise unfundability and address the problem can have some unpleasant side-effects for CMR and its members:
1) We can waste a lot of time.
2) By going down the funding route and giving the client hope that funding will be obtained when in reality it is unfundable, will probably lose us a potentially long-term client, because when the funding falls apart, then so will the relationship.
3) We lose the opportunity to talk the client through the reasons why they are unfundable as they are, and moving onto the many other ways we can help the company.
It is therefore important that we do not fudge the matter - unless we feel reasonably certain that the client has a fundable proposition, we should square-up to that at an early stage, rather than move down a path that is almost certainly doomed to failure. We will win more friends with our clients this way than waffling optimism when it is inappropriate.
CMR INVESTOR BACKGROUND
Summary from James Wigzell (CMR's previous Investment Director)
CMR's ability to access funding for our SME clients is a unique feature of the operation and opens many doors to us. It is thus most important to be fully confident about this resource - by knowing our investors preferences and the way the funding process operates.
Ultimately however, the most crucial fee earning capability in all these new contacts with SME's is to be able to convert them very early on - from the initial finance request to consultancy services based on the needs and opportunities of the business that is then disclosed.
Statistics and experience show that only 1% or 2% of 'raw' business plans sent in to venture capital institutions receive investment, so it is absolutely essential to work closely with the client on the above services, as well as achieving an investible proposition.
INVESTORS PREFERENCES
Our private investors have a very wide range of personal backgrounds and skills, but these are not necessarily relevant to their interest in a proposition - although they can be helpful in providing a suitable match where the entrepreneur is looking for a particular skill supplement from his investor. However, an important factor is frequently the investors often-quoted wish to be 'within two hours, or 50 miles' of where he/she lives.
The real key to successful investing is to have a thoroughly good business plan that demonstrates a sensible and well researched business opportunity. This needs to have all the standard features expected, in addition to which we can highlight the following essentials, in an approximate order of priority:-
1. Entrepreneur own cash in - and at risk before the investor's.2. Excitement factor - be it making lots of money, or a particular industry hype.3. Personal chemistry between entrepreneur and investor - absolutely vital.4. Personal involvement of the investor - must match the requirements of both.5. Good gross margins - for profit and business resilience against adversity.6. Exit route - so the investor can see how his rewards can be realised.7. Good patents - where these are appropriate to the business.8. Sound specific use of the investor's money - tangible assets are comforting.
1. Not repaying the entrepreneur directly out of the immediate investment.2. Not funding initial high salaries, expensive cars or other superfluous overheads.3. Not funding completion of R & D or market research - product to be complete.4. Caution over business where market access is controlled by big players.5. Considerable concern over software based businesses.6. Property based businesses are likely to be steady and lack the excitement factor.7. Overseas operated businesses are impractical logistically - for CMR and investors.
THE FUNDING PROCEDURE
Once the full Regional appraisal procedures have been completed successfully, and all other possible consultancy opportunities have been examined, the following steps will take place:-
1. Business Plan and Region's 'few' page outline sent to the Centre, covering:-a) nature of the businessb) business results to date, or forecast, in summaryc) investment required and equity offeredd) product summarye) marketplace, pricing and competitionf) founder's credibility i.e. CV's etc.g) reasons for successful investment e.g. niche, margins, exit routeh) considered downside, and alleviation of risk
2. Centre considers its approval
3. Region makes available non-circumvention mandate - with exclusivity and fees.
4. Region discusses and produces CMR Opinion for investors (possible co. visit)
5. Telephone selected investors.
6. Send Opinion.
7. Send Plan with, or possibly following receipt of, CMR Executive's summary.
8. Investor may meet the local involved CMR Executive.
9. Investor visits the Company, accompanied by a CMR representative.
10. Probably other visits to define the 'personal chemistry'.
11. A time schedule is set and Heads of Agreement drawn up.
12. The investor must complete his own Due Diligence and legal/financial advice.
After this stage, the agreed fee is paid to CMR on drawdown of the funding.
Further advice from Brian Wood (CMR’s Investment Director)
CMR Projects and investors Investors
CMR investors are a varied bunch. There are professional investors working through funds with millions to invest, to small investors who might have retired early with a good final payment, prepared to put GBP50,000 into a company as a speculation, perhaps providing a continuing interest.
Investors expect to be approached personally by CMR executives with vetted projects, which meet the criteria given when they registered. The investors' newsletter is the opportunity to scoop up other and unfunded projects, and offer them generally.
Investors are asked to say what they are interested in, what they are not interested in, where they would prefer the company to be based, and how much they would like to invest. From experience it can be an embarrassment to promote a company, which does not meet the stated preferences. Some people are very specific about what they want. Some are much more general but in practice have likes and dislikes, and it is useful to tease these out.
Investors are a moving target. Feedback is necessary to up-date the information originally provided.
Propositions
It is not possible to say which propositions will be funded and which will not. But it is possible to define the characteristics of a project likely to be funded, and also to list the apparent turn- offs.
Before a project can be presented to an investor it should contain
1.1 If an existing business, up to date audited P&L and Balance Sheet. This is the company into which the investor is buying. If the accounts are getting out of date, then some idea of what has happened since is useful.
1.2 A business plan should have an Executive Summary and a contents page. There would normally be sections on
- The product, whether new or improved or whatever.- The market, whether existing or to be developed.- Management details.- Funding required and what it is to be used for.- Forecast sales, margins, overheads and profit.- Forecast cash flow. - Forecast Balance Sheet.- The management details and the detailed financial information would
The business plan need not be in great detail; a punchy few pages with all the necessary information, is better than a computer generated plan, with hundreds of pages, and sheets and sheets of accounts.
It may be good to detail the proposed arrangement and possible exit route, but not essential as the investor will negotiate his own deal, and make his own judgement about getting out.
1.3 A signed Funding Assistance Agreement. The draft is ideal, but sometimes needs to be adapted.
Characteristics of a good proposal
2.1 Development of an existing profitable business. Could be a new product, cash to finance working capital for growth, or any natural development. It is important to adequately explain what the business is about and in objective terms, why an investor should get excited about it.
2.2 Existing proven management.
2.3 Good gross margins. This leaves room for unexpected downturns.
2.4 Not too high expectations on market share.
2.5 If a start up, commitment and cash from the management team before investor cash is put at risk.
2.6 Realistic assumptions.
2.7 There has to be something genuinely new or different. No point in trying to do something already being done.
2.8 An investor would like to see the company taking advantage of all other funding sources, as this can improve the gearing of the money he puts in.
Turn offs. This is much easier - in no special order
3.10 Start ups. These have to be good to get funded, but some investors are looking for them.
3.11 Products dreamed up by technical wizards, which might be amazing, but for which there is unlikely to be a market.
3.12 Products which still need development - a black hole.
3.13 Global launches. Prove the product and the market first.
3.14 Ideas which would be better licensed to someone who already has production or marketing capacity.
3.15 Investment to be spent on PR, advertising, or directors' salaries. All potential black holes. Investors often (but not always) prefer to see their money spent on something tangible. If not assets then working capital.
3.16 Where the best route would be F & F (friends and family) or industry contacts. This includes films, music, games, nightclubs, or indeed any media or trendy retail proposal. This is not to say that external investment cannot be attracted, but it can be more difficult.
3.17 Where there will be no eventual value in the company to be realised. This happens where the promoter is really only trying to set himself up with a job for his lifetime. Also applies where the company is too dependent on one person, the goodwill would go out of the door with him if he leaves.
3.18 For the time being dot coms. This does not mean that e-commerce is not the way forward, but the project should be commerce driven not internet driven. Most companies will in future use the internet, but just because it uses the internet, it doesn't mean it is sure to be profitable.
3.19 Property. Property speculators work on their own, or with colleagues. We do have some investors who are interested in property investment, but as a generality CMR will normally not deal with pure property propositions – there needs to be a trading aspect to the business.
3.20 Where the funds looked for are out of proportion to the share in the business offered. Classically the sort of start up where the company has no opening value, the management team have put in GBP20,000 and their time and effort, and are offering 15% for GBP300,000 or more.
In an existing company goodwill can be calculated from historic profits. The management team should expect to give away slightly more equity than the investment is worth, to attract that investment. Or a complicated arrangement of convertibles which is best left for negotiation with the intending investor.
3.21 Where the assumptions are too good to be true - 600% return after two years - or positive cash flow after six months - GBP15m sales in year two from a standing start. While the returns might look good, the forecasts are unbelievable, and the whole proposition lacks credibility.
3.22 Rescues, unless an investor has said that is what he is looking for. There are however some investors who specifically look for turnaround situations.
3.23 An investor would normally wish to take a stake in the holding company. It is a turn off if the investor is asked to take a stake in a new subsidiary, particularly if the management is the same as the holding company, and admin. services are provided by the parent company and paid for by a management fee.
It is worth remembering that an investor’s interest is excited by the product, the opportunity, the market or whatever. The business plan then consolidates his interest, or turns him off.
EFFECT OF FINANCIAL SERVICES LEGISLATION ON CMR OPERATIONS.
Many developed countries now have legislation relating to private investment into smaller non-public-listed businesses. They all follow similar principles and providing we follow the guidelines below (which are based on the UK legislation) there are no impediments to CMR’s operations.
In the UK, the Financial Services Authority (now renamed Financial Conduct Authority) has laws affecting business angel operations, such as CMR's funding facilities. The effective bottom-line effect on CMR is that there is no significant effect as long as we follow CMR procedures.
The UK Financial Services and Markets Act, 2000 (FS&MA) has very onerous provisions but provides some useful exemptions to encourage business angel investment. We are able to operate without impediment provided we limit ourselves to dealing with ‘High Net Worth’ individuals, or with ‘Sophisticated’ investors, or with people who are not resident in the UK (NB. Channel Island & IoM residents are non-UK). These terms are defined in the new Act.
Those of you that are cynics about our law-makers will appreciate the next bit, when the Act was first introduced! Not only did the investor have to be 'High Net Worth' (either earning GBP100K p.a. or with more than GBP250K in liquid assets) or 'Sophisticated' (there is a subjective definition of this), but they also had to have to have a piece of paper signed by their accountant or employer (if HNW), or other approved person if ‘Sophisticated’, certifying that they are indeed HNW or Sophisticated. Furthermore, this certification had to be renewed every twelve months! Several years ago these requirements were abandoned and investors are now able to self-certify. CMR provides suitable forms for this on our website.
The key word in the FSA affecting CMR is in the term 'financial promotion' - effectively every communication we have which contains any possible reference or inducement to invest into a project, falls under the definition of 'financial promotion'. The side-step we can (and must) take, is to have on every 'financial promotion' we have, the following statement. This is the catch-all (or perhaps escape-all!) phrase that lets us avoid all the other onerous provisions in the Act. IMPORTANT NOTICE: The information is directed only at persons who have valid certification that they are ‘High Net Worth Individuals’, or ‘Sophisticated Investors’ as defined by the Financial Services & Markets Act 2000, or are non-UK residents. CMR has procedures to prevent investment by any other class of person, as required by the Financial Services Authority. Any opinions and views expressed by CMR are for orientation purposes only. CMR does not endorse or recommend, and any comments made are not to be relied upon for investment or any other purpose. The information has not been approved by an authorised person under section 21 of the Financial Services & Markets Act 2000. Investment in new business carries high risks, including the possibility of complete loss, as well as the possibility of high rewards. It is highly speculative and potential investors should be aware that no established market exists for the trading of shares in private companies. Before investing in a project about which information is given, potential investors are strongly advised to take advice from a person authorised under the Financial Services & Markets Act who specialises in advising on investments of this kind.
We have to have effective procedures in place that will prevent someone who does not have a valid certificate from investing in our projects. We already have a signed statement from our investor bank that they are sophisticated investors. However, to ensure that we do not fall foul of the new law, we will also need to satisfy ourselves that only certified investors or those outside the UK actually invest money in any of our projects. This we will do by asking our investors to give us a signed statement to
that effect before finalising their agreement to invest (in the CMR investor agreement they have already signed that they undertake not to come to any agreement with any party introduced by CMR without our written agreement). Following lengthy conversations with the Financial Services Authority it does not appear to be a requirement for us to actually see the investor's 'certificate' - it appears that a signed statement from the investor that he has a valid certificate, will be sufficient. The FSA were quite woolly about this aspect, and so we may need to review again later, if this view changes.
EFFECT OF THE FCA RULES FOR CMR MEMBERS
The following is a summary of the do's and don'ts for CMR members:
1) Do make sure that EVERY communication you have relating to any project handled through CMR, to anyone (other than the client), which could possibly be interpreted as a 'financial promotion' contains (in normal sized type) the above statement. If in doubt - include the statement!2) Do not allow an UK investor to finalise any investment deal without having provided us with the signed statement that they have a valid certificate.3) Do not introduce CMR projects to anyone who is outside the CMR investor bank. If you want to do this, you must get that person signed-up and registered as a CMR investor. 4) Do not keep any records on CMR's investors that may have been given to you for a specific project. This is 'one-trip' data and must be destroyed after use for that project. This is also a requirement under the Data Protection Act.5) If in doubt about anything, please ask - don't assume!
CMR PRE-INVESTMENT WORK
In most CMR Regions we undertake quite a lot of fee-earning work for clients in helping them to get ready for possible inward investment, through giving advice or preparing business plans, etc.
This is good both for regional revenue generation and for clients in helping them to stand the best chance of obtaining the investment they need.
However, there is one area of potential concern when we undertake such work – that is we must be sure not to give the client any grounds for complaint, especially if there is subsequently no investor interest in their proposition. This is important because, as we know, the statistics for business angel funding for SME’s are loaded against the client, and there will undoubtedly be many clients for whom we provide pre-investment advice, plans, etc., who will be subsequently disappointed.
To avoid this problem arising, these procedures to be followed:
Mandatory: All contracts/agreements for pre-funding work must contain a clause or sentence that makes it clear to the client that CMR cannot guarantee that funding will be obtained. We cannot even guarantee that investors will be interested enough to want to have preliminary discussions with them. The standard CMR Funding Agreement includes suitable wording; 'Whilst CMR will try to help obtain the required funding, it obviously cannot guarantee that funding or investor interest will be obtained.' Please avoid the words 'use best endeavours' as this has a very onerous legal meaning.
SECTION 2 - OTHER FORMS OF FUNDING - COLLATERAL LENDING.
So far we have dealt with equity-based risk finance, where the investor is putting money into a company for which he gets shares, and he then hopes that the company will develop and grow, giving him a good dividend flow and capital growth through an escalating share price. Of course, if things go in the opposite direction, he stands to lose everything.
Collateral lending is different; the investor or lender will be putting his money into the company, in return for a fixed rate of return plus security to cover his loan in the event of the company having trouble in repaying the money. Typically, collateral funding for SME's falls into the following categories:
1) Bank overdrafts or loans secured on a fixed & floating charge over the company's assets, often reinforced by personal guarantees from the directors.
2) Invoice discounting or factoring, secured primarily on the company's sales ledger, but sometimes with charges and guarantees on top.
3) Asset leasing
4) Commercial mortgages secured on property.
5) Government-backed loan facilities, usually through the Small Firms Loan Guarantee Scheme operated by the banks and the DTI. Loans from this source tend to be problematic, depending on the bank, the political climate, and other imponderables!
CMR has access to all these sources, often through affiliated companies. Normally commissions are paid by the lender for business introduced to them, and we benefit from these, plus any fees we are charging directly to the client to help them get the funding they seek. The contacts through to collateral lending sources will be through CMR's Investment Director.
PUBLIC ISSUES & FLOTATIONS
Generally speaking, selling shares in a company to the public, rather than to specific private investors, is an expensive business - mainly because of all the professional fees associated with public offerings. Of the main markets of possible interest to SME's, PLUS is probably the least expensive, as it is not a fully regulated market as are the others. Even so, a PLUS listing will cost about GBP200,000 to raise GBP2million, whereas all the rest (AIM, NASDAQ, EASDAQ or a full stockmarket listing) will cost well over this in fees and other up-front costs. Effectively these markets are only really practical for companies raising in excess of GBP5million. CMR does have affiliated firms who handle such work on behalf of CMR clients.
DIFFERENCE BETWEEN CMR MANAGING FUNDING PROJECTS and JUST FUNDEX
There are two primary ways CMR provides access to its investor base for clients:
1) CMR-Managed Projects - where CMR reviews the proposition, advises on changes that should be made to the company’s strategy/operations and/or to the presentation of the proposition and the underlying business plan (for which we will usually agree a separate fee with the client.
When the proposition is thought (by CMR) to be worthy of presentation to our investors – we will do just that. For all CMR-managed projects that are uploaded onto Fundex there will be a CMR logo alongside to indicate to investors that this has been managed by CMR (but not with detailed due diligence – which is the investor’s responsibility).
The CMR system will also produce a list of investors who would appear to be especially suitable for this proposition because it matches the investor’s stated investment preferences. Those CMR ‘matched’ investors will then be personally contacted by CMR to notify them that a CMR-managed proposition that appears to match their preferences has just been uploaded onto Fundex.
Any interested investors will then be personally handled by the CMR Executive who is managing the project – and arrangements made to introduce them to the client. Although the legal relationship is always between the Client and the Investor – they make their own decisions and take their own independent professional advice – the CMR Executive will help smooth the path.
Finally, every few weeks, CMR will publish the CMR Investor Newsletter, which contains details of all propositions (CMR-managed and Public direct entries) received since the previous newsletter. This is sent to all registered CMR investors with the ability to click a button if interested – for CMR-managed projects the CMR Executive involved will personally handle the interested investor(s).
For this service, CMR usually charges a success fee (payable when the client has received the investment funds) of 5% for the 1st GBP500K (or equivalent), 4% for the next GBP500K, 3% on the next GBP500K, and 2% on the balance.
2) FUNDEX Public Entries – where the client themselves merely uploads the details of their proposition. There is no CMR review of this (although we do prevent clearly rubbish projects from being uploaded), nor any advice given, nor any help in handling interested investors.
These Public Entries are not specially presented to investors. They are only included in the CMR Investor Newsletter.
For this service, there is no upfront cost but we do charge a success fee of 2% reducing in stages to 0.25% for large projects – details are on Fundex.
It is clearly in the client’s best interests to adopt the CMR-managed route to ensure the best chance for achieving success.
This is an extract of a message to a client explaining the funding process and the CMR difference:
The art of arranging small business funding is more complex and sensitive than many people initially think – which is probably why so many fail to raise the investment they seek. The first fundamental issue is to have a presentation that will attract investors – that may seem a ridiculously obvious statement to make – but it’s one that most get wrong – even (or perhaps especially) when they have had say an accounting firm produce an expensive business plan. A boring plan that fails to ignite (in a non-rhetorical way) excitement and interest in investors is doomed to failure and will get no further
than the reject pile. The second is to make sure the plan addresses all the issues and questions investors will have – bearing in mind they are mostly a conservative lot. Also for that reason the plan must deal with/remove any issues likely to offend investors (high salaries, expensive cars, paying off loans, etc., etc.). Presentations have to be aligned with the way investors think – and must not include any phrase that is likely to upset or turn-off investors.
Our system will match propositions to specific investors (based on their desires) and then individually present the proposal to them. After that, we will then expand the presentation to all our other investors. Following that, if still not successful, we will address the investor bases of our affiliated networks and also look at external sources like VC’s/VCT’s, private equity houses, trade investors – and more latterly, crowd-funding sources. In that respect we do have an alliance with a major crowd funding site – which I think could be better suited to your type of project than conventional ‘old-fashioned’ investors. But it is worth trying all available channels. Sadly, we cannot ever guarantee that funding will be achieved – but by properly presenting and addressing to the right investor sectors, the chances of success are greatly improved.
The structure of CMR is both innovative and unique – we are not an ordinary funding broker, like so many are. All our executives are very senior people who have held CEO or main board positions in major companies. They come with a level of experience and insight that can only be acquired through actually managing enterprises at the leading edge. The skills and opinions they bring are often critical to achieving a successful outcome – even where their views may differ from the client’s.
NOTE RE DEALING WITH CLIENTS WHO HAVE APPROACHED US FOR FUNDING SUPPORT
This is the main reason that prospective clients will initially get in touch with us – it is our primary door-opener through to new clients.
The first meeting or conversation with such a client will normally start with a discussion about their need for funding and will then move into a review of the company’s situation and how it intends presenting itself to potential investors. It is that conversation that allows the CMR Executive to probe into the client’s strengths and weaknesses and will uncover what problems there are and actions that are needed before the client’s proposition can be presented to investors. There is of course, absolutely no point in presenting investors with a half-baked proposition, or one that is riddled with inaccuracies or things that are likely to turn-off investors – that would be a complete waste of everyone’s time.
Whilst many of those issues discussed can lead eventually into consultancy work – it is very important that the client does not gain the view that the CMR executive is on some sort of consultancy selling mission – if that were to be perceived, we can be pretty certain the project will go no further. Most owners or CEOs are very sensitive about not being sold-to – it is a definite turn-off. They have almost certainly been previously bombarded with consultants trying to push their services.
Most potential clients who are looking for funding will regard us as being a potential investor in their business, or at the very least as the probable introducer of investors to them. It is very important that the CMR Executive meeting or talking to a client for the first time, acts in the same way they would do if they were personally the investor. That means looking at the business to see if there are any problems or issues that would likely turn-off an investor. It is most important that pushing consultancy services is not on the agenda at this stage. Handled properly, the client will hopefully start to realise that he/she does need some external help (from CMR) to address the problems and issues discussed. This should be a subtle process not involving any overt selling pressure from us.
Once the business is suitable for presentation to investors, the balance of our work is covered by our Funding Assistance Agreement (see Appendix 2) – the terms of this can be changed by the CMR Executive managing the client, in respect of fees, etc., charged. CMR Centre is happy with whatever fee structure is negotiated by the managing CMR Executive – subject of course, to all fees, etc., being routed through and invoiced by CMR.
The above discussions may well reveal other problems or weaknesses in the client’s business or company, not necessarily linked to their funding needs, that could benefit from having CMR’s & your expertise to advise and help. This would be a good time to raise those issues – but again, not in a pushy/selling way.
This final section in the ‘Funding’ Chapter is a summary of advice learned from our experiences over the years – it is important to follow this if you are to be successful.`
ADVICE ON ACQUIRING & HANDLING CLIENTS We often get asked by CMR Execs for advice on how to acquire and then handle clients through to a successful outcome, and in particular, to an actual fee-earning stage. Much of this is already covered in the CMR Operations Manual, but it may be useful to summarise some of the more important issues involved, drawing on the experience and lessons learned over the last thirty years or so of CMR's existence. The core principles upon which CMR is based have remained unchanged over that time - our primary role is to connect very senior, highly experienced director-level executives into that part of the market that lacks the expertise and experience needed to succeed in today's business environment - the SME, entrepreneur and innovator sector who have the bright ideas, but not usually the experience or resources to ensure success. That was CMR's founding principle and will always be so. Along the way, we learned what worked and what didn't - this summary is a distillation of the wisdom obtained - but which not everyone is yet fully incorporating into how they operate. By essence, CMR is a somewhat feral organisation - we try hard not to over-prescribe what we do and how we handle situations, instead we prefer to rely on the professionalism and ethical values of our executive members to develop the best relationships with our continually expanding client base. Acquiring new clients:
1) Overt or any form of pressure/over-keen selling does not work - in fact the opposite is true.2) It may sound obvious, but it is best to present yourself as completely honest, trustworthy and
primarily interested in helping others, rather than just there to make money for yourself. Clients have an acute sense of smell on the latter situation.
3) You must appear to be unconcerned about making money. For particularly interesting projects, be prepared to help/work on a contingency basis - but only if you think it a worthwhile project. Do not do too much work for a client without an agreement on how you will be rewarded. Being seen as a 'soft touch' or working without some agreement does not enhance your image. The perception you want to give is that you are a very busy and successful person, but you are willing to help them.
4) Grow your reputation for being nice, helpful and trustworthy - and particularly as someone to whom professionals will be happy to refer clients.
5) Even if you can't help a client - be as pleasant as you can. (I can't tell you the number of times that clients who we rejected (or vice-versa) at the time subsequently referred other people to us.)
Other important issues to understand are:
a) Business people do not usually go looking for a 'consultant' unless it's for a specialised task, or it is being funded by the government. So you must have something special over and above the 'ordinary' to open the initial conversation. CMR gives you that tool.
b) Consultants generally have a bad name in the SME sector - caused by all the pushy, mediocre, money-seeking consultants who have preceded you. It's important to differentiate yourself, to be 'different'.
c) Companies (especially SMEs) have a great reluctance to pay fees - especially upfront. However, they do accept that the consultant has to earn to live - and provided they can see a real benefit arising, they will pay. Many will have been previously oversold by consultants, so will be wary of promises that you make in the enthusiasm of the moment.
d) The need for clients to be convinced they need you is paramount. That can usually be achieved by telling them something important they haven't thought of themselves - or where they realise they are out-of-their-depth in terms of the skills and experience needed. This should be performed in a non-selling way. A degree of personal gravitas is helpful if not vital for the consultant.
Access to prospective clients:
i) Taking the statement above about business people not going looking for a consultant - you need to have an indirect reason for talking with them.
ii) CMR provides the perfect pathway in terms of discussing a potential client's funding needs when we are approached by them, BUT more importantly it also empowers those CMR Exec members who want to be proactive in developing business themselves under the CMR umbrella (i.e. not just waiting for projects to be presented to them).
iii) The fact that a CMR exec can be looking-out for investment opportunities on behalf of our registered bank of private investors is a powerful tool for gaining access to potential clients. CMR was originally developed by pushing-out tentacles into investor networks and professional firms, with us looking for suitable investment opportunities. That ability is available to all CMR Exec Members in every country. As a potential investor (on behalf of CMR's investors) you can join investor networks and attend suitable functions for professional interaction and investor forums, etc. - with the perceived strength and reputation of CMR behind you. Handled properly, you will find this an invaluable source of new business.
Converting prospective clients into actual fee-paying clients:
1) It is a huge mistake to fall into the trap of either being so arrogant or foolish as to think you
can just demand some sort of upfront fee before you have even interacted with the client and their proposition. A lot of 'consultants' do fall into that trap - and are then surprised when the client becomes disinterested in proceeding further.
2) ALWAYS look at a client's proposition first - before even starting to talk about fees. In the vast majority of cases, if you are good at what you're doing (an important prerequisite for success), you will see many areas for improvement in what the client has so far presented, and probably many other areas within their business that needs changing or improvement before it can be properly presented to investors. You will also probably see other routes forward for the client - not just simple funding solutions.
3) Bring together all the thoughts you have about the client's business, its presentation and the other possible routes forward - and discuss these with the client even if this is within a summary conversation during the initial conversation or meeting. At the point you are discussing the work that's needed and the options to be assessed, you can and should start talking about how you/CMR can help and about fee structures and rewards for achieving success. The best outcomes will be achieved if the client starts to realise that he/she is out of their depth and that they need a trustworthy expert (you) to help them realise their ambitions.
4) It is a waste to reject a client just because they have no immediate money to pay you - unless of course, you consider their business does not have good potential. Fees can be earned either when investment funds are received or from rewards from equity in the company's future success. The best income-strategy advice to CMR execs is to try having part of your expected future emoluments coming from equity you own in businesses - and part from money fees received. Successful equity is good because the dividends can roll-in for very many years after you last did any work on the project!
Handling a client's project:
a) Ideally, you want to be seen as your client's friend and have the same broad motivations as they do. That means focussing on their business and aspirations - not on your own desire to extract money from them. They will be acutely suspicious if they sense the latter is your objective and that is the reason why sheer upfront fees, however you 'name' them, often just do not work and succeed in closing the door.
b) You should have considered all the aspects, weaknesses, opportunities and other routes forward - and discuss these with the client. You also need to review the 'what if'/plan B alternatives, if the primary route forward proves not possible. If direct private investor funding is seen as the best way to go, you must broaden-out the potential investor base beyond just CMR's registered investors. Our investor base is useful for marketing and credibility purposes but there are now many other investment sources that should also be considered - but only of course, if it is felt that the proposition has real merit. If private investor funding is not forthcoming, then look at trade funding routes - JV's, M&A, licensing, etc., etc. In many cases, obtaining external private investment is not anyway the best way forward - you should always consider the alternative routes available.
c) Remember that making money purely from trying to obtain inward investment for SMEs is very tough - many investment-only companies have gone bust over the years. However, funding is the best door-opener to many other opportunities, business relationships and consultancy income. View it as such and you will be successful.
d) The CMR Ops Manual has a great deal of advice on all these areas, and on the products/services we can provide.
Presenting a client's funding proposal:
i) Too many funding propositions are boring documents that fail completely to ignite any enthusiasm or interest from investors. In many cases they even omit to adequately explain what the business does and how it does it. Often they are written by people too close to the business who do not feel the need to explain in simple terms what they do - OR it's written by people without the ability to think about what an investor wants to know, and what will turn them on or off.
ii) The first thing every proposition needs if it is going to attract private investors - is a WOW factor. If investors don't get excited within the first few seconds, the proposition will be thrown onto the reject pile. If you, the CMR exec handling the project, cannot get excited - then it's highly probable that no investor will either.
iii) You must communicate the WOW factor clearly and without using rhetorical language. Investors do not want to be 'sold to' - but they do want to understand why they should get excited about a proposition and what the facts are.
iv) You must clearly explain what the business does and how it does it. Do not use unexplained industry jargon and do not assume that the investors already have a deep knowledge of the business - it all needs to be explained clearly. Try to give the investor the ability to make a judgement on how viable or commercial the business is. Give a link to websites - show what the products or services offered are, together with pricing information. Especially where the business is going to be dependent on the people running it (most are) - you need to communicate confidence in the skills and experience of those involved, perhaps with CMR management support where appropriate.
v) You must address all the things a sensible investor wants to know about - especially what the risks and competition are.
vi) Most investors are not stupid - and they usually abhor receiving pushy propositions that try over-selling and/or glossing over weaknesses. It's far more effective to have a very business-like assessment of the business seeking investment, rather than an over-the-top selling presentation.
THE IMPORTANCE OF PRESENTING TO EXTERNAL INVESTORS
Whilst when CMR first started, we were almost the only source of inward investment for smaller businesses and entrepreneurs, nowadays there is a plethora of funding sources – quite literally thousands of organisations providing funding resources. Whenever we have a client proposition that
we consider good enough to deserve funding, we should present the opportunity to suitable investor sources, especially if CMR’s own investor base has not shown interest.
This is particularly important if we are charging a client an upfront fee for helping them to become ‘investment ready’ or for other help before the stage of presenting their proposition to potential investors. Whilst we may feel that the upfront fee is to cover the time spent on getting the client’s business and presentation ready – quite often the client will be agreeing to pay upfront fees on the expectation that a successful funding will result. We never want to be in the situation of a client demanding a refund of fees paid, on the basis that a successful funding did not result – either because our investors were ‘ not good enough’ or because we did not present to enough suitable investors.
To prevent this situation from arising – and with the knowledge that presenting to as wide a number of potential investors as possible will increase the chances of success – we must present to a suitable range of potential external investors, as well as to CMR’s own investor base. Below are some of the links that can be used to find further funding sources that may be relevant to the client project being handled.
ALTERNATIVE FUNDING SOURCES
There is a plethora of funding sources available throughout the world. Below are lists of some – but it is a continually changing scene – so best to search Google for up-to-date listings.
Which sources to approach will depend on the type of client proposition – industry area, geographic location, size of investment, etc. Many funding sources will have preferences, so try to find those with the best match.
UK Based: http://entrepreneurhandbook.co.uk/venture-capitalists/
UK Venture Capital Trusts (VCTs): http://www.growthbusiness.co.uk/adviser-directory/vct-fund-manager/
Venture Capital Firms (VCs):UK Based: http://www.askivy.net/articles/venture-capital/interview-preparation/list-of-venture-capital-firms-in-london Global/USA:https://en.wikipedia.org/wiki/List_of_venture_capital_firms https://www.dezinersoftware.com/venture-capital/ https://www.cbinsights.com/blog/top-venture-capital-partners/
‘Trade’ InvestorsAlways consider that there may be other companies who could have an interest in investing and/or combining with the client company. As their returns will not necessarily just related to the invested money, and there could be trading/ competitive advantages, that the equity cost of this route may be lower for the client.
SUMMARY OF INTERNAL CMR PROCEDURES FOR HANDLING FUNDING PROPOSITIONS
1) Firstly decide if you wish to handle this project personally (or as a group) OR – you merely want to refer the client to entering the details onto Fundex, without any specific help from yourself. Of course only do this if you think their project has merit. Refer them to: www.cmrworld.com/bexchange/default.asp
2) If deciding to handle the client’s proposition, get the client to sign the CMR Funding Assistance Agreement (FAA) – after you have negotiated the terms. You, as the managing CMR executive handling the client have complete discretion over the fees, etc., to be charged (CMR accepts whatever you & the client agree). Very often the share option clause is dropped – but that is your decision.
3) You will now need to prepare the CMR summary/pitch for the proposition, suitable for uploading to Fundex.
4) You should also consider other possible non-funding routes forward for this client. These may include:a) International licensing (if good intellectual protection exists – e.g. patents, etc)b) Sale or merger or JV, etc.c) CMR Catalyst Programmed) Turnarounde) Internal reorganisation/ changes
5) When ready for Fundex entry:a) Go to the appropriate CMR regional intranet at bottom right-hand of website. Password
is regional name without spaces.b) Go to ‘Place new business proposition’ and enter the details required.c) When finished email-notify CMR. CMR will review and then approve/ upload to Fundex.d) Any investor interest will be email-communicated to you for handling.
6) If no immediate interest from CMR registered investors, and if you truly believe the proposition is good enough and deserves to obtain inward investment, then draw up a list of potentially suitable external investor sources – and then present the opportunity to them.
Please read the brochure on Self-Funding Business Loans for Scheme outline
SECTION A – INTRODUCTION
CMFC is a specialist division of CMR, established in order to manage CMR’s Self-Funding Business Loans. These form a unique method of business finance, providing small to medium-sized enterprises with loans that make no demands on cashflow, while substantially increasing profits.
Many SMEs purchase inefficiently and few have had the benefit of a professional review of their buying function and methods. CMFC, working in conjunction with its supply-chain management partners, identifies cost savings in a client’s business and organises a loan for the client based on those savings. CMFC and the client share the savings for 30 months and in all normal circumstances the client’s share pays the loan interest and repays all the capital. In this way the loan is financed entirely out of savings, not out of cashflow. The client gains not only a loan, but also an inherently more efficient and more profitable business.
Although the lender will normally require the same security on a CMFC loan as on any other, it is another unique feature of the scheme that it can create its own collateral. If the client lacks full security, the loan input is delayed until the client’s cumulative share of the cost savings equals the missing security. CMFC can therefore obtain loans for companies that have been turned down by their banks.
CMFC operates through CMR’s regional structure, where local marketing is also determined. The scheme can be marketed directly to prospective companies (an introductory leaflet exists for this purpose) as well as through the development of regional relationships with accountants and other professional firms, Chambers of Commerce, banks etc.
The CMR region will be the introduction point for many potential CMFC clients and will provide the management for these projects. All CMR members are encouraged to introduce clients. The introducing member will frequently become the client manager, although this is subject to CMFC approval. Because of the need for a legal agreement with the client, which can raise complex and sensitive issues, each region contains CMFC Experts – CMR members who have been specifically trained in the handling of CMFC projects. An Expert should be involved at an early stage of each prospective project. For this reason, CMR members who identify potential projects must notify their Regional Director as soon as possible.
Experience has shown that companies are intrigued by the idea of self-funding loans and that CMFC is an excellent ‘door-opener’ for arranging meetings with prospective clients. If these contacts are handled well, CMR members will have the opportunity to build relationships leading to other consultancy and business support services.
Work undertaken on CMFC will be remunerated from the cashflow of each project. Fees will be paid monthly as savings accrue and are detailed in Section E.
A firm of chartered accountants or solicitors will oversee the financial administration of each project and ensure that payments are made in accordance with the legal agreement. In most cases the overseer will be the client’s own accountants or solicitors – which gives them an added incentive to introduce us to their clients.
SECTION B – DETAILED DESCIPTION OF SCHEME
The CMFC brochure ‘Self-Funding Business Loans’ should be read in conjunction with the legal agreement that gives effect to it (attached).
SECTION C – CLIENT ELIGIBILITY
In principle, any SME trading in the UK is eligible to participate as long as CMFC management can be satisfied on four points:
- that there are sufficient cost savings to ensure that CMFC’s share will provide an acceptable fee income to all involved and a reasonable profit for CMFC;
- that there is no reason to believe that the company will no longer be trading in three years’ time;
- that there is confidence in the integrity and professionalism of the client management team and a belief that they will not seek to renege on commitments or waste time with obstructive tactics;
- that there are no apparent reasons why a lender should refuse to advance a loan, subject to normal security requirements.
It will be appreciated that these requirements are to some extent judgmental. To be more specific, the following detailed qualifications describe an ideal prospect:
Company size
The minimum annual savings for a project are set at GBP200,000. As a rule of thumb, savings on eligible purchases are usually about 10%. Eligible purchases should therefore not be less than GBP2 million. Eligible purchases include, for example, bought-in goods and components, services, utilities, maintenance contracts etc. They exclude payroll, rent and rates and most finance costs. They may exclude highly specialised purchases (if only one or two suppliers can provide an item, substantial cost savings may be unobtainable). Also, because the cost savings are not based on bulk buying, a prospective retail client would need a much larger turnover than a prospective manufacturing client, because goods for resale will not be covered by the CMFC Scheme. As a guide, turnover should be between GBP4 million and GBP50 million, but the key factor is eligible purchases and not turnover.
The company should have been trading successfully for at least three years and should have a stable management team. Provision of information to CMR (two years of audited accounts, current management accounts, financial projections etc.) will be essential both for the project itself and for financial reassurance and evidence of professionalism. Detailed purchasing information will obviously be required as well. Companies that are either unable or unwilling to provide any of this information should be identified and eliminated at an early stage.
Loan considerations
CMFC may be purchase-based, but it is intended to be a loan product and the client will normally be required to take out a loan of between 85% and 100% of the annual cost savings. The minimum loan on the minimum annual savings is therefore GBP170,000.
In certain circumstances it is possible for a CMFC scheme to take place without a loan, but only with the express approval of CMFC management and subject to additional financial requirements. The absence of a loan removes the uniqueness of the CMFC scheme, reduces the discipline on the client to maintain the level of savings over 30 months and is financially disadvantageous to the client. This option is therefore not encouraged, but it is available as a last resort.
The client will eventually need to satisfy the lender’s requirements on net tangible assets, borrowings and profit cover. As previously mentioned, a CMFC project can create its own collateral. However, to create 100% security for a loan would take about two years, which is too long for all concerned to wait. The maximum period for a client to wait until the security for a loan has built up should be about 12 months. This means that the scheme itself should not need to provide more than 50% of the loan amount as collateral. The client will need to have sufficient security (or personal guarantees) for the balance.
Specific requirements
As mentioned above, the client will be required to provide CMR with detailed financial information. The client will be required to sign a legal agreement with CMFC to regulate the project. The client will also be required to enter into a three-month trial period before obtaining the loan, to validate the cost savings and to confirm that there is a lender willing to provide the loan on acceptable terms.
All these requirements should be made known to a prospective client at an early stage. Companies unable to accept these terms – or who suggest in any other way that they may be unreliable long term partners – should be eliminated.
When a CMR member (assisted by an Expert and CMFC management) assesses the eligibility of a prospective client, a balance needs to be struck between two considerations; a) we want projects to succeed, b) but we do not want to waste unpaid time on projects that have no realistic chance of success. The guidelines above are intended to weed out unsustainable projects, not to put bureaucratic obstacles in the way of good ones. Within reason, CMFC will be prepared to negotiate to meet specific client concerns or requirements. When a member is in doubt, please consult a CMFC Expert or member of CMFC management. Do not assume that an apparent problem cannot be solved.
1. Explain the principles of a CMFC project to a prospective client.
2. Find out enough information about the company to establish whether it is likely to be eligible.
3. Make sure that the prospective client understands what is involved in a project and is keen to proceed further.
4. Leave the client with a copy of the 4-page explanatory brochure and, unless judged to be premature, the legal agreement.
Pre-stage 2: Detailed discussions
All meetings in pre-stage 2 should include a CMFC Expert. Please ask your Regional Director to nominate one to accompany you.
1. Discuss the legal agreement and establish whether there are any major obstacles to the client’s signature. Discuss any requested variations to the agreement. Refer any outstanding issues to CMFC.
2. Discuss the proposed overseer for the project. Establish whether the client is happy for his own accountants to be used. Agree the overseer.
3. Establish the loan amount that the client would ideally like, and whether he would prefer for it to be organised through his own bank or through a lender introduced by CMFC.
4. Obtain detailed financial information from the client:
Essential – Full company name and address; active subsidiaries; main contact name(s), telephone number(s) and e-mail address(es); last two sets of audited accounts; current management accounts; forecast cashflows, P&Ls and balance sheets; name and branch of existing bankers; full details of existing borrowings; details of available security; any other material financial information (e.g. factoring arrangements, mortgages, covenants, debentures etc.).
Desirable: Names and CVs of directors; plan of corporate organisation; company brochure; details of company history; full business plan.
5. Obtain detailed purchasing information from the client:
Essential – Location and organisation of purchasing department; contact names; approximate value of spend under review; main categories of expenditure; overview of client’s objectives and strategies and how specific categories of spend may be affected by these.
Desirable: For suppliers covering top 80% of spend value: name, address and contact for each supplier; spend in total and by major item; regularity/seasonality of purchasing; years of relationship and any special links; notes on performance; quality benchmarks in use; price history files (preferably in electronic format). [n.b. If this information is not provided at this stage of the project, it will become essential at the next stage.]
1. CMFC's appointed Procurement Partner (PP) will visit the client to undertake a purchasing review. This will be in conjunction with the CMR regional executive appointed to manage the project.
2. CMFC's PP will review the client's purchasing activities and will produce a report detailing the changes that are recommended together with an estimate of the cost savings achievable if the proposed changes are made. The report will also detail the supplier changes that are recommended. [n.b. It is quite likely that this review will reveal other efficiency improvements that are not directly related to purchase prices. Such consultancy gains will be dealt with separately from the CMFC funding contract, which only recognises actual purchase price changes.]
3. CMFC's PP and the CMR project manager will discuss this report with the client. The client can remove any proposed supplier changes and the estimated cost savings will be re-calculated.
4. By this stage, CMFC management and the CMR project manager will have determined whether a loan is likely to be made available to the client (whether immediately or when further collateral has been created) and what terms and conditions may be placed upon it.
Assuming all is in order, both parties will confirm in writing their agreement to continue with the project, which will now move to the three-month trial stage. This is intended to give both the client and CMFC practical experience of how the formal contract is likely to work out. If the client is worried that actual monthly savings may not yet meet the 1/12
th of Annual Savings figure that is used to determine the monthly payment to the overseer, he may request an extension of up to another three months for the trial period. This contingency is not included in the standard legal agreement and would not normally be mentioned to the client unless he raises it as a problem. The effect of any such extension will be to increase the number of months’ cost saving share received by CMFC, because the 30 months start at the beginning of the contract period.
The client may terminate the project at any point up to this stage (although the pre-vetting stage should have weeded out any clients who are not seriously intending to proceed). If this happens, and if the client wishes to implement any of the cost-saving measures introduced by CMFC, the cost savings will be shared 50:50 between the client and CMFC for a period of thirty months from the date of termination. The client is under no obligation to continue with any suppliers introduced by CMFC. At this point the client also becomes committed to accept the indicated terms of the loan.
Stage 2: Trial period
1. CMFC's PP and the CMR project manager will handle the implementation of the sourcing changes. Not all changes will be capable of being put into effect during the trial period, especially where there are high stocks or long term supply contracts.
2. During the trial period, the client will judge the quality and performance of the new suppliers. All new suppliers should have been vetted by the PP, so problems should not arise. However, if they do, they should be relayed by the CMR project manager to the PP. Together they will assess whether the problem can be resolved to the client's satisfaction. If not, they will normally recommend another supplier that gives a worthwhile price difference. The client may remove any supplier from the list.
3. By the end of the trial period there is a list of suppliers and supplies that have been agreed by the client. This is known in the legal agreement as the 'Designated Supplies Schedule' and represents the base from which any subsequent changes will be calculated.
4. Cost savings during the trial period are shared 50:50 between the client and CMFC.
Stage 3: Contract period (loan option)
1. If both CMFC and the client and the bank/lender are happy to proceed to the final stage, the client will be offered a loan of up to one year's forecast cost savings.
2. The client will need to sign all the normal bank agreements, in addition to the CMFC agreement he will already have signed. The legal contract for the loan is directly between the bank and the client, with the latter being legally responsible for the payment of interest and capital over a 30 month timescale. Both should come from the CMFC scheme, but if for any reason they do not, the client is liable to pay the lender directly.
3. The offer of a loan can have come from the client's own bank or from a lender introduced by CMFC. There is no downside for the bank to lend money under the scheme, so all banks should be happy to do so as long as the required collateral exists.
4. Other agreements will also be in place between CMFC and the PP and between CMFC and the CMR project manager.
5. During the contract period, the client shall pay 1/12th of the Annual Savings to the overseer each
month, who shall disburse it according to the provisions of the legal agreement. This is covered in detail in the next section. The CMR project manager shall notify CMFC immediately in the event of any problem with the monthly payment.
6. The CMR project manager will continue to monitor the client and will report monthly to CMFC on the progress of the contract and on the financial position of the client. In particular, the CMR executive will liaise with the PP in respect of any problems or changes occurring in the supply chain. In the event of problems with the recommended suppliers, CMFC's PP will attempt to resolve or find a suitable replacement, but in the last resort the client may remove that supplier from the schedule. There is a provision in the legal agreement that obliges the client to consider CMFC recommendations if they are contemplating taking 5% or more of total purchases out of the scheme: this is to protect CMFC if an unscrupulous client tries to circumvent CMFC once he has obtained the loan.
7. If the client considers there has been a reduction in cost savings (for any reason) he may request a fresh audit to determine the actual level of savings, taking into account seasonal factors. This audit will be undertaken by CMFC and the overseer (whose costs will be added to his regular fee for that month). CMFC is protected against frivolous requests for new audits by the fact that savings must have fallen by at least 10% for the Annual Savings (and hence the client’s monthly payment) to be reduced. The client is protected by the fact that the only circumstances under which the Annual Savings (as used to calculate CMFC’s share) may rise above their opening level is if the client implements changes previously recommended by CMFC during the course of the contract period. There is also a safety margin of about 15% built into the scheme, so savings have to fall considerably before the client’s share is unable to meet the loan repayments in full.
8. If the audit reveals a reduction in annual cost savings of more than 10%, the reduction shall be applied to the Annual Savings (and to the client’s monthly payment) from the 1st of the month following completion of the audit. There will be no retrospective changes.
9. CMFC cannot request the first audit, but may request an audit if it believes cost savings have increased (by more than 10%) from a previously-audited lower level. In those circumstances, the Annual Savings figure (on which monthly payments are determined) can increase up to the initial Annual Savings level when the scheme started (or more, if further CMFC proposals have been implemented). This means that the client receives the benefit of any increase in savings, whilst being partially protected from any decrease.
Stage 3: Contract period (non-loan option)
1. The non-loan option will only be made available to a client in exceptional circumstances and only with the express approval of CMFC management. In almost all respects the contract period will operate in the same way as under the loan option. There are three significant differences:
(i) On any re-audit of savings during the contact period, savings will need to have fallen by 20% or more (normally 10%) before there is any formal adjustment to the Annual Savings figure.
(ii) CMFC will only bear 25% (normally 50%) of the financial consequences of any adjustment to Annual Savings. (This is achieved by redefining Monthly Savings in the legal agreement for the non-loan option.)
(Both the changes above reflect CMFC’s conviction, confirmed by the PP’s experience, that the absence of the financial discipline imposed by monthly loan repayments makes it far more likely that annual savings will fall under the non-loan option.)
(iii) The client will still make monthly payments to an overseer, but the client’s share will be returned directly to the client instead of being used to repay the lender.
2. The existence of the non-loan option means that it would be illogical to refuse a client who wanted a loan, but at a lower level than the 85% of savings required under the loan option. Whether such a project would be subject to the additional requirements of the non-loan option would depend on the precise circumstances and would be decided by CMFC management.
SECTION E – FINANCIAL ADMINISTRATION
During the trial period, cost savings will be calculated directly from purchase invoices for the month in question. These savings will be paid by the client to the overseer within seven days of each month end and will be held by the overseer in a reserve account. When the scheme progresses to the contract period, the overseer will release 50% of the savings (after his own agreed fees) to CMFC, and 50% to the client, unless the scheme is required to provide extra collateral to the lender, in which case the client’s share shall be held in a reserve account until it is no longer so required.
During the contract period, the client shall pay 1/12th of the Annual Savings to the overseer within
seven days of each month end. This will continue for 30 months (i.e. 30 monthly payments will have been received by the overseer), at which point the scheme will terminate. The Annual Savings level can change during the course of the contract, as explained below, but is always the base from which
the Monthly Savings are calculated and from which monthly payments are made by the client to the overseer.
When the overseer receives the client's payment, he takes his own agreed fee and allocates the balance between CMFC and the client. The client and CMFC each receive 50% of the first GBP30,000 of Monthly Savings. The Client receives 60% of the next GBP20,000 (CMFC 40%), 70% of the following GBP20,000 (CMFC 30%), 80% of the next GBP20,000 (CMFC 20%) and 90% of any Monthly Savings in excess of GBP90,000 (CMFC 10%). This reflects the fact that CMFC's costs do not increase in proportion to scheme size.
After the overseer has disbursed his own fee and CMFC’s entitlement each month, the client's share of savings will be disbursed in the following priority order: the interest due to the lender; the scheduled capital repayment to the lender; any remaining surplus to the client. If there are insufficient funds to meet the capital repayment in full, the client must pay any shortfall directly to the lender.
Unless interest rates are especially high or the overseer’s fee unusually large, any CMFC project should be able to absorb a fall in Annual Savings of at least 15%, while still paying all the loan interest and repaying all the capital. It should be noted that this comment applies cumulatively over the full 30 months: some individual months may show a deficit and others a surplus (this is because of declining interest charges over the period).
Receipts by CMFC from the overseer shall be paid in the following priority order: first: CMFC's Procurement Partner, CMR executive(s) managing or contributing to the project, CMFC Expert, CMR Regional Management, introductory commission; second: CMFC marketing, operational management, accounting, legal and general administration costs; third: lender profit share, CMFC profit.
Fee arrangements for members introducing business to CMFC and/or undertaking client management roles are as follows:
1. Projects will attract a commission of 10% of CMFC’s share of the first year’s cost savings, paid monthly over that first year. Even the minimum contract (GBP200,000 p.a. cost savings) will therefore produce a commission of around GBP10,000, with proportional increases above that.
2. There will be a contract between CMFC and the CMR project leader to define responsibilities and remuneration for each project. The standard fee formula will be 5% of CMFC’s share of the cost savings, plus GBP1,000 for each month of the contract period. Any change to the monthly savings as the scheme progresses will affect both parts of this fee. The fee covers the whole management process. If more than one member is involved, then local agreement will be needed on the split – with the usual CMR arbitration arrangements if there is a disagreement. The fee will be paid over the 30-month contract period. The CMFC contact with the client can and should be used to develop a wider business relationship.
The split between the introductory and the project stages is defined as the moment that the Client and a CMFC Director have both signed the legal agreement. All work prior to signature is covered by the introductory commission, which will need to be split by mutual agreement if more than one CMR member is involved or if there is a need to reward a third party, such as an intermediary. This means that the introducer is responsible for getting all the required financial information from the client and
1.2 CMR - Cavendish Management Resources Ltd. whose registered office is 30 Percy Street, London W1T 2DB
1.3 CMFC – Cavendish Management Finance Corporation whose registered office is 30 Percy Street, London W1T 2DB
2. CMR/CMFC agrees:
2.1 To hold in confidence all information supplied by the Company.
2.2 To use such information only for evaluation purposes, and to limit distribution of the information to potential suppliers, sub-contractors, partners, potential and actual overseers and other parties involved in and with CMR & CMFC in the CMFC Self Funding Loan Programme. Also included are other parties who have signed a confidentiality agreement with CMR/CMFC.
2.3 To return all information including documents, drawings, prototypes etc. on demand.
3. This Agreement will terminate:
3.1 With the written consent of both parties.
3.2 If the information is found to be in the public domain.
3.3 If the information is published or otherwise becomes part of the public domain through no fault of CMR/CMFC.
3.4 If the information is already known to CMR/CMFC.
This Agreement is effective from ..................................................................................
For the Company .................................................Date ...................................
For CMR/CMFC .................................................Date ..................................
It is most important that we present our Funders with Clients that they are happy to accept as part of their own database and that can offer them the appropriate level of security.
To this end, it is vital that the basic criteria indicated below are met, as otherwise we will be wasting everyone’s time and there will be no point in completing the standard CMFC financial checklist.
It is possible that the more stringent criteria may be eased as Funders become accustomed to this new financial product, or we will add Funders to the panel that are prepared to accept different levels of credit standing. Initially, however, the selection of clients will be most rigorous and we will rely on the very significant financial and purchasing benefits of the CMFC Loan to attract well qualified clients throughout our Regions.
Requirements
The company is required to:-
(Finance) be a soundly established UK operation with a stable management team be trading successfully for a minimum of three years be able to present the last three years of audited accounts have available the latest management accounts show good growth business plan projections and satisfactory cash-flows satisfy Funder covenants on net tangible assets, borrowings and profit cover
(Security) be able to ask its main lender to grant possible primary security waivers have available satisfactory secondary level security/personal guarantees demonstrate the specific purpose of the CMFC loan and that it is not to rescue severe cash-flow or gearing problems as a last resort loan!
(Business) be aware of its prime risk situations and competition be in our target turnover range of GBP5 - 50 million have a purchasing base of at least 20% of turnover request a loan of GBP200k to GBP1.5m agree the three month trial period to confirm actual cost savings to:-
- establish the equivalent loan size that can be repaid- confirm a Funder’s acceptance of the client
and ................................................................ Registration No. .............................of..................................................................................................................................................................................................................hereinafter referred to as "the Client"
The purpose of the Agreement
The purpose is to enter into a staged contractual programme (the “Programme”) whereby CMFC will propose, and the Client may adopt, purchase cost savings which are then linked to the provision of a 30 month loan, under which all interest and capital repayments are normally met by the purchase cost savings. During this Programme, all cost savings (net of third party administration costs) are shared by CMFC and the Client.
1. Stages of the Programme
1.1 Upon the signing of this Agreement, CMFC will:
1.11 conduct a purchase audit of the Client's business and indicate the level of Annual Savings that are likely to be available;
1.12 instigate discussions with the Client’s bankers and/or other lenders and inform the Client whether a loan will be available (whether immediately or subject to the Client providing additional security through the Programme via the “Unsecured Option”) and, if so, under what terms.
1.2 If either CMFC or the Client does not wish to proceed further, the Programme and this Agreement shall terminate, subject only to the provisions of Clause 5 and the continuing provisions of Clause 9.
1.3 If CMFC and the Client both wish to proceed, they confirm in writing their agreement to enter into a trial period (the “Trial Period”) during which the cost savings will be implemented, validated, benchmarked and documented. In proceeding to the Trial Period the Client is accepting the terms of the proposed loan under 1.12 above.
1.4 Before the Trial Period commences the Client’s auditor, or some other agreed third party, shall be appointed as the financial overseer (the “Overseer”) of the Programme. The Overseer will ensure that, throughout the Programme, all monies are managed in accordance with this Agreement.
1.5 By the end of the Trial Period, CMFC will have prepared a detailed summary of the cost savings secured or anticipated and how they have been or are to be achieved. CMFC and the Client will discuss this summary; the Client will advise of any changes he is unwilling to make and the annual forecast cost
savings excluding VAT (the “Annual Savings”) will be agreed. CMFC will then produce a schedule of the agreed projected cost savings and how it is proposed they are to be achieved with specified suppliers (the “Designated Supplies Schedule” and “Designated Suppliers”). If the Client later adopts cost savings suggested by CMFC, the Annual Savings will increase correspondingly from that moment.
1.6 The Programme will then enter its final phase, the “Contract Period”. The savings during this phase will be paid into the “Contract Period Fund” and disbursed by the Overseer. Any loan is a separate agreement between the Lender and the Client and will be subject to the terms and conditions of the Lender.
2. Operation of the Programme during the Trial Period
2.1 Unless otherwise agreed by both parties, the Trial Period shall last for three months.
2.2 Both parties shall agree an administration fee with the Overseer.
2.3 All cost savings resulting from CMFC proposals shall be paid by the Client into a fund controlled by the Overseer within seven days of each month end.
2.4 When the Programme proceeds to the Contract Period phase, the Client and CMFC are each entitled to 50% of the savings (net of the Overseer’s fee) achieved in the Trial Period. CMFC’s share will be disbursed by the Overseer at the end of the Trial Period. The Client’s share will also be disbursed at this time unless Additional Security is required under the Unsecured Option, in which case it will be placed in the Loan Collateral Reserve and remain there until security is no longer required by the Lender.
3. Operation of the Programme during the Contract Period
3.1 Before the Contract Period commences, a “Finance Schedule” shall be drawn up which will form part of this Agreement and which will be countersigned by CMFC, the Client and the Overseer. The Finance Schedule will define inter alia:
- the Annual Savings at the start of the Contract Period;
- the “Monthly Savings” (calculated as one twelfth of the current Annual Savings);
- details of the loan and its provider (the “Lender”),including: the amount of the loan (which shall not exceed the Annual Savings), the month of the final repayment instalment (which shall be 30 months from the start of the Contract Period) and the Lender’s interest rate basis;
- if the Lender requires additional security from the Client for the loan (the “Unsecured Option”), the amount so required (the “Additional Security”);
- the “Overseer’s Fee”;
- a statement of the planned monthly disbursement by the Overseer.
3.2 The Client undertakes, within seven days of each month end, to make a “Monthly Payment” into the Contract Period Fund equal to the current Monthly Savings and to pay 30 such instalments during the Contract Period.
3.3 The Client and CMFC shall each be due 50% (after deduction of the Overseer’s Fee) of the first GBP30,000 of Monthly Savings. The Client shall be due 60% of the next GBP20,000 (CMFC 40%), 70% of the following GBP20,000 (CMFC 30%), 80% of the next GBP20,000 (CMFC 20%) and 90% of any Monthly Savings in excess of GBP90,000 (CMFC 10%). These sums shall be termed the “Client Entitlement” and the “CMFC Entitlement” respectively.
3.4 The Overseer will disburse the Monthly Payment as follows: his own fee, the CMFC Entitlement, the Client Entitlement. The Client Entitlement will be used for payment of the loan interest and scheduled repayment of the capital and will be paid directly to the Lender. Any surplus will, subject to clause 3.5, be returned to the Client. Any deficit will be paid directly by the Client to the Lender.
3.5 The Contract Period for the Unsecured Option is divided into two phases: the pre-loan phase, during which a reserve (the “Loan Collateral Reserve”) is accumulated for a pre-agreed period to meet the Lender’s security requirements and the post-loan phase, during which the loan is repaid and the Lender’s security requirements continue to be applied to the outstanding amount. In the pre-loan phase, the Client’s share of the Monthly Payments will be disbursed to the Loan Collateral Reserve, and in the post-loan phase this Reserve will be maintained at the required security level.
3.6 If the Client repays the loan capital in full before the end of the Contract Period, the Monthly Payment between then and the end of the Contract Period shall not be altered.
3.7 Provisions relating to calculation of cost savings:
3.7.1 Cost savings shall be determined by either the simple difference between the price from the new Designated Supplier and the previous price paid to the old supplier as applied to the current level of supplies, or the level of savings made with an unchanged Designated Supplier as a result of new purchasing arrangements or strategies introduced by CMFC. When such savings are anticipated, an objective method of measuring the quantum will be agreed between the Client and CMFC on a case-by-case basis. If the savings are made due to the application of other systems, methods or strategies then the quantum will be evaluated by the Overseer.
3.7.2 If a Designated Supplier notifies an increase in price or if a specification change is proposed, the Client may decide either to accept the new prices or specification or to withdraw that supplier from the Designated Supplies Schedule. CMFC may attempt to provide the Client with an alternative source of supply but shall be under no obligation to do so. If the Client decides to accept the new prices and/or specification offered by the Designated Supplier or an alternative suggested by CMFC, the cost savings due to CMFC shall be calculated to maintain the same percentage saving on the new price as obtained relative to the old price.
3.7.3 If the Client makes a minor specification amendment such that there is no material change to the function, fit or usage of any item for a product included in the Designated Supplies Schedule and still receives a similar cost saving then this shall be deemed to continue the cost saving in the Designated Supplies Schedule.
4. Protection of the Client’s interests
4.1 The Client need not accept any cost saving proposal made by CMFC nor use any supplier introduced by CMFC. If a proposal is accepted but is later found by the Client to be unsatisfactory, the Client may at any stage revert to the previous supplier or ask CMFC to help to negotiate new arrangements. However the Client must notify and re-examine alternatives with CMFC for any changes he proposes that will reduce the Annual Savings by more than 5% in total.
4.2 It is the Client’s responsibility to satisfy himself that the Annual Savings agreed at the end of the Trial Period continue to be achieved during the Contract Period. If the Client believes that the savings have materially reduced, he may request an audit of the cost savings, which will be carried out by CMFC in conjunction with the Overseer. This audit will establish the current forecast 12-month level of savings, taking into account seasonal variations, and may result in a revision of the Annual Savings.
4.3 If the revised savings are within 10% of the previous Annual Savings, whether more or less, no change will be made to the Annual Savings. If there is a difference of 10% or more, then (subject to Clause 4.4) the Annual Savings will be adjusted in exact proportion to the findings of the audit. Any change to the
Annual Savings will be implemented from the 1st of the month following the completion of the audit. There will be no retrospective changes. If the Client repays the loan capital in full before the end of the Contract Period, the Annual Savings will not be changed once repayment has taken place.
4.4 CMFC shall have no corresponding right to request a first audit if it believes that the savings achieved are higher than the Annual Savings. It may request a second or subsequent audit at any time that the Annual Savings are below their original level, which may result in the Annual Savings being increased up to their original level. The only circumstances under which the Annual Savings may exceed their original level are as provided for in Clause 1.8.
4.5 The Overseer’s costs for performing any audit shall be added to the Overseer’s Fee before the next disbursement. CMFC will bear its own costs for the first audit, irrespective of the findings. Thereafter, CMFC’s reasonable costs in any audit shall be borne by CMFC unless the audit has been requested by the Client and has not resulted in a downward revision to the Annual Savings (of more than 10%), in which case they shall be borne by the Client.
5. Protection of CMFC’s interests
5.1 The Client acknowledges that:
5.1.1 CMFC makes a substantial commitment in time and expertise and that CMFC may introduce suppliers, negotiate terms or disclose systems which may be of significant commercial value to the Client. Therefore, and notwithstanding any other provisions of this Agreement, if the Client uses any of the recommendations, systems, methods, strategies, arrangements or contacts introduced by CMFC or its associates, or derives any other commercial benefits thereby, then the Client agrees to share equally with CMFC the cost savings or benefits achieved and realised for a period of thirty months from the date of termination of this Agreement, unless termination takes place in accordance with Clause 6.1, in which case the Client’s liability under this clause shall cease forthwith.
5.1.2 CMFC retains all and any intellectual property rights in any of the systems or methods used in the Programme and the Client is not entitled to use those systems and/or methods or any part thereof save strictly in accordance with this agreement nor to disclose those systems or methods or any part thereof to any third party
5.2 In the event of payments being due to CMFC under Clause 5.1, CMFC’s share of cost savings is to be paid to CMFC by the Client within one month of the end of each calendar quarter. CMFC shall have the right to commission, at its own expense, an independent auditor's [as defined in the Companies Act 1985] report to certify the accuracy of the payments made, or that no payments to CMFC are due. If the audit establishes that CMFC has been underpaid by 5% or more, then the Client will reimburse the cost of the audit. The Client will make available to the independent auditor all information necessary to establish the quantum of the CMFC Entitlement.
5.3 If any monthly payment received by the Overseer is less than the current Monthly Savings then, after deduction of his own fee, the Overseer will first disburse the CMFC Entitlement. An event of default will arise if the amount received is insufficient to cover in whole or in part both the Overseer’s Fee and the CMFC Entitlement.
5.4 Payments received by the Overseer later than seven days after the due date and/or of insufficient amount will be subject to interest charged on the balance of the CMFC Entitlement of 2% per calendar month on a monthly basis compounded with monthly rests and this sum will be disbursed to CMFC. An event of default will arise if full payment is not received by the Overseer within three calendar months of its due date.
5.5 CMFC has no liability to the Client or to any supplier in respect of any transaction entered into between the Client and a supplier.
6. Termination
6.1 This Agreement shall terminate (irrespective of whether the loan has been fully repaid or not) when 30 payments of Monthly Savings in aggregate have been paid into the Contract Period Fund and disbursed to the parties as specified and any outstanding balances due to the Overseer or CMFC have been paid.
6.2 Subject to Clause 5 above either party may terminate this Agreement at any point until both parties have consented in writing to proceed to the Trial Period.
6.3 After both parties have consented in writing to proceed to the Trial Period, this Agreement may only terminate either as provided in Clause 6.1 or according to the provisions of Clause 6.4.
6.4 In the event of default by either party of its obligations under this Agreement, or by the Client under the loan agreement, the Agreement may be terminated by the other party, subject to the provisions of Clause 5 and upon receipt of one month’s written notice. This is in the event that any default, which (being capable of remedy) has not been remedied within 30 days of a formal notice of the default being served, or which is incapable of remedy. Any such termination shall be without prejudice to accrued and antecedent rights and obligations of either party.
6.5 Upon such termination or in the event of the Client ceasing to trade or voluntarily entering into or being placed in liquidation or administration or entering into any form of arrangement with its creditors, all sums outstanding to CMFC over the entire period of this Agreement shall become immediately due for payment and CMFC shall rank as a creditor for this sum forthwith. In calculating the Client’s debt to CMFC, the Monthly Savings shall be assumed to continue at the level at which they were last assessed.
7. No obligation or liability on CMFC
For the avoidance of doubt, CMFC is under no obligation to the Client to procure a loan (either at all or in any particular amount) and has no liability with regard to payments of interest or principal of any loan. Nor is CMFC liable for the consequences of any changes made by the Client in respect of its recommendations, nor to procure any supplier to offer to supply the Client at prices lower than those that the Client is currently paying, or at all.
8. Independent arbitrator
In the event of a dispute arising that cannot be resolved in a reasonable time, the parties agree to submit the dispute to binding arbitration. Each party in dispute will appoint a third party to act as their arbitrator. If these arbitrators are unable to reach a unanimous agreement then they shall appoint by agreement (or in default of agreement to be appointed by the President of [the Institute of Chartered Accountants] a further independent arbitrator whose decision shall be final and will be binding on the parties.
9.1. During discussions, CMFC and the Client may exchange information relating to the Client’s business, systems, methods, strategies, alternative suppliers or alternative purchasing arrangements that the Client could use to secure cost savings when compared to the Client's existing systems, methods, strategies or arrangements. All information will be exchanged in complete confidence and shall not be disclosed to other parties for a period of 3 years from the date of signing this agreement.
9.2 The information disclosed by CMFC, or any associated party, to the Client must be held in complete confidence and the Client will hold such information UPON TRUST for CMFC as absolutely entitled thereto and will not make any use of it without CMFC’s written consent, except under and in accordance with the terms of this Agreement.
This Agreement is effective from .................................................. (Date)
Original cost Reduced cost %ge saving Annual volume Cost-saving
This Agreement is effective from..................................................(Date)
For the Client ............................................................ Date............................
For CMFC ............................................................. Date ...........................
2a. Finance Schedule(All sums excluding VAT)
“Contract Period” ............. months
Lender’s Name and address – with contact details
Period of loan Agreement ............. monthsAmount of loan GBP ............Lender’s interest rate basis ........... %Amount of “Additional Security” required by Lender ........... % GBP ............
2b. Statement of Monthly Disbursements at opening level in Priority Order(from Contract Period Fund)
Overseer’s Fee GBP ..........CMFC Entitlement GBP ..........Interest charge on loan GBP ..........Capital Repayment of the loan GBP ..........Any balance to the Client
The Unsecured Optiona) Pre-loan phase:
Overseer’s Fee GBP ..........CMFC Entitlement GBP ..........Any balance to the “Loan Collateral Reserve”
b) Post-loan phase:in additionAdditional Security balance to be retained ...% GBP ...........Expected date Lender will take security ........................
This Agreement is effective from..................................................(Date)
For the Overseer ................................................. Date............................
For the Client ............................................................ Date............................
For CMFC ............................................................... Date ...........................
Many of the SME's coming to CMR for funding are often looking for funding to help them develop a new innovative product or idea. Also there are very many individual inventors and universities who have inventions but do not have the resources nor often the ability, to properly commercialise those inventions themselves.
CMR's Programme for helping all inventors is quite unique in the UK, and the practical and specialist resources we can bring to bear are unequalled. There are other organisations that profess to 'help' inventors, but many of them exist primarily to extract up-front fees from naive inventors for 'marketing' their inventions. The only body that has similarities with CMR is the British Technology Group (privatised from the government several years ago), in that they do not charge any up-front fees and only take an equity position (usually 51%). BTG have a well-earned reputation for being slow and bureaucratic in the way they work, and are generally not liked by their clients – they also now only handle bio technologies. In contrast, CMR is fast, very professional, has much greater specialist & expert resources through its vast executive network, and is generally liked by its clients!
CMR's IPR International Licensing Programme can often be regarded as an alternative to private investor funding - in fact IPR Licensing is really the same as bringing-in a large corporate investor, but one who not only inputs investment money, but also has the technical, manufacturing and market distribution strengths to make sure the innovative new product will be a commercial success.
Licensing is essentially a process of allowing a larger corporation to take the invention, to brand it with its own logo, and to treat the product just as if it had invented and owned the product itself. To all outside perspectives, the product will appear to be the brainchild of and be owned by the corporation. In return, the licensee corporation will pay sums to the licensor for the privilege of having the licence to use the intellectual property within the territories and/or application areas granted. These payments are known as royalties, although quite often there will also be up-front licence fees, and other payments received.
Licensing can bring great advantages, especially when compared to the inventor trying to commercialise his invention himself (as many want to). In most cases the inventor has no personal or business strengths other than the invention itself, but many inventors will want to try and handle the business development themselves - a role that most are unsuited to. As a result many viable inventions fail to see the commercial light of day, not because the invention is no good, but because the inventor's own weaknesses brought failure. The Patent Office is littered with good ideas that were never commercially successful, for that very reason.
One of the first tasks for CMR when introduced to an inventor, is often to persuade the inventor that trying to do it himself is not the best way forward, and that instead of trying to raise the GBP'000's he seeks to build his own factory, etc., it would be better to internationally license his invention to major corporations who are better equipped to make a success of it, and will pay a handsome price (in royalty terms) to acquire the licence.
The arguments used for persuading the inventor are two-fold:
1) The success of any new product will be largely dependent on the market distribution strengths that are put behind the product in all the global markets it addresses. These
strengths need to be in terms of the ability to promote, support and distribute the product into all its markets, together with the credibility that only a large corporation has, with its trusted and respected brand name, that will be applied to the inventor's product. No amount of investment into the inventor's small company could ever create these strengths.
2) The protection of the intellectual property is of paramount importance, particularly from infringement or from those who may want to challenge the patents. If other large companies see that the patents are only owned by a small company or an individual, they may be tempted to challenge or infringe the patent on the basis that they have more clout and can afford the legal costs involved. If it is seen that a major corporation (our licensee) has an interest in the IPR, then other corporations will think twice before embarking on any hostile activity, knowing that they will not be allowed to get away with it.
Having persuaded the inventor that handling the invention through the licensing route is the best way forward, we will sign-up the inventor (or company, or university) to CMR's standard IPR agreement (copy of which is in Appendix 3). CMR charges no time fees for the work undertaken, but does take an equity stake in the invention (or rather in the company we set-up to own the invention), of usually one third. Our efforts are therefore on an entirely speculative basis, and we will only make money if we successfully commercialise the invention. Clearly, we will only take on-board those inventions in which we have considerable confidence in our ability to succeed.
In making our judgement about an invention presented to us, we will be considering several important aspects:
a) What we think of it from a technical viewpoint.b) How we view the market prospects and competitive issues.c) How strong the intellectual property is, and how well it could be defended if attacked.d) Whether we have the right relationship or contractual arrangements with the inventor. This can be very important - inventors have a reputation for being uncommercial, and we do not want to find that all our good work is negated by an unrealistic inventor.
One of the great strengths of CMR is our ability to always bring real experts into the project from the executive network we have. It is almost unheard for us not to have at least one expert, and often several, for any particular project we are handling. Not only does that allow us to make good judgements on both the technical and market issues involved, but those same CMR experts will probably already know many of the potential licensee corporations around the world who could be interested in the invention.
Many people think that handling inventions is a very high-risk activity. This is true if you are say a venture capital company who invests directly into an invention, but it is far less true in the way that CMR handles it. First of all of course, we are only investing time, not money. Secondly, we go down a route of gradually exposing the invention to various experts, both internally and then with potential licensee corporations, and we will fairly quickly start to get the message over whether or not we really do have the best thing since sliced bread! We really only have to start spending heavyweight time when we are reasonably sure that the project is a winner but one can never be completely sure!
TYPES OF IPR
There are many types of intellectual property, but the main ones that will be of interest to CMR are:
a) PATENTS. Inventions covered by patents are generally the most important to CMR. Patents usually cover the principles and concepts behind the invention, and if properly drafted patents can provide very worthwhile protection for the invention. Patents are inexpensive to start with (an UK patent application is now free (used to be GBP25) but expensive in the long run (world coverage will cost in excess of GBP100,000 over the patent's life). More about patents later.
b) COPYRIGHT. This has the great advantage of being free, and copyright is automatic. Its disadvantage is that it only provides protection for things that are recorded (on paper or other media). Its main use is in respect of publications and software, where it provides very strong protection.
c) DESIGN REGISTRATION. For the type of business handled by CMR, Design Registrations do not provide adequate protection. It is fine for protecting Coca-Cola bottles and the like, but is only of very limited value for protecting inventions.
d) TRADEMARKS. These can be valuable where a market position needs to be protected, and there are many examples where registered trademarks have kept a product going, well after the time the patents expired. 'Nutrasweet' would be a good example of this.
e) KNOWHOW. Keeping something secret is an important type of intellectual property, particularly in industries such as the chemical industry. Here it is common practice to deliberately not patent an invention or new discovery, because the act of patenting publishes to the world at large exactly what you have done to achieve your invention. In the chemical world it is too easy to circumvent the patented compound, so keeping the process secret is the best form of protection.
MORE ABOUT PATENTS
Because patents are so important to the work that CMR does, all CMR members should have a good knowledge of the subject, as it will help in having preliminary discussions with companies having innovative products.
a) The Patenting Process; usually starts with the filing of a British patent application. Whilst the basic official filing fee is now free, we would never suggest that no more is done than just filing. Because of the need to ensure the patent will subsequently be able to withstand close scrutiny and perhaps legal attack, it is vital that a qualified patent agent professionally drafts any patent. This will increase the application cost to between about GBP600 to GBP5,000+ depending on complexity. Many inventors try to cut corners by drafting the patent themselves, but this is most definitely a false economy and could easily result in the inventor eventually losing his patent.
b) From the filing date of the British patent application (also known as the 'priority date') the inventor has exactly one year before having to move to the next stage. One year and one day later, the patent application will have automatically lapsed, unless the inventor has taken action. There are three primary options available:
i) Continue with just a British patent.
ii) Move into the 'national phases' for the countries you wish to have patents in (e.g. USA, Japan, etc.). This is where the costs start to escalate, because each country has
its own patent office, wants the patent application to be in their language, and has its own fee structure.
iii) Convert the British patent application into a 'PCT patent application'. PCT stands for Patent Co-operation Treaty, under which most of the world's developed countries are signatories. There are however some notable exceptions, including Taiwan, several Middle East countries, much of Africa and some South American countries. It does however cover most of the industrialised countries, and for the expenditure of about GBP4,000 will give another 18 months of time delay before one has to enter the expensive national phases for the countries desired.
The real art of commercialising patented innovation, is to use the first 2½ years (12 months as a British patent application, plus another 18 months as a PCT patent application) to get the commercial aspects well underway and generating revenue, before the expensive national phases are entered. Many small companies and inventors do not do this and waste the time - it is those inventors that will often come to CMR only a few days before their patents lapse (we have a special fast track list of investors interested in providing that type of funding at very short notice).
c) In the UK, about 18 months after the 'priority filing date', the patent application will be 'published' - up until that point it has been confidential, but now it is in the public domain. Up until that time, the original patent application could be withdrawn and re-applied for, without problems apart from losing the priority date. Once publication has occurred that option no longer applies.
Any patent can be challenged, whether it is just a patent application or even a granted patent (with some time restrictions in some countries), and it is obviously important that the patent wording provides the best cover available. Challenging the validity of a patent is the way infringements often happen - the large company saying to the small inventor, "we don't think your patent should have been granted - see you in court".
For CMR the strength of the patent is of vital importance, since no corporation is going to pay anything in royalties or up-front payments until they have examined the patent with a fine toothcomb. Granted patents are not essential to enable licensing to proceed, but if we are having to deal with patent applications, then further checking will be needed.
There are a number of pre-requisites before a patent can be granted:
1) It must be 'new' and 'inventive' - that means there must be no evidence of the idea having been thought of before. The technical term for this is that there should be no 'prior art' as revealed by publications, or previous patents or anything else that is in the public domain.
2) It must not be 'obvious'.
3) It must be capable of being enshrined in something physical (i.e. it cannot be a complete abstract).
All of these aspects will need to be checked before CMR will take on-board a patent application. The patent agent will normally be able to advise on these, but the first aspect - the need to be inventive - will require a professional search to be made, in which a skilled patent searcher (it is actually a
profession) will search through all the patent documents and through publications to ensure that no prior art exists. Whilst this is a comfort, it is not absolutely solid, because as stated above, British patent applications are not published into the public domain until eighteen months after its filing date - this means that any similar invention filed in the previous eighteen months will not be revealed by the search. The filing date, otherwise known as the priority date, is the absolute determinate of whether or not the invention is new. If someone had filed a similar application one minute before, they take precedence and the second inventor loses.
HOW CMR HANDLES AN IPR/LICENSING PROJECT
1) As stated above, the first stage for CMR is often to convince the inventor that international licensing is the best route forward. The arguments used in this persuasion are recited above.
2) Once the inventor, small company or university is on-board, and has signed CMR's standard licensing agreement (see Appendix 3), the next stage for CMR is to make sure the intellectual property is in good order and well protected. There are four main areas of protection that will be needed if commercial success is to be achieved and preserved:
a) Technical Protection; making sure that the patents are properly written and filed. If this stage was undertaken by a professional patent agent, then there is a likelihood that they will be in order technically.
b) Business Risk Protection; many patents we see are owned by companies that are now technically insolvent, and in these circumstances potentially very valuable patents could be at risk from creditor action. It is vital that the company owning the patents is invulnerable to any business risks at all. Usually, CMR will form a virginal company that will purely own the patents and receive royalties, and undertake no other activities which could bring risk.
c) Infringement Protection; one of the greatest concerns of many inventors is that their invention will be copied. This is a very real risk particularly if the invention has great commercial value, and in many cases the best protection is to have a big 'bully' of a corporation on side with a vested interest in protecting its interests in the IPR. CMR will always build protection of the IPR into the licensing arrangements with the large corporations wherever this is possible.
d) Tax Planning Protection; sometimes the inventor will be keen to protect his revenue from the taxman by having the IPR owned offshore. This is often a more attractive proposition in concept that it is in fact, especially as most developed countries insist on withholding taxes if the royalties are being paid to a tax haven. There are other considerations that also make the offshore option not that attractive. However, this is a decision left entirely with the inventor, but we would generally recommend against going offshore.
3) When we are happy that the IPR is properly protected, the next stage is to seriously consider the licensing strategy that will be best, given the specific circumstances involved. There are many different routes to go, and the decision on which way to go will be influenced by the circumstances of the invention and the protection level it has, and by the characteristics of the industry area and market the invention addresses. With licensing, any decision on strategy will need to be continually reviewed and where necessary, revised. There are so many imponderables and uncertainties involved that it is not possible to just stick with the opening strategy, without this continuous reassessment.
Decisions will need to be made on whether or not to go for exclusive or non-exclusive licensees, globally or by territory, or by application area. These decisions will be made partly on the market situation and partly on the strength of the intellectual property, and the consequent difficulty or otherwise in protecting it over the long-term.
Generally, the preference will be to go for exclusive licensing (sometimes globally, sometimes by territory or application area), because it is then usually easier to tie-in the ongoing protection for the intellectual property together with the technical additions and improvements that will inevitably arise in the future. Also with exclusive licences it is easier to negotiate licence fees up-front, higher percentage royalties down-stream, and more favourable contract conditions.
Where we have a particularly important invention, which represents a major break-through, there is a need to be more circumspect about granting exclusive licences. This is because we do not want to create a situation where a competitor is so threatened by being excluded from having a licence, that they will take all means available to overthrow or infringe the patents. In those circumstances we will formulate a licensing strategy that will not permanently exclude such competitors.
4) Having decided the opening strategy, CMR will then simultaneously:
a) Identify the potential licensees that conform to the strategic specification.
b) Develop the 'marketing' package - i.e. the way in which we are going to present and negotiate with the targeted corporations likely to be prospective licensees. This 'package' will include the presentation material for the invention itself, plus an outline of the commercial aspects. Ideally we want each corporation approached to perceive this as a product that can be incorporated into their own product range, adding market share, profitability, etc.
5) When the licence marketing aspects have been fully prepared, we will then start to approach the targeted corporations. This stage of the exercise should happen within the same time frame, so that hopefully we have all of the prospective licensees eagerly anticipating being granted a licence, with perhaps a pang of horror that one of their competitors may get it instead! By creating a 'sensitively' competitive environment, we stand the best chance of maximising royalties and contract terms.
6) Experience has taught us to continue all negotiations, until a deal is done and the money actually in the bank! We have seen 'absolutely certain' deals fall apart almost as pens were poised to sign, and we will always continue all negotiations with all parties 'to the wire'.
7) When licensing contracts have been completed, the final role of CMR is to make sure that everything stays on the rails, and that royalty cheques are calculated and received as contracted. We are normally dealing with large, respectable companies, and in using auditor's certificates to verify payments, this is usually not too much of a problem.
It is sometimes said that the majority of small companies are technically insolvent. This may be an overstatement (depending on the stage of the economic cycle!), but it is true that a large number of companies suffer from serious liquidity problems, and many succumb each year by going 'bust'.
In many of these cases, CMR can greatly help the companies, not necessarily only through providing funding (many insolvent companies will be fundamentally unfundable anyway), but through handling the insolvency problem and moving the company into a position where insolvency will not be a problem in the future.
In analysing the type of help that CMR can provide to such companies, it would be worthwhile looking at the reasons why companies get into these problems in the first place, especially as the solution will often be specific to the cause. The main reasons why companies run into solvency problems are:
1) Declining sales & therefore gross profit generation, and being unable to reduce costs further, or having been too slow in reacting.2) Never having really achieved a sound business base, surviving on minimal margins until now!3) Having a good core business, but expanded into new business activity areas sometime ago, which have now turned bad and become a liability, dragging the rest of the company down.4) Having bad luck on a contract or business deal.
These are not all the reasons, but between them they will account for the majority of insolvency problems in the small company sector. Of course, many 'armchair' bankers and other professional observers will usually attribute insolvency problems to 'poor management'. Whilst this may be true in a number of cases, it is far too glib a generalised reason for many of the businesses who run into trouble. The actual reality for many small businesses is that life is very tough for them, especially when the economy is having one of its regular downturns.
When CMR looks at a company with problems, there are four key questions we will ask ourselves:
1) Is the business, or any part of it, worthwhile saving?2) If so, what shape should the business have in the future?3) What is the best way to achieve that, from a business viewpoint?4) What insolvency procedures & tactics should we pursue?
If the answer to question 1. is no, the business isn't worth saving, then there could still be fee earning opportunities for us to help the directors have a softer landing than they otherwise might.
If the answer is yes, the business is worth saving, we will then look to see if the company can be saved, or whether only the business can be rescued (the difference being that in the second case, the company will disappear, but the business will continue in a different form).
In answering the question of what shape should the business be in the future, we will look at the problems it had:
1) If the business is basically sound, but had some bad luck that is unlikely to re-occur, then probably the way forward is to 'tidy-up' the business and then continue as was.
2) If the core business is basically sound, but has collected around it other business activities that have turned sour and adversely affected the rest of the business, the way forward will probably be to 'tidy-up' the business, strip-away the rubbish, and continue with the core business.
3) If the business is no longer sound as a stand-alone, but nevertheless does produce a worthwhile contribution, then the route forward is to 'merge' the business in some way with another business having sufficient synergy to absorb the business in a way that returns much of the gross profit generated to the net profit line. This 'merger' will be arranged after the business has been 'cleaned' through an insolvency procedure.
4) If the business is basically sound but has been adversely affected by poor management, then a MBI or management support solution could be appropriate.
In suitable cases it may be possible to bring-in an investor to help the 'reconstructed' business to develop positively. Such investments can be attractive to investors particularly as the insolvency procedure used to 'tidy-up' or 'clean-up' the business, often results in the 'phoenix' business having either zero or greatly reduced liabilities to creditors. In fact one of the dangers to be wary of in handling a 'phoenix' business, is that you can 'kid' yourself that the business is doing better than it really is. This is because the new business will be making much greater profits over the first few weeks and months, than would normally be the case, as it converts the good stock it probably acquired from the old company at auction room prices, into full profit sales. During the receivership or liquidation, all the old, obsolete stock will have been dumped.
Before going on to examine the ways in which CMR will handle a corporate recovery project, we should look at the various types of insolvency procedure that are available to us.
SUMMARY OF INSOLVENCY PROCEDURES
Everything that happens insolvency-wise in the UK, it governed by The Insolvency Act 1986, which was the attempt of the government of the day to engender a recovery environment for troubled companies, perhaps similar to the Chapter 11 provisions in the USA. As with most things, the government failed miserably, and it is a fact of business life in the UK that most companies that go into an insolvency procedure actually go bust and disappear. Of the 30,000 companies that are declared insolvent each year, less than a thousand are rescued as they were.
There are four types of insolvency procedure in the UK:
1) Administration: This was the original attempt to replicate the Chapter 11 provisions in the USA, but is little used (less than 200 cases in 1997). Under Administration, the company is under the control of an insolvency practitioner, which has the effect of increasing the costs substantially, with a reduction in terms of practical management efficiency! 'Administration' is never used by CMR.
2) Receivership: Receivers are people (they must be authorised insolvency practitioners), who are appointed by someone who has a charge over company assets (often in the form of a debenture). This is usually a bank, but not always. A Receiver, acts entirely for his client (the bank) and has no special obligations to the other creditors. He totally controls the company, and is only answerable for his actions to a subsequently appointed liquidator. A Receiver will retire from his position when either:
a) He has obtained full satisfaction for his client (i.e. the bank has fully recovered its money), or
b) He decides that he has obtained as much as he can from the company's assets, and it is not worth spending further time. This is often the most likely scenario in the small company sector. At this point it is up to the (hapless) unsecured creditors to decide whether or not to appoint a liquidator. As these cost money, and the likelihood of recovering any money after the Receiver has left is about zero, most companies in this situation will eventually be struck-off rather than be formally liquidated.
3) Liquidators: These are insolvency practitioners appointed (usually) by the creditors, and they work on behalf of the creditors to liquidate the company's assets. When the assets are turned into cash, this will be dispensed according to a strict pecking order:
a) First in line is the Liquidator himself, for any unpaid fees and expenses.
b) Next come any secured creditors, who have a charge over some of the company's assets.
c) Next are the preferential creditors, for example - employees' wages, redundancy pay, the Inland Revenue for part of the taxes due, etc.
d) Finally come the unsecured creditors, who will often receive nothing at all in a small company liquidation.
4) Corporate Voluntary Arrangement (CVA): This is the 'up and coming' procedure, although only 700 happened in 1997, of which more than half failed. One of the reasons it is more popular is that the banks changed their policy a little while ago, and now only award receivership work to a few large firms of insolvency practitioners. Those other practitioners who have seen their receivership business disappear, now actively promote CVA's as the way forward!
A CVA operates by getting 75% by value of creditors to agree to a scheme of arrangement, following which the CVA can be legally imposed on all the other creditors. In the case of a CVA, the company's management will continue to run the business (if approved by 75% of creditors) and the insolvency practitioner 'merely' supervises the financial arrangements of
the CVA and makes sure that all monies due to the creditors are paid in accordance with the terms of the CVA. If a CVA runs into trouble, and cannot pay creditors as laid down, the CVA can be re-negotiated, but only again if 75% of the creditors at that time agree.
HOW CMR HANDLES CORPORATE RECOVERY PROJECTS
The first thing to say, is that speed of action is often critical. This is not an area of our operations where there is spare time to waste - we must move quickly and decisively.
The obvious start point for CMR is the recognition that the client has a solvency problem. The normal definition of insolvency is an inability of the company to pay its bills as they become due. Merely looking at the bottom-line of the company's balance sheet will not give that information. It would be possible for a company to have a large positive figure (because of fixed or intangible assets), but still be chronically insolvent because of a lack of cash. Rolls Royce is a classic example of this, where the company had capitalised as an asset on its balance sheet the development costs of the RB211 jet engine and therefore had a large positive balance sheet total, but still went bust! It is therefore necessary to look at the liquidity of the company - i.e. cash plus current debtors minus current creditors.
Sometimes the company themselves to not realise that they are insolvent, and in these circumstances we will need to discuss their situation sensitively with them, pointing out the dangers to them as directors (through wrongful trading provisions, etc.), and work through with them the best way forward to deal with the problem and to put them in the best position to continue with the business in the future. We will also need to address their personal situation, especially as many directors of small companies will have given personal guarantees to banks, factoring companies, etc., and their houses may also be on the line. [Technical point: Wrongful trading occurs where the directors continue to allow the company to trade whilst insolvent when there are no reasonable grounds for believing the company will become solvent again].
These are all important issues for the directors, and many of them will have been worrying about the situation for sometime, but without knowing what the solution is - many will be hoping that 'something will turn-up'. Because of the complexities and technical knowledge involved in these cases, it is important that expert help is brought-in immediately. Until further notice all possible corporate recovery projects should be initially referred to CMR Centre, and speedy arrangements will be made to involve one of the insolvency practitioner firms we work with.
The strategy and tactics for handling the project will then be worked-through, agreed with the client, and then implemented quickly. The earlier we get involved in helping a client, the more options will be available, and the higher is the probability of achieving a successful outcome. It is important that we work with our own insolvency practitioner partners, so that the whole project can be carefully planned all the way through. It is therefore important that we get to a client before other insolvency practitioners have been appointed - it is necessary for CMR to 'manage' the process.
The CMR method of managing insolvency has now been enshrined in the Pre-pack arrangements now authorised by the Government, which helps businesses to keep going rather than permanently close-down.
There are several main routes by which we obtain corporate recovery clients:
1) From companies that come to us looking for funding assistance. If they are insolvent, then normally the business will need to be 'stabilised' through an insolvency procedure before investment input can be made.2) Referrals from external affiliates and contacts.3) From our own proactive efforts through the telemarketing and other programmes - where we make sensitive 'funding' approaches to companies that have been targeted as probably having financial difficulties.4) From personal contacts of CMR members.
When a contact is made, from whatever source, it is important that we move quickly and professionally. We need to be aware of, and differentiate ourselves from the 'cowboy' operators who specialise in 'ambulance chasing', apparently offering to help companies that have solvency problems, but in reality only acting as a conduit to an insolvency firm for which a fee will be paid. There are many such companies, who pick-up that a company has had a CCJ (County Court Judgement) registered against it, and will make an approach offering help. In theory at least, CMR should be being put in touch with companies before that point is reached.
THE LINK BETWEEN CORPORATE RECOVERY AND M&A
Whenever we enter a phase in the economic cycle where a lot of companies come under financial pressure, some will go under. This represents a significant opportunity for CMR to help these companies in a quite innovative way, and of course, by doing this we create a big business opportunity for ourselves. CMR is ideally placed to develop this opportunity.
THE OPPORTUNITY
Many 'marginal' companies struggle along, perhaps making reasonable money in boom times, but not when the economic environment is less favourable. They all have turnover and gross profits, but lose most or all of this because of the fixed costs of being in business. To take an example, a small company may have a turnover of GBP2 million or so, with gross profits of say GBP800,000 p.a., which it loses through its fixed costs (which will be irreducible). Conventional corporate recovery action will not help the company because of the fundamental problem it has - the only solution would be for a significant turnover increase to help absorb those costs, which would be impossible to achieve, especially at a time of recession.
There is often only one solution that can save the business and the personal interests of its directors/ owners. That is to achieve an effective increase in turnover relative to cost base, through 'merging' with another similar company. For many small companies it is impossible for them to arrange this themselves, especially on terms that would be beneficial (any direct action by them would be seen as a sign of weakness). The opportunity for CMR is both to instigate the action and to act as the catalyst and manager to make it happen, either directly or through an insolvency process.
To use our example above, a merger is quite likely to result in at least half of the gross profit dropping down as net profit, which would mean an additional GBP400,000 of wealth created each year, or a total wealth created of GBP2 million (using a P/E of 5). The action would have a similar effect on Company B - the one we merge into. Such action can lead to a CMR Catalyst Group (see next chapter) being formed, involving 3, 4, 5, or 6 synergistic companies.
The profit potential to CMR and its members is enormous. However, it takes a special skill to be able to identify the opportunities, to discuss with likely business partners, and to make it happen in a beneficial and sustainable way for all concerned - our client(s) and ourselves. Of course, merely discussing the possibilities with potential merger partners can generate very useful new client contacts too!
CMR COMPANY SALES PROGRAMME
The company sales market is vast – the primary exit route for a company owner is to sell their business. In the SME sector the predominant reason for owners to sell is their desire to retire – many will have looked upon the value of their business as being their pension fund. As the post-war baby boomers are now coming up to retirement age, the market for company sales will become brisk over the coming years.
This represents a major opportunity for CMR because our structure and expertise is particularly suited to the company sales process. Many of our competitors are single-thread brokers who only really have the capability to advertise their client’s businesses for sale. CMR has the ability to be far more proactive and to include some important features that ordinary brokers cannot hope to match.
CMR’s competitive advantage comes from two main factors:
1) Because of the size and breadth of our executive base we have the ability to accurately target and approach potential buyers. We also have the specific industry experience to know how to structure and negotiate the deals.
2) We have the CMR MBI Programme – management buy-in’s are an ideal way for a retiring owner to pass their business onto experienced executives, for probably an enhanced value over an outright sale. MBI sales channels are generally not available to ordinary company sales brokers.
In this section of the CMR Operations Manual we concentrate on the conventional company sales process – a separate section follows on the CMR MBI Programme. Generally both processes (conventional and MBI) should be employed for clients to give the best chance of securing a successful sale.
The following considerations apply for clients in the sales process, and these form part of our marketing approach to them.
Maximise the sales value of your business
The value of a business is what someone is willing to pay for it. However, different people have different perspectives with different purposes and motivations. A buyer who has a strategic purpose who believes he can derive more future benefit from buying the business, is a buyer who will probably be prepared to pay more than someone else. So the selling strategies adopted are of vital importance in terms of maximising sales values.
Buyer perception is also very important - if it looks good, appears reliable, has good future potential and fits what the buyer is looking for, then the probability of a sale increase, as does the price the buyer will pay. It follows that presenting the business in an attractive way, whilst removing any barriers to a sale, is key to achieving maximum sales value.
When it comes to the actual price negotiation, the buyer will be influenced by the level of current profitability and whether this is on an upward path. If it is, the sales price achieved will probably be higher. If enough time exists before selling, it is often possible to use cost reduction and profit improvement techniques - a specific CMR service - to increase the apparent profitability and therefore the eventual sales price.
Another important influence on the sales value achieved will be the level of buyer competition. The ideal situation is where several buyers fight to win.
A further method of enhancing the eventual sales price achieved is to consider selling the business to external executives who want to take over the running of the business themselves. This is called a MBI - management buy-in. Although these are usually structured on a part-payment now with earn-out payments over a defined period, the eventual price paid can be considerably higher. Sometimes a MBI purchase will be combined with existing employees of the company, in which case it is called a BIMBO (Buy-In Management & Buy-Out)
In summary, many significant factors influence the maximising of the eventual sales value achieved. All need to be considered as an integral part of the sales process. CMR will guide sellers through this maze of options to achieve the best final result.
Sell your business quickly
Everyone would like to sell their business at the price sought and without delay. Sadly that does not always happen. Many people suffer a protracted selling process or even worse - will not sell at all.
This tends to happen when sellers have not properly prepared the business or the presentation before putting it on the market. It also happens when people approach the selling process in a half-hearted manner, when a clear sales strategy has neither been agreed upon or actioned.
Many sellers go to a company sales agency that merely lists their business together with many others, in the hope that a suitable buyer will simply appear. This is a sloppy way of trying to sell a business. This method will leave sellers disappointed and their businesses under-valued. This is not the CMR approach!
CMR makes sure that the business is properly prepared and presented. Then we specifically and strategically target those buyer groups that are likely to be interested in the business at the price sought. Those potential buyers will be approached on a strictly confidential basis within the same timeframe - our objective is to encourage as many serious buyers as possible to compete in the race to win the company.
We therefore avoid the prevarication and extended negotiation process that often occurs when there is only one potential buyer involved. We have found that this is the best way to achieve the price sought and complete the sale in the shortest possible time.
Get expert advice to make right decisions
Selling your business is not something most people do very often! In fact, many business owners will only do it once in their lives. This complex process has many traps and pitfalls and most owners will lack any prior experience upon which they can rely. It is vital to do it the right way - CMR will help you through.
It makes sense to take advice from experts who have much experience of selling companies. CMR will guide you through the process, discuss with you the pros and cons of the decisions you will need to make and give you their opinions. This is done in a highly supportive way, but of course, at the end of the day - what you do with your business is your decision - CMR will help you come to the right decisions.
The decisions before you will be many and varied, including: What type of sale are you looking for - outright? phased? for cash? or other consideration? ... with your continuing involvement? or without? What sort of buyers would you like - trade, investors, MBI executives, involving existing staff (MBO or BIMBO)? What price should it be marketed for? What timescales would you like? The list is endless - CMR will guide you through.
Adopt correct selling strategies
Selling your company is not something that just happens - it needs to be carefully planned and executed.
Your objective and ours is, of course, to sell your business quickly and for the best price - hopefully at the asking price or more.
In order to achieve this target, the entire process must be carefully thought through. We will help you to make decisions on how to structure and present the buying opportunity that the sale of your company represents. The perception of your business in the eyes of potential buyers has to be absolutely right. The selection and
targeting of buyers is also extremely important - we know that some buyers will be prepared to pay more than others will.
There may be some aspects of the company that could represent a turn-off and it is vital that these are dealt with - either eliminated or explained, before buyers are approached. CMR can help with this process.
There will almost certainly be things that can be done to enhance the perceived attractiveness of your company to potential buyers. We will ensure that these are put in place before marketing the company.
The handling of prospective buyers is another major aspect to consider. We may suggest that initial discussions are conducted by an intermediary - CMR can perform this function. This will protect the seller's identity and allow the pre-sifting of potential purchasers before the first meeting with you.
All these issues and many more will be the subject of extensive discussions between you and CMR - we will advise and recommend, but the ultimate decisions are yours.
Setting sales price at the right level
The correct price/value of a business is what someone will pay for it. This is a massive over-simplification because, to a large extent, the price/value will be based on the buyer's perception of the company plus the buyer's own situation. Some buyers will be prepared to pay more and of course if there is buyer competition, this will usually increase the price paid.
The setting of the asking price is therefore more of an art than a science - there is no magical formula that can be applied to all situations.
CMR approaches the challenge by working with the owner to discuss the various issues involved. A non-exhaustive list of items to consider is: past profit performance, consistency - rising or falling, marketable assets, speed of sale sought, any barriers/ skeletons-in-the-cupboard, market situation, likely buyer motivations.
CMR's experts will suggest a price having discussed the rationale with the owner. If there is no specific rush to sell the business, the decision will normally be taken to price the business for the perfect buyer - i.e. the buyer who will see the greatest value because of their own circumstances. We also take negotiating margins into account - many buyers will only feel happy if they have negotiated a reduction in price!
As we start to market the business and have discussions with potential buyers, we will start to refine the asking price - perhaps the price is a little too high? Note that it is much easier to go down than up!
At the end of the day decisions on pricing and the deals to make are yours. CMR will guide you, but it is of course your ultimate decision.
The question of how and when to target potential buyers is important. On one hand, there is a big advantage in approaching prospective buyers within the same timeframe as this will increase the chances of stimulating competitive bidding. However, in some circumstances there will be several different types of buyer group, one or more of which could be more likely to pay a higher price because the business is more valuable to them. Obviously it would be better to give those buyers the chance to buy first, rather than risk having to accept a lower price because of timing effects.
It is always a fine decision, and one that will be taken in consultation with the owner.
In terms of how to target buyers, clearly the first stage has to be the identification of potential buyers and their classification into their appropriate buyer groups - trade, institutional, investor, MBI, MBO or BIMBO. CMR has a wide range of executive skills in every industry and will be able to supplement the owner's knowledge in developing the target list of prospects.
The timing is vital. Having decided which particular buyer group is going to be targeted first, the next stage is to make the initial approach and to do it in a way that is most likely to develop bidding competition. This always has the effect of increasing the eventual sales price.
Quite uniquely, CMR has its own bank of private investors and senior executives who could be interested in a MBI (management buy-in) purchase of the business. Generally MBI purchasers will pay a higher eventual price, although part of the consideration will usually be paid downstream, as negotiated with the owner. It is a useful additional source of potential buyers, especially for retirement sales where the existing owner may be prepared to continue in the business for a time, and the incoming executives/ buyers will appreciate a handover period.
Market the business professionally
Marketing a business for sale is similar to the marketing of any other 'product'. The process in both cases is to market the business/product in a way that presents potential buyers with an attractive proposition at a price they are prepared to pay.
We want the buyer to believe that by acquiring the company they will achieve their objectives and of course, make more money/profits as a result.
Different buyer groups will often have different motivations. These must be reflected in the marketing material produced. Sometimes therefore the marketing packages produced will differ, reflecting the specific buyer groups.
Traditionally a 'Sales Memorandum' will be produced, which will include all the details of the company needed by potential buyers to evaluate whether to take their interest further.
Normally we will approach targeted buyers directly, but sometimes there may be situations where more general advertising is appropriate. The need for
confidentiality, which will vary from one company to another, will determine the desired marketing route.
In all cases, CMR's experts will advise and discuss the key options with the business owner.
Negotiate & complete
The final stage is to negotiate with all the buyers who have indicated an interest. If the process runs true to form, there will be some serious potential buyers and some that fall into the tyre-kicking category. Obviously we only want to spend time with the former. To a large extent the degree of negotiation strength will depend on whether there is a competitive buyer situation.
A guiding principle in negotiation is to try to look at the situation from the other guy's viewpoint - in this way, it is far more likely to hammer-out a deal that stands a good chance of being accepted.
Realism is essential in coming to deals, and a benefit of having CMR's experts onside is the sum total of our rational views, opinions and specialised experience. We can also act as the intermediary, which means that the owner's position remains unsullied by the rough and tumble of negotiation and they can intervene as appropriate. The final decision is, of course, always entirely down to the owner.
When an outline deal has been reached, it is crucial that the owner seeks independent professional advice, especially on legal and taxation matters.
CMR INTERNAL PROCEDURES
The CMR Company Sales Programme can be activated both by CMR Regions and the M&A Special Business Group – for control and management purposes the M&A Group will have the ultimate authority to supervise CMR’s operations in this area.
So, all regional CMR company sales activities will be managed by CMR Regional Directors, working through their Divisional Director, and in conjunction with the CMR M&A Director.
We need to be aware that some company sales activities could fall within the provisions of the Markets and Financial Services Act, and so legal procedures must be followed implicitly.
CMR COMPANY SALES FEE STRUCTURE
The principles enshrined in all of CMR’s business concepts and ethics will be applied also to our company sales operations.
This means that as a principle we will not charge a fixed upfront fee for brokering a deal, but we will charge a percentage success fee, usually with a minimum level set. However, it would be permissible to offer the client a reduced percentage success fee in return for a fixed
upfront fee, if the client wishes to adopt that option – but it must be the client’s option, understanding that any upfront payment is not refundable.
As a generality, we will charge the client fees for work done/ deliverables in bringing the project to the point where it can be offered/ presented to buyers or investors, and also for undertaking any additional work not directly related to the actual introduction of buyers/investors.
As a matter of policy, we will not engage in any due diligence work – that must be entrusted by the client and other parties to their own independent professional advisers.
The CMR fee structure is designed to preclude a client from reclaiming money paid to CMR, on the basis we did not achieve a successful outcome, despite having charged upfront for doing so. For this same reason, we must always make sure the client understands that we cannot guarantee that a successful outcome will be achieved.
CMR's STANDARD COMPANY SALE ASSISTANCE AGREEMENT
For the attention of __________________________________________________date
Dear Sirs,
Company Sale Assistance Agreement (CSAA)
We will be pleased to provide assistance in meeting your business objectives and those of any associated companies, through:
Introducing buyers, merger partners, or acquisition prospects or others (all referred to as “Other Parties”), or the formation of a group of companies which will include all or part of your business.
You confirm that you will not, either directly or indirectly, make any arrangement with any “Other Party” introduced by CMR without our written permission. Offers from or to those “Other Parties” during the currency of our agreement will not be unreasonably refused by you. If agreement with those ‘Other Parties’ introduced by CMR has not been completed within twelve months from this date; we shall make available to you a list of our introduced contacts to attach to this Agreement and to whom these introductory terms continue to apply.
Fee Agreement
CMR’s fee structure is in stages to reflect the work undertaken and the successes achieved. Whilst every effort will be made, CMR obviously cannot guarantee that a successful outcome will always be achieved. Out-of-pocket expenses as agreed with the client will be reimbursed promptly.
A retainer fee of GBP7,500 + VAT is payable upon the signing of this agreement.
A briefing preparation fee (as defined below ) at GBPx (rate to be agreed) payable 50% upon agreement, and 50% on completion of stage.
A further fee may be agreed if an exceptional amount of work or research is required for targeting potential buyers, otherwise that activity is included in the success fee.
Normal general advice during discussions with potential buyers is covered by the success fee, but detailed and legal negotiations are not. The client is strongly advised to take independent professional advice for this stage. If CMR's presence (as an observer) is requested, a separate fee may be agreed.
Work covered by Brief Preparation Fee previous review of available data and initial review meetings collection of data on your historic data, business field, competitors, market trends assistance in producing Business Plan & Strategy Plan to optimize 5-year projections suggestions of plan strategy change and/or Company re-organization preparation of a draft Sales Prospectus Executive Summary
Success Fee
1. For purchases, mergers, joint ventures or actual sale arranged:
a fee equal to 5% + VAT of the actual sale value agreed up to GBP500,000, with a minimum of GBP7,500, plus
a fee equal to 4% + VAT of the actual sale value agreed between GBP500,001 and GBP1,000,000, plus
a fee equal to 3% + VAT of the actual sale value agreed between GBP1,000,001 and GBP2,000,000
A fee equal to 2% + VAT above GBP2,000,000
a like fee based on the notional value on the open market as assessed by an independent firm of Chartered Accountants to be nominated by The Institute of Chartered Accountants in England and Wales, if a negotiation other than a straightforward sale is completed. Cost of this assessment is for your account.
Such payment will be made on drawdown or within seven days of receipt by you of these funds, or legal completion of the agreement.
If a group of companies including your business is formed through the actions of CMR, you will not unreasonably refuse to accept the same terms negotiated by CMR with the ‘Other Parties’ involved, at the time of group formation.
If you decide to retain principal assets in a company sale CMR may charge a fee corresponding to the relevant success fee percentage that would have applied if they were not being retained.
If it proves necessary to provide additional consulting services to prepare the business for sale, then CMR reserves the right to charge at a rate of GBP700 per diem, plus out of pocket expenses, for such consulting services, subject to prior approval in writing.
Abort Fee
In the event a merger, joint venture or actual sale with target Companies introduced by CMR is aborted by the client, subsequent to Heads of Agreement being signed, CMR shall be entitled to an abort fee of 50% of the success fee that would otherwise have been payable, and will invoice upon irrevocable negotiation breakdown.
Agreement commencement date ____________, for an initial term of 12 months
This agreement shall be subject to the laws of England.
Agreed by and on behalf of Cavendish Management Resources Limited, whose registered office is 30 Percy Street, London W1T 2DB
_______________________________________________ Date ____________CMR responsible:
Agreed by and on behalf of __________________________________________, whose registered
office is _________________________ _________________________________________________.
_______________________________________________ Date ____________Client Director:
CMR MBI PROGRAMME
SUMMARY
One of the main elements of CMR's business model has been the use of funding as a door-opener to potential business clients - this is supplemented by the CMR MBI Programme.
A major challenge for private businesses is the retirement sale. Children no longer wish to take over family firms and with the changing economy trade sales are no longer so easy or rewarding. In parallel, numbers of skilled executives who have enjoyed early retirement are looking to control their own destiny and run their own business. The challenge is matching candidates with opportunities.
The MBI Programme
The CMR MBI Programme starts with an approach being made by CMR Centre to businesses that have put themselves up for sale – details of suitable companies (above GBP1 million sales) are obtained from company sales brokers/websites to which CMR subscribes. The programme will also accept MBI propositions directly from brokers and companies themselves.
The approach introduces CMR to the company seller together with the concept of a possible sale through the MBI route. Suitable businesses would be introduced to potential MBI buyers comprising CMR MBI investors & executives and others on the MBI register or known to members who could possibly be interested in buying the business.
The reality of life for many company sellers is that they will not readily find suitable buyers, and those that do, because of sellers’ normal exaggerated ideas of the value of their business, will rarely be offered the full price they seek. As a result, many of those sellers will be interested to at least explore an approach that could give them an alternative exit route. One attraction of the MBI route can be that in accepting a deferred element of payment, which helps the purchasers’ funding, the vendor can receive more than through a conventional trade sale
Just as we cannot guarantee that funding will be achieved, we will not be guaranteeing that actual buyers will be forthcoming – only that their business if suitable, will be confidentially introduced to potential MBI buyers.
Associated opportunities
In order to be introduced to our MBI buyers (and obtain maximum value for the business), the company must be ‘investment ready’ – which means the vendor must have presented the opportunity reasonably professionally and there should not be any significant unaddressed problems/ barriers for an incoming buyer. This review and re-presentation may also generate some fee-earning opportunities for us in helping the business to be more saleable, not necessarily just through CMR.
Many of those companies that are up for sale will have financial or trading problems, and some will have been put up for sale by relatives when the owner has fallen ill or died. There could also be opportunities for ‘improving’ the business before introducing to prospective purchasers. Our initial meeting with the ‘client’ could throw-up those opportunities for us - providing interim management or other specialised help to the company. Those companies that are considered to be suitable for the CMR MBI Programme will be introduced to CMR’s MBI investor & executive base. It may also be possible that CMR’s M&A Division can help them find a conventional buyer.
The MBI Register
Part of this MBI programme includes increasing the reservoir of potential MBI purchasers and executives, and for this we have opened a new form of CMR membership - that of CMR MBI Membership. All existing CMR members and investors will be automatically included (with opt-out capability). CMR MBI Membership is free and will also be offered widely to executives generally and others interested in such business propositions – it is hoped that eventually we will have many thousands of MBI members. CMR MBI members will be informed of new business purchase opportunities meeting their preferences and have been 'vetted' through CMR's regional operations. As with normal CMR investors for funding propositions, there will also be a regular email newsletter listing all MBI opportunities
received since the previous newsletter. However to take an opportunity further beyond this stage, free members will have to convert/upgrade to CMR Full Membership.
Included in the CMR Programme is training for existing CMR members, providing guidelines on how to handle the initial meeting with company sellers. There is also a paid-for training course for executives/ business people wishing to learn more about how to arrange and successfully handle a company purchase/MBI.
As part of the programme, CMR provides a syndication facility enabling CMR MBI members to join together in making a purchase if they wish.
Promoting the MBI Programme and fee structure
The CMR Website incorporates the new facility - we have effectively replicated and slightly modified the CMR FundEX & investor website sections to deal separately with this company purchase/MBI programme.
Internally the MBI system will involve passing to CMR Regions those client meeting opportunities that have been generated through CMR Centre. Such generation will only occur as requested by each CMR Region (to ensure that all opportunities are actually followed-up). The normal 10% introductory commission will accrue to CMR Centre to help pay for the system’s costs. Introductions into the system from other sources will also attract that commission payment.
Normal CMR fee sharing arrangements for Company Purchase/MBI projects apply with the CMR Region/members who are handling the project earning 70% of the fees received, with Divisional/ Regional management taking 5%. CMR Centre will receive its usual 15% and the introducers 10% fee will be handled as noted above. Fees charged for successful company purchase/MBI projects by CMR are the same as for funding:
a) 5% on the first GBP500,000 initial purchase price in cash/ consideration, reducing thereafter to 4% on the next GBP500,000, to 3% on the next GBP1,000,000, thereafter down to 2%, plus
b) Where the initial purchase payment does not represent the full eventual consideration, then CMR shall be entitled to 5% (as reduced in a. above) of the issued share capital reduced by the proportion the amount paid initially has to the total consideration. There will be an addendum to the shareholders agreement to protect CMR’s interests. Equity will be subject to the same fee splits as above.
Fees charged to the client for other work undertaken will be subject to standard CMR fee sharing arrangements.
We noticed that your business may be available for purchase - we might have an interest.
CMR is an organisation comprising investors and senior executives with a particular interest in investing in or purchasing suitable companies. You can review CMR's overall operations at www.cmrworld.com
Because of our many investors & executives, the interest from CMR could be in the form of either a complete upfront purchase for cash or through a management buy-in arrangement.
We would be interested in discussing this further with you - please let me know if you are too - we will arrange for one of our executives to call for a preliminary and confidential discussion with you. There will be of course no obligation to proceed further.
Kind regards,Mike Downey FCCAManaging Director
DRAFT LETTER TO COMPANY SALES BROKERS (can be modified)
We are potentially interested in this company sale proposition. If acceptable to you, one of our regional executives will shortly make contact with you to discuss in more detail. They will sign your confidentiality agreement directly with you. Our interest in this proposition is in respect of the CMR MBI Programme – details and an explanation of this are shown below.
Please advise by return email that this business is still available for sale.
Regards,MBI Company Purchase DivisionCavendish Management ResourcesEmail: [email protected]
CMR MBI PROGRAMMEManagement buy-in
Why we are interested in this proposition
CMR was established in 1984 and is now the leading business funding and management support organisation for SMEs in the UK and Ireland. See www.cmrworld.com for details. Over the years we have arranged the investment of many millions of pounds into businesses.
CMR has a substantial number of investors and executives who are interested in buying or investing into businesses. That interest can be for an outright purchase or a MBI/BIMBO purchase including a negotiated element of earn-out, which can often result in a higher eventual price for the seller.
CMR is now greatly expanding its MBI operations – MBI’s can be an excellent career move for senior director-level executives who desire to run their own business, and have the funds to back that
ambition. As part of CMR's MBI Programme we provide sources of finance plus syndication facilities and support for our executive/ investor members. The Programme notifies our executives/ investors when potentially suitable MBI/BIMBO opportunities are received following a preliminary pre-vetting of propositions presented.
The CMR MBI process involves one of our executives (we have 450 senior director-level executives in all parts of the UK and Ireland) visiting the company to discuss going the MBI-sale route. If it is appropriate and the owner agrees, we will prepare a brief summary for introduction of the proposition to CMR's MBI investors/executives - this is done in confidence and at this stage will not identify the selling company. By investigating this MBI route the company is not precluded from seeking buyers in other directions – effectively the range of options available to the seller is expanded, and the chances of securing a satisfactory outcome is improved.
If the summarised proposition generates interest, the CMR executives/ investors expressing that interest will be put directly in touch with the company (through yourselves if appropriate). At this time we would recommend that full confidentiality agreements should be personally signed by those involved. All parties are responsible for taking their own independent professional advice and due diligence. CMR takes no responsibility in that respect.
The CMR MBI Programme is an alternative channel for sellers, and will be especially useful for retirement sales. There are very many senior executives for whom the MBI buying of a company makes excellent sense for developing their future career and financial independence.
If there are any aspects of the programme you would like to discuss, please don't hesitate to make contact with me. One of our executives will be in touch shortly to discuss this particular proposition with you.
Kind regards,Mike Downey FCCAManaging DirectorCMR MBI OPERATING PROCEDURES
1) CMR Centre set-up meeting with client as above. This passed to the relevant CMR Region or CMR M&A Group as appropriate.
2) Visit from CMR Regional Executive trained in the CMR MBI system if client is self-selling. If client is listed through a Company Sales Broker, the meeting will be conducted only by a CMR member authorised by CMR’s M&A Division who will make arrangements through the relevant broker (CMR Region will be kept advised).
3) CMR Exec explains outline of programme to client:
a) Initial (free) assessment - i.e. this visitb) Explain how the CMR MBI system works - also how CMR’s M&A Division can possibly help.b) The need for a quality business summary/ prospectus - if one does not exist then offer to arrange (charged for). This can also be used by the client for discussions with other prospective purchasers.
c) Review of all issues likely to represent a barrier to sale or which could turn-off prospective purchasers. Suggestions for rectification.d) Discuss the advantages of having CMR’s M&A Division handle the company sale. Refer to CMR M&A Division if appropriate.e) If not going CMR M&A route, assess suitability for CMR MBI route.
4) CMR Exec contacts CMR M&A Division or CMR Regional Director if client a prospect for CMR Company Sale Programme.
5) CMR Exec lists client’s business on CMR MBI database, if not being passed to CMR M&A Division, and if client has signed our standard terms & conditions. All CMR MBI members will then be informed of the new MBI opportunity, and those interested will make contact with the seller through the handling CMR member.
6) CMR Exec assesses possible further business opportunities with client. As stated above, the visit should be regarded as a door-opener to discuss other routes forward for the company and the (probably) many other ways CMR can help the client.
CMR Terms of Trade - MBI Projects:
i) To companies directly handled by CMR (i.e. not through a broker)
a) 5% on the first GBP500,000 initial purchase price in cash/ consideration, reducing thereafter to 4% on the next GBP500,000, to 3% on the next GBP1,000,000, thereafter down to 2%, plus
b) Where the initial purchase payment does not represent the full eventual consideration, then CMR shall be entitled to 5% (as reduced in a. above) of the issued share capital reduced by the proportion the amount paid initially has to the total consideration. There will be an addendum to the shareholders agreement to protect CMR’s interests.
ii) To companies introduced through a brokera) Nil% unless negotiated with broker.
iii) To Company buyers/MBI’ersa) A fee of 0.5% of the total purchase price is payable to CMR
CMR fee/equity standard sharing - 10% to introducer, 75% to those directly involved in preparing company for presentation to MBIs (not the MBI team), 7.5% to Div/Reg Directors, 7.5% to CMR.
CMR MBI EXECUTIVE/INVESTOR DATABASE
1) Open to all executives & investors without charge.
2) Must be Full or RMC Associate members of CMR to take any opportunity forward.3) All 'vetted' opportunities are sent to MBI database in same way as for regular funding projects:
a) Email notified based on preferences matchedb) By regular email newsletterc) On website to be searched (by public) – can include video (if confidentiality allows).
4) MBI members may bid for business as either individuals or as teams, possibly in competition with other CMR MBI individuals/teams. (NB: CMR’s client is always the selling company, not the MBI team).5) All MBI members will have signed CDA and agreed to CMR's terms.6) Successful MBI team will ensure that CMR has 5% share option with shareholders agreement. They will also ensure that the seller pays CMR its success fees.7) CMR provides optional (chargeable) training courses for MBI members to help the process of successfully handling the MBI and subsequent business issues.
ARRANGEMENTS FOR MBI DATABASE MEMBERS
CMR provides a facility for executives and investors who are interested in possibly being involved in a MBI purchase and running a business.
MBI members register (free) on the CMR MBI Database, and are email notified of all 'vetted' business purchase opportunities that meet their stated preferences. They will also receive regular email newsletters listing all new 'vetted' opportunities received by CMR. The CMR website can also be reviewed at anytime, where all current MBI opportunities are listed – company identification is not included. This service is free of charge. Some company sale propositions will be considered (by the client) to be so sensitive/ confidential that only MBI members who are already also CMR full members will be notified (through the password-protected CMR Intranet).
If an opportunity is of interest the CMR MBI member can register that interest online with the CMR executive who is managing that project (this goes via cmradmin to check membership status – only enquiries from CMR full members will be passed-on). Further information will be passed-on as appropriate, including details of other CMR MBI members who are interested. The regional 'vetting' is not a due diligence process, but merely intended to sort the business wheat from the chaff. Bidding members are fully responsible for taking due diligence and professional advice as appropriate and as they deem necessary.
CMR MBI members are now in a free enterprise zone - it is their decision whether to make a bid for the business, and whether that is done individually or as part of a syndicate with other CMR members. The situation could be competitive either with other CMR individuals or syndicates, or of course with external potential buyers.
Part of the approach made by CMR to the business seller, is that the CMR-introduced deal could be on a part cash/ part earn-out basis, although of course this is subject to negotiation between the parties.
CMR will give whatever support it can, but obviously the ultimate and legal responsibility for the negotiations and final agreement rests entirely with the buyer and seller. CMR provides a training and mentoring programme to help its members optimise their chances for achieving a successful outcome.
Whilst the initial part of the CMR MBI Programme is free of charge, there is a success fee when a deal is done. This is in two parts:
a) 5% on the first GBP500,000 initial purchase price in cash/ consideration, reducing thereafter to 4% on the next GBP500,000, to 3% on the next GBP1,000,000, thereafter down to 2%, plus b) Where the initial purchase payment does not represent the full eventual consideration, then CMR shall be entitled to 5% (as reduced in a. above) of the issued share capital reduced by the proportion the amount paid initially has to the total consideration. There will be an addendum to the shareholders agreement to protect CMR’s interests.
CMR MBI MEMBERSHIP – BRIEFING FOR EXTERNAL CANDIDATES
CMR MBI Membership is open to all senior executives and others who may have an interest in owning and running an existing, established business purchased through the MBI (Management Buy In) route. CMR MBI membership is free, and provides the following facilities:
1) Notification by email of all MBI opportunities that have been ‘vetted’ by CMR’s executives. CMR MBI members can also search the CMR MBI website for all current MBI opportunities. NB: ‘Vetting’ by CMR executives merely means that the business has been looked at and considered possibly suitable for a MBI purchase – in no way is it an endorsement of that business, nor has any due diligence been undertaken – that is the sole responsibility of those making an offer for the business.
2) Syndication Service: CMR MBI members can indicate to CMR that they are interested in a particular MBI opportunity and are interested in perhaps linking with other CMR MBI members. CMR will pass that onto those other CMR MBI members who have expressed the same interest.
3) Financing Options: CMR will be able to suggest sources of finance should the MBI purchasers or business consider this desirable. However, CMR cannot guarantee that sources of finance will be forthcoming, and it is the ultimate responsibility of those concerned to make their own arrangements and take their own independent professional advice.
4) Ongoing Business Support: CMR’s core business is the provision of senior management support and specialist business resources – see CMR Website at www.cmrworld.com for full details. Those resources are fully available to businesses purchased through the CMR MBI Programme.
5) Training Courses: There are many potential pitfalls and intricacies involved with a MBI purchase, and those considering the MBI route for their future business and career development would be well-advised to attend the special CMR MBI Training Course. This intensive one-day course costs GBP350 + VAT, inclusive of meals and course materials.
Whilst CMR MBI membership is free, and members will be freely notified of all ‘vetted’ opportunities received by CMR, Full CMR Executive Membership is required to take any opportunity forward beyond the initial ‘I’m interested’ stage. Full CMR Membership gives complete access to all of CMR’s resources and the entire CMR skills network – an invaluable facility for successfully running a MBI purchased company. Free CMR MBI members can attend the MBI Training Course without upgrading to Full CMR Membership.
To join as a free CMR MBI Member go to the CMR Website at www.cmrworld.com and click Join us – MBI. If you prefer to join straightaway as a CMR Full Member, please click the ‘Join us – Executives’ button – all CMR Full Members are automatically registered as a MBI Member.
FURTHER NOTES FOR CMR EXECUTIVES HANDLING INITIAL MEETING:
Standard approaches are made by CMR to companies who have placed themselves up for sale. No doubt most will be hoping a cash buyer comes ready to pay the price they ask for. The reality is usually going to be different - they either won't attract a suitable buyer, or if they do, the price offered is likely to be unacceptably below their asking price. As a result there will be many such companies who will be interested in at least discussing an alternative approach with CMR.
1) It is important to recognise that as with funding projects, we will not be able to guarantee a successful outcome - we cannot guarantee anything, other than we will introduce their prospective business sale (if it is suitable) to our investors/MBI group, and if they meet our presentational standards. It will be entirely for the investors/MBI Group to decide whether to take things further, and of course, whether to make a purchase/MBI offer.
2) To extract maximum value, we should view the meetings with company sellers as an opportunity to also explore other ways we might be able to help them. The reality of life is that many companies that have put themselves up for sale will have problems, some may be being put up for sale by the family of the deceased owner, and some will require help in continuing to run the business when they don't find a suitable buyer, etc., etc.
There will be many opportunities for CMR to provide its expertise and resources to help these companies.
3) Suggested structure for the initial meeting - this is a guide only - you should handle the meeting in the way you feel most comfortable.
a) Probably best to start by giving a quick overview of CMR and its operations. Main points to cover are:
i) Established 1984ii) Operates throughout UK and Ireland with circa 450 senior executives and many investors. Refer to the website for more details on our operations.iii) All CMR executives are director level people and many are interested, in conjunction with our investors, in becoming involved with buying into businesses that they can then run successfully into the future.
b) Explain that the way CMR operates in this respect is to review the business and make recommendations on any changes we think appropriate to the way the business is presenting itself to potential buyers - we would not want to present the business to our own investor/MBI's if there were important deficiencies. Such a review by CMR is free-of-charge/ subject to standard fee of say GBP500 (basis to be decided by CMR executive handling – but a fee-charge is recommended if more time than just initial meeting needed for review). In all cases if we are charging fees, the seller is our client (not the purchaser) and our objective is to help the company in its approach to all potential buyers, not just CMR's investors/MBIs.
Of course, if those recommendations we make involve further work being done (for example, rewriting the sale prospectus), and the client is agreeable, there will be a fee charged by CMR as agreed.
c) Explain the ‘conventional’ company sale programme provided by CMR’s M&A Division and discuss whether the client would like to go that route. If they do, the M&A Division should be contacted to progress with the client.
Advantages for client in having CMR M&A Division handle the company sale:
i) CMR has probably the largest network of contacts for finding suitable buyersii) CMR has many hundreds of senior executives and investors with experience in all industry areasiii) CMR has great experience in advising companies on how to approach the selling process and how to value the business. iv) CMR can help to present the business in the best way for attracting buyers.v) CMR can access the widest range of selling options – from outright conventional sale, management buy-in and buy-out, merger, to CMR’s own Progressive Company Sale Programme.
d) If a MBI sale route is considered suitable it will then be introduced to CMR's investors and MBIs through the CMR website system. Interest from CMR MBI members will be directed to the company via the handling CMR member for further discussion as appropriate. CMR cannot guarantee that any investor/MBI interest will be generated, nor of course that they will want to make an offer for the company. The company is responsible for taking its own professional advice before finalising any arrangement.
e) Explain that many of CMR's executives and investors are interested in becoming directly involved with running the business, and that any offer from them could either be for a complete upfront purchase, or in the form of a percentage of the agreed price being paid upfront, with the balance being paid from profits made over subsequent years. The details of this are for discussion between the parties involved, but often this arrangement will result in the owner being paid a better price than for a completely outright sale, if that were possible. Obviously the owner/seller has complete discretion over whether to accept or reject any offer made. In all cases the discussions are strictly confidential. We should recommend the seller has a separate confidentiality agreement with all parties they negotiate with, and not to just rely on the overall confidentiality agreement all MBI members have made with CMR.
d) If the meeting is progressing well, suggest to the owner/seller that you have a quick review now with him/her on the business, particularly concentrating on any problems there might be
for a potential buyer. This will help to start identifying areas where CMR could help. Particular opportunities to look for are:
1) Company has financial/ business difficulties 2) Company has management difficulties (MD may have died, etc.)3) Company can't cope with problems4) Company is really too small to compete profitably
These are only a few pointers - there will be a myriad of other aspects that could provide CMR with opportunities to help.
e) Wherever needed - call in experts from CMR to help - don't try to do it all yourself. CMR has experts in every business and industry area, and of course from those who specialise in company sales/ M&A work. If in doubt call them.
CMR CATALYST GROUP FORMATION
Many small companies in the UK struggle along in a continually marginal state - sometimes making a small profit, sometimes not. They are companies that generally lack any real form of infrastructure and also lack a sufficiently high sales turnover basis, and therefore gross profit generation to pay the fixed costs that have to be incurred if they are to be in business. Companies such as this are normally unattractive to investors and therefore usually unfundable, and are generally doomed to be externally in this state, until they perhaps go bust - as many eventually will. There are a large number of companies in this situation in the UK.
The only way that these companies can hope to break-out from their circumstances, is for there to be a sustained increase in sales turnover, which will move them above the level at which they are
continually vulnerable to the normal fluctuations of business. Of course, they will also have to develop the management infrastructure that will enable them to cope with the higher activity levels.
In reality, for most of these companies the probability of achieving this sustained sales turnover growth organically is remote, and most will be destined to remain as they are, as marginal companies.
CMR's Catalyst Group Programme gives the opportunities for companies such as this to grow as part of a cohesive group, where the resources, infrastructure and market strengths needed are provided. Formation of the group in itself provides the critical mass that was previously lacking in the individual companies now comprising the group. The composition of the group is important, as it must result in a market strength that is greater than merely the sum of the component companies. This strength is achieved by bringing together companies that address the same market niche, but from different product directions. We call this our Catalyst Group Programme because CMR acts as the catalyst to make it happen - in most cases it would be impossible for the individual companies to do it by themselves.
1st STAGE
The first stage of CMR's Catalyst Programme is to identify the market niche area to be 'attacked'. There are two ways of doing this:
a) By pre-planning
b) Opportunistically, by using a particular company exhibiting the 'marginal' symptoms needed, as the base around which to construct a catalyst group.
Of the two options, we have found the second to be preferable, particularly as it provides us with a market expert from the outset, in the shape of the managing director of the first company.
It is obviously important to decide whether the particular market area being looked at is suitable for a catalyst group formation. The parameters being looked for in making this judgement are:
1) It should be an identifiable market sector, which has several different types of companies supplying it. For example, a collection of general engineering companies would not qualify. A collection of engineering companies supplying a particular market sector, could qualify.
2) Preferably, the individual small companies that may be candidates for our catalyst group will often only be acting as a subcontractor, or only providing part of the eventual customer's needs. By joining the companies together, we should be creating a group that is capable of providing much of the customer's need in that market sector.
3) It is helpful if the market sector has many 'fragmented' suppliers, for not only does this provide a useful reservoir of potentially suitable companies for the group, but it will also allow greater differentiation of service level by our subsequently formed group.
Having decided that this particular market sector is suitable, the next task is to determine the type of company that would add strength to the catalyst group. As a generality, we will be looking for companies that provide complementary products/services without too much of an overlap with other companies in the group. It may also be that we decide to bring-in and amalgamate direct competitor companies, if this is appropriate and adds strength to the group as a whole.
Once we have determined the shape of the group we wish to form, the next stage is to open the discussions with the companies that fit the profile we have established, and for whom this new group could be an attractive proposition. There will be many companies in the various market sub-niches to be talked to, and this of course, can give CMR members many further opportunities to form business relationships.
Generally, most companies approached in this way will be very interested in discussing the proposal - most find it an intriguing way forward, and the thought of being part of a group is for many a comforting alternative to being by oneself and vulnerable. Because of the way in which CMR organises the group (see below), this is not like being taken-over, but more of a co-operative group venture, although the group itself will be run and managed as a proper business unit. The managing director/ owner of each participating company will have a seat on the group's board.
Having had discussions with all of the companies identified as being possible candidates, the decision will be taken (by CMR) on which of those companies will be invited to join the group. During this next stage of the Group's development, each of the participating companies will not change the way they operate and will continue to deal with their clients as they always have. The Group Board will merely have a co-ordinating role during this stage. CMR will have provided the Group Chairman plus other management support as appropriate, and the moderate cost of this will be met by a small subscription from the participating companies. The role of Chairman is key to the catalyst group's success - it is vital that he can instil the required levels of confidence and optimism with all of the participants.
During this stage the Group will start to build its further development plans, the participating companies will get used to working with each other, and if the Group is to achieve eventual success, each participating company will begin to feel more certain that this is the way to go, and that their future as part of the group will be 'rosy'! If those feelings are not engendered, the group will probably fail to achieve the objectives.
The formation of the Group will in itself usually result in an increase in profitability for its members, from the following effects:
1) Sales turnover invariably rises through the cross-introduction of 'pet customers' from one member company to another.
2) Sales turnover again rises because of internal sourcing rather than using outside companies.
3) Costs can reduce through larger buying discounts, etc., and through combining some administration functions.
3rd STAGE
At some stage during the first twelve months (it can happen as soon as all parties feel happy to proceed), a decision will be needed:
a) Firstly, by the Group, to decide whether or not it wants to keep all the participants in the group.
b) Secondly, by the participating companies, on whether or not they want to stay in the group as it moves to the next (and crucial) stage.
This is an important moment, because this next stage firmly commits the participating companies to their future in the group. Not only will there be an exchange of shares, but the group will in future be run as a cohesive group with all major decisions being taken by the Group Board. In this stage the companies become legal subsidiaries of the group.
Those companies continuing with the group will now exchange 51% of their share capital for shares in the group. The number of shares they receive will be determined by an independent firm of Chartered Accountants on an equal value basis, with all the other companies involved. CMR has a non-dilutable 25% shareholding in the Group.
The Group will now be run on a proper business basis, albeit with the need to consider the minority interests within each subsidiary company. The Group should now be able to start really building its market position, and to gain from the combined strengths the Group now has. At this point, it also becomes a group that could be attractive to external investors, and so able to obtain the extra capital needed to more fully realise the potential.
4th STAGE
At any time, but certainly before a public flotation or sale of the Group, the remaining 49% of shares in each subsidiary will be exchanged for shares in the Group (as determined by a firm of Chartered Accountants), and the Group then becomes wholly owned. This also allows all shareholders to benefit from the capitalisation gains that are realised at such times.
HANDLING A CMR CATALYST PROJECT
The most important element in any CMR Catalyst project will be the CMR members involved in bringing the group together, and in particular, the CMR member who will be the Chairman and/or Chief Executive of the group. It is he who must be able to engender the enthusiasm needed to start the process, and he must be able to command the respect and trust that will be needed by the subsidiary company owners if they are to feel comfortable in putting their companies into the group. It is also he who must drive the process forward - CMR acts as the proactive catalyst - without CMR's active participation, the group will not succeed.
Whilst this is the most important single aspect to the eventual success of the group, there are many others that will also need to be incorporated. The following sections outline the various stages and actions that will be necessary:
The first of these must be to create the interest and enthusiasm with those companies deemed by CMR to probably be appropriate candidates for inclusion, whilst at the same time, assessing whether or not the companies are right for the group. The essential characteristics needed for a company to be included are:
i) It must fit the product/market niche sector adopted for the group, preferably without too much of an overlap with other companies in the group.
ii) It should be a relatively 'marginal' company. The attractions for joining a catalyst group are much greater if the company has been struggling. Companies that are doing well, will generally not wish to give-up their independence in this way, or will try to dominate the group.
iii) The owners and senior management must be psychologically prepared to co-operate with others, and ultimately able to accept that their future will be determined by the Group's Board, not just by themselves.
iv) There should be no pre-history of personal conflicts with any of the other parties being brought into the group. It is important that all parties will 'get on' reasonably well.
The enthusiasm will be created primarily by looking at the advantages the group will bestow on those taking part. Whilst there will be short-term benefits (in terms of increased turnover and reduced costs) the main long-term advantages will be the main reasons for going ahead. These advantages can be summarised as:
1) Enabling the Group to develop and service the market sector in a more comprehensive way than the companies ever could if acting by themselves. As a result to build the overall business and turnover base on more solid foundations.
2) Giving the Group an infrastructure base that the individual companies do not possess, enabling each managing director to concentrate more on specifically building the business whilst the growth is controlled and managed properly. The Group is also far more likely to be attractive to investors than the individual companies were.
3) Membership of a larger group gives comfort, particularly in times of recession, and each member company will be far less vulnerable than they are as stand-alone businesses.
4) From a personal point of view, membership of the Group gives each of the owners greater security. Instead of having all their eggs in one basket, they will have shares also in the Group.
5) Formation of the Group effectively removes the 'glass ceiling' above most small companies, whereby they usually lack the resources and infrastructure to enable them to grow above a certain size. Most small companies are stuck in this sort of time warp, destined never to breakout. It is quite possible that the value of the 49% of shares held in the second stage could exceed the value of the 100% they started with, plus of course, they also have shares in the group.
It is important that all the parties have a consensus view about what the group's objectives are and how these will be achieved. There should be no serious disagreements about these. It will be largely up to the Chairman/CEO from CMR to make sure that all parties are rowing together and in the same direction!
During the first stage, the group board will be purely acting in an advisory capacity, although moves can be made that will start to pull the group into being a cohesive business. However, real progress will only be possible as the group passes into the 2nd stage, with the companies becoming subsidiaries. The rate of progress will be determined by the companies themselves as driven forward by the Chairman/CEO. During the first stage all parties will be able to assess the group and each other, and come to a decision over that period on whether or not to proceed to the next stage. Hopefully, the way the group has been operating will persuade all to remain.
As always with small private companies or groups, it is not usually possible to pre-determine the exit route, and in the case of catalyst groups the decision on this will be taken by the members of the group, as the circumstances arise. It is usual for CMR to insist on a shareholder's agreement that, amongst other aspects, will control director's salary and expense levels, and have a dividend policy that means that all distributable profits after making due allowance for reasonable working capital requirements, will be paid to shareholders.
CMR MERGERS & ACQUISITIONS
In the SME sector addressed by CMR, M&A activity is likely to arise from the following sources:
a) From CMR itself when we have a client for whom conventional funding is not appropriate or possible. In such circumstances we should look to see if 'merging' the company with another is appropriate and in the best interests of the client. This is likely to arise when the
client company is of sub-critical size or in other ways is too marginal. Many small companies have an insufficient sales turnover to generate the gross profit needed to cover the fixed costs of being in business, and make a net profit. For such companies the solution to their problems invariably rests on increasing their turnover levels - but this easier said than done - achieving sales growth organically is often not possible. The answer for such companies will often be to put them 'together' with another company, either a larger company or perhaps another small company where together they achieve the critical mass needed. The 'putting together' could be through a merger, company sale, acquisition, or through a CMR Catalyst Group formation.
b) From CMR where we have a client who has solvency problems, probably caused through being 'too marginal', and where we will manage the insolvency process (through receivership or liquidation) and arrange for the 'phoenix business' to be merged or acquired, with/by a suitable third party business.
c) From CMR's clients who may ask us to find the partner(s) necessary for a merger , acquisition or company sale. Into this category also falls those overseas companies that ask CMR to find them the right partner or distributor in the UK.
d) From CMR's investors, some of who will spasmodically ask CMR to find a particular type of company for them to invest into, or purchase.
Whatever the source, the method of processing the project will be similar:
1) Firstly to agree the objectives and modus operandi with the client. In many cases CMR will help the client to resolve the best forward strategy to adopt. This stage will also help to identify the type of 'partner' company sought, and produce a target list of companies to approach.
2) Approaches will be made by CMR to the managing directors of the targeted companies, often on a covert basis to protect the identity of our client. The discussions will be developed as appears natural, with confidentiality agreements signed where appropriate.
3) CMR will help and advise its client, and will be part of the negotiations where appropriate. However, as with funding operations, the client must take his own professional advice and both parties undertake their own due diligence. CMR's role is essentially that of introducer and facilitator - not accountant or lawyer.
4) CMR will agree its fee/remuneration base with the client prior to starting work. A standard CMR agreement for this is shown in Appendix 4 - but the actual terms will be negotiated locally according to circumstances.
The same broad processes apply also to company sale activity, except that the need for covertness and confidentiality is usually absolute - there being no better way of destabilising a company than telling the world that it is up for sale! Getting a suitable confidentiality/ non-circumvention agreement in place is vital if the business to be merged or sold is insolvent, and the process will involve liquidating the company. We would not want any prospective purchaser to come to a private deal without us!
The Progressive Company Sale Programme (PCSP) is a new, innovative product for CMR, with great market potential. There are many aspects to PCSP and we need to build practical experience of the
Programme over time. Therefore this Operating Manual must be regarded as a preliminary edition, to be amended and added to as experience is built.
There will probably not be a standard set of terms we can apply to all PCSP business handled, as each client will be different, and will require specific arrangements. The following Manual therefore deals with PCSP on a general basis, and the terms will need to be tailored to the circumstances of each client.
2) INTRODUCTION
The concept of PCSP is new to the UK (and elsewhere as far as we know!), and was originally conceived to provide a solution to a potential client of CMR, who wished to retire but was experiencing difficulties in finding a buyer. PCSP continues the main strategic thrust of CMR - namely the input of professional management skills and other resources into the SME company sector.
PCSP is primarily targeted at profitable companies. A company that has financial or trading difficulties will probably require help from CMR under one of our other Programmes, before it can be considered for PCSP. This is not an absolute statement, and each proposition will be reviewed individually.
The particular problems, faced by the owners of very many small to medium-sized businesses (SME's) who wish to retire, are first of all the problem of finding a buyer, closely followed by the problem of realising a reasonable price for the business. The root of these problems originate in the recession and the generally non-buoyant business environment, both of which have depressed the market for business sales. Additionally, the recession has had the effect of significantly reducing balance sheet values and profitability, which are the prime determinants of business worth - resulting in a much lower 'disposal' value being achieved by owners selling for cash.
The end-result is that many SME owners are effectively 'trapped' in their businesses - unable to sell for a reasonable price, and therefore unable to retire as they would wish. There are believed to be many thousands of SME owners in this position, and for whom the PCSP could provide a very beneficial exit route. The solution provided by CMR effectively allows the owner to gradually phase himself out from the need to constantly manage his business himself, gradually relying more and more on the professional managers input by CMR, until he eventually is happy that he has reached the point where the business no longer requires his personal presence. As part of the arrangements agreed with CMR, the owner will eventually receive a much higher price for his business than if he tried (and succeeded) in selling the business outright in today's market.
The arrangements made between the SME owner and CMR allow considerable flexibility for the owner, with a minimisation of risk for him. At the same time, there is a considerable incentive for the CMR executives involved to achieve a rapid pay-off for the owner and to build the business. One would hope that professional managers from CMR will be able to considerably enhance performance in the business, and produce a higher rate of profitable growth.
Minimisation of risk for the SME owner is a vital component in the 'selling proposition'. The owner is selling a business that may well have taken a large part of his life to build, and he will not want to put this at risk in any way. It is therefore extremely important that the owner feels completely comfortable with the CMR executives involved, and in the way they are working. For this reason, the arrangements give complete control to the owner, with the ability for him to terminate the
arrangements quickly and without excessive cost, if he is unhappy with the way things are working out. This will of course, put a considerable onus on the CMR executives involved to 'get on' with the owner, even though his management style may not be to our liking.
Of course, both the SME owner and CMR need to be protected against the unreasonable happening, and there are detailed provisions (referred to below) that will provide all parties with that protection.
There are two types of PCSP:
a) Non-funded PCSP - i.e. where no funds are required nor input. The entire operation can be financed internally from profit generation.
b) Funded PCSP - i.e. where a CMR investor inputs funds, either to partially buy-out the SME owner and/or to fund the ongoing financial requirements of the business.
The arrangements with the SME owner will be different between the two schemes, details of which are shown below.
When the sale is complete and the business is fully owned, there will be a number of alternative options available to CMR and the CMR members involved. These options range from continuing the business 'as is', merging it with others, acquiring further businesses, selling the business, or floating on a stock market. Appropriate decisions will be taken by those involved at the time.
3) CMR's OBJECTIVES
The objectives of CMR in creating and promoting PCSP are:
a) To provide SME owners with a safe and professional way to retire or exit from a business.
b) To develop PCSP into a major product offering from CMR, and to have PCSP regarded as an effective and professional alternative to outright sale for a business.
c) As a result of successfully marketing and managing PCSP to SME's and their professional advisors, to provide CMR and CMR executive members with opportunities for major revenue earnings and equity participation.
4) THE MARKET FOR PCSP
The primary market for PCSP is the SME owner wishing to retire. There are however, other market sectors for which PCSP (or a derivative) could be appropriate. The list of applicable market sectors is:
a) Retiring SME owners.
b) Situations where the SME owner has died, or become incapacitated, leaving the spouse/executor/trustee with the problem of managing the business.
c) Group companies/venture capital companies having subsidiaries/investees they wish to dispose of, but are unable to find an appropriate buyer, and do not want the continuing management burden.
d) Receivers with companies they are unable to sell outright, and would like to off-load the management problem.
5) MARKETING APPROACHES
As with all marketing within CMR, the approach should be professional and low-key, 'non-selling'. Certainly to start with, we will want to restrict the number of PCSP projects taken-on, until we have our procedures running smoothly.
The availability of PCSP from CMR can be included in presentations to business groups and professional firms, bank managers, etc. Eventually PR exposure will be most useful in generating PCSP business, but it is premature at this time to develop PR activity in this area. Possibly a fertile source of PCSP clients could be the 'Businesses for Sale' advertisements in national newspapers, notably the Financial Times. At a later stage, CMR will develop institutional contacts for PCSP with venture capital companies, and possibly, company sales agencies.
6) CLIENT CONSIDERATIONS & SENSITIVITIES
As mentioned above, PCSP addresses a market sector full of tremendous sensitivities and nervousness amongst prospective clients. In many cases we will be dealing with SME owners for whom their business is their life, and they will be extremely worried and cautious about passing their business across to strangers.
In formulating PCSP we have tried to fully recognise these concerns, and arrange our procedures to allow the client to maintain full control over his business until he has built enough trust and confidence in the CMR executive team involved in his company.
We must remember that the company is still controlled by the owner until 75% of the agreed price has been paid to him, and until 100% has been paid, he has a blocking 50% representation on the Board. He can also terminate the arrangements during the first two years if he becomes unhappy with the way his company is being managed. Building the right relationship with the client is going to be one of the most important tasks to be undertaken by the CMR team involved.
7) THE PROCESS
The process for undertaking a PCSP will generally include the following elements, once the initial introduction has been made:
a) Discussion of concepts involved: It is very important that the client fully understands, agrees with, and feels comfortable with the concepts and processes involved. At all costs we want to avoid the situation arising where the client has misunderstood what we will be doing, becomes unhappy with the process, and exercises his right to terminate the agreement. We must be careful not to over-sell the proposition to him.
At this initial stage, an agreement in outline, of the strategy to be followed by the company and the CMR team, should be obtained. The key CMR executives involved should also be introduced at this time to the client - personal chemistry is going to be very important.
b) Agreement of price: This will obviously be a matter for personal negotiation between the client and CMR, which should include the involvement, where practical, of the key CMR members who will
be mainly involved in the project (and stand to gain or lose on the results). The general principles we should follow in setting the price are:
i) It needs to be perceived to be higher than the price for an outright sale.
ii) It will probably reflect a price/earnings ratio of about 4 to 5 (but variable according to industry) based on the net profits before tax we would expect the company to make over the next few years (i.e. not based on the very depressed levels of past years, but also not being over-optimistic about future profit trends). In theory, the price should not reflect any upside benefits expected from CMR's involvement.
iii) If CMR investor input is sought, the price should be lower in proportion.
c) The legal agreement between the client and CMR should be ideally finalised and signed at this stage. See below for more details of this. The rates of pay for the CMR members involved and for the client when working in his company, will need to be established at this time. The draft legal agreement shown in Appendix A below, is deliberately worded in plain English to avoid 'intimidating' the client, but it will need to be put into proper legalese before finalisation.
d) The company's full business plan should be produced/reviewed and agreed by all parties. This plan will include the costs of CMR executives involved on a full or part-time basis, and the costs of regular review by CMR central and/or regional management. Costs of producing/reviewing this plan will be charged to the client company at the 50% level, as part of the arrangements. In the event that management review costs exceed that agreed with the client, any excess that cannot be charged to the client company will be shared by all CMR members involved, through an appropriate reduction in the 70% of fees normally passed to those members.
e) The Plan will be implemented, with regular reviews in conjunction with the client. Invoicing for fees will be undertaken by CMR Centre, with the usual arrangement for CMR executives to be paid as soon as payment is received.
f) At the end of each year, audited accounts will be prepared, and a decision taken jointly by the client and CMR over the amount of profit available for transfer, after considering and retaining normal working capital requirements of the business. If the parties fail to agree a figure, the Company's auditor's advice will be taken and adopted.
g) The agreed amount will be charged as a management fee by Newco (a CMR company) into the client company. The resulting net profit after tax in Newco will be used to purchase shares in the client company at the agreed price. This process will continue each year, until the full agreed purchase price has been paid. CMR executives shall be allocated shares in Newco each year, in accordance with the formula specified in 10.5 below.
h) Following the payment of the full agreed price, the client will be paid 10% of the profits made by the client company for the following five years, subject to 9a below.
To make PCSP as risk free for the client as possible, there are a number of protection clauses included in the agreement:
a) The client has a veto over the selection of CMR members working in his company. This veto applies for the first six months of a CMR member's involvement.
b) Without needing to give any reason, the client may terminate the arrangements at any time during the first twelve months. In these circumstances the client company will only be liable to pay CMR for fees incurred and outstanding at the 50% rate.
c) During the second year the client may terminate the arrangements. In these circumstances, the client company shall be liable to pay CMR for fees incurred at the full rate during that second year, less payments already made in that year, plus any other outstanding amounts. CMR shall be entitled to, and retain any equity earned in the first year. CMR shall be able to insist that the client purchases their shares at the price paid by CMR.
9) SAFEGUARDS FOR CMR
CMR has deliberately put itself in a weak position relative to the client during the first two years. However, there is a need for CMR to be protected against unreasonable behaviour. The agreement gives CMR the following protection:
a) The ability to purchase the client company outright at any time, by paying the full price (less any money already paid). If this option is exercised within the first twelve months, the 10% of net profits bonus for five years is cancelled. If the option is exercised during the second year, the 10% of net profits bonus will be payable for two years following the year of purchase.
b) CMR may withdraw at any time, without obligation to the client. In these circumstances the client company shall pay any outstanding fees incurred at the 50% rate. CMR shall retain any equity earned in the client company, but the client is entitled to require CMR to sell its holding back to him at a price determined by an independent chartered accountant.
10) CONSIDERATIONS FOR CMR EXECUTIVES INVOLVED
10.1 Involvement by CMR executives with PCSP obviously involves some speculative risk in terms of time spent. Firstly there are the normal commercial risks present in any business. In the case of business being handled through the PCSP route, we are also especially dependent upon the goodwill and relationship with the client over the first two years. He has the power to terminate during that period. Additionally, he also controls the company until 75% of the purchase price has been paid, thereafter he has a 'blocking' 50% representation on the Board. This may limit some of the actions we would want to take for the business.
10.2 Naturally, we would hope that problems will not arise, but it is important to recognise the dangers and limitations placed upon us. It is clearly very important that the CMR executives involved work hard to maintain good relations with the client. It will also be important for us to build confidence at an early stage that the client will act in a reasonable way with us - if we have any doubts over this, we should probably not get involved, or else modify the terms & conditions to give us extra protection.
10.3 The contract with the client will be in the name of Newco, which will start life as a 100% owned CMR company. Newco will invoice the client for fees, and will pay CMR executives when payment received from the client. Newco will purchase shares in the client company at the end of each year, from the special management fees charged, after clearing its own liabilities, if any. CMR members will be allocated shares in Newco in accordance with the formula shown in 10.5 below.
10.4 The normal CMR fee and commission arrangements need to be amended for PCSP, to take into account the much longer timescales, and the much higher total fee chargings than for normal main-line CMR business. Also there will be statutory, legal and management responsibilities that will be on-going.
10.5 A CMR member's 'normal fees' (which will be uplifted by the normal 100/70%) to the client company will be personally agreed between him, CMR management, and the client. In the absence of any further agreement by all those parties, the 'normal fees' will inflate each year in-line with changes to the Retail Price Index. Until the end of the year following which the client is paid 75% of the agreed purchase price, the fee actually due to the CMR member will be 50% of the 'normal fee' agreed. Thereafter, the CMR member will be due the full 'normal fee' agreed. During his involvement with the client company, the executive must maintain his CMR membership and continue to abide by CMR's ethical rules.
10.6 Equity in Newco will be allocated as follows:
CMR Centre 25%CMR Region involved 5%CMR Executives involved 70%
The allocation of equity to the CMR members involved will be made as the shares in the client company are acquired each year, and will be based on the proportion that each CMR member's fees charged (converted to be at full rate) bears to the total of CMR members' fees charged (converted to be at full rate) during the year. Where the allocation results in a fractional share, which cannot be easily accommodated, a Trust will be established within Newco to hold those fractional shares on behalf of the CMR members concerned. Newco will declare a full dividend, payable to all shareholders, each year, subject only to a reasonable retention for working capital requirements. Any CMR member who ceases to be involved with the project, may be required to sell his shares in Newco at a price determined by an independent chartered accountant. It may be that some time commitment will be required from key CMR members involved with the client company.
Newco will be responsible for its own expenses, and where these cannot be charged to the client company, and until revenues are received by Newco, will be funded by loans from CMR Centre. Newco's board of directors will consist of shareholders having 10% or more of the equity.
10.7 CMR Introduction Commission. Because of the long-term and high value content of CMR input, the payment of CMR introductory commissions for the PCSP need to be different from other CMR main-line business. It would clearly not be equitable for 10% of all fees for all time be paid for a simple introduction. The arrangements for the PCSP are that introductory commissions of 10% will be paid on the first year's gross fees charged to the client company, excluding any direct expenses charged, and that no equity shares will accrue to the introducer. If they are involved in working for the client company, their equity share entitlement will be calculated in the same way as for other CMR members involved (i.e. not taking commission payments into the calculation). After the first
year, when introductory commissions are no longer being paid, the 10% of gross fees released will accrue to Newco.
CMR MANAGEMENT SUPPORT & CONSULTANCY
Management support is really the core of all CMR's services to SME's, and is an integral part of everything CMR does. Many of the small to medium-sized companies in the UK are being run by people who do not have a great depth of management experience, and who try to cope with the trials and tribulations of running a business as best they know how. They are often unaware of the alternative ways forward and will find it difficult to determine the best longer-term strategies they should adopt. If things start to go wrong, they are also often unable to react in the most appropriate way, sometimes making the situation worse for them.
It is this management gap that CMR helps to fill, by the input of experienced executives with many years of knowledge and expertise, usually acquired in much larger and successful corporations operating in the UK and throughout the world. Often the CMR members working with SME clients will also have specific experience of the client's industry area, thus bringing a great deal of general management experience to bear, with the knowledge of how this relates to the specific business area in which the client operates. This combination can be of immense value to the client company.
Within CMR exists a vast wealth of expertise and experience, in every business area and discipline imaginable. This reservoir of talent is accessed through the CMR network, which gives every CMR member the ability to bring together the exact skill base needed for every job, no matter whether it is a CMR or private project. In fact the network is also of great value to those CMR members working in a corporate employment situation, because they can also call upon the skill base to help them or their companies whenever needed.
Whenever a client comes to CMR for help, for funding or one of the many other services we provide, we start to use our management expertise and experience. Firstly to analyse the situation and to determine what the real problems or circumstances are - these are often quite different than the client first supposes. Having determined the problems faced by the client, we will then work through the possible solutions there are, to find the best of the alternatives available (there are invariably many possible routes forward).
In most cases, CMR's management involvement with a client will start as a result of a specific project, perhaps for funding or one of the many other services we provide. As stated elsewhere in this operations manual, the primary objective in any contact between CMR and a client, is to build a rapport and relationship that will become long-term and will enable CMR and its members to provide management help for the company for many years into the future.
The way in which the relationship and rapport is built is obviously a personal thing, and it would be difficult in this manual to say how it should be done - the method will vary from one client to another. However, it would be true to say that all successful business relationships are built on respect and trust, and it is clearly going to be important to establish both of these with the client. To be successful, you must be able to build respect from the client in terms of your knowledge, expertise and your ability to deliver solutions to whatever his problems are. He must also be able to trust you to do this, and to always act in his best interests.
In CMR, every member has a great advantage - and that is the ability to call upon others to support any dealings you have with clients. Nobody in CMR is totally reliant just on their own skill, and therefore everyone has the ability to turn a prospective client into a real revenue-generating client,
even if they lack the personal expertise base needed for that particular client. CMR projects should be a team effort, because this will greatly increase the likelihood of ultimate success.
For many CMR members, a success project can turn into a long-term relationship with the client, as he begins to appreciate the value brought to the business by having the CMR member as part of the team. That is really what CMR is about!
CMR FEE SHARING RULESCMR's fee sharing structure is intended to be reasonable and fair to all those involved. CMR has to rely on the honesty and integrity of all its members to account properly for fees due to the organisation. CMR has been deliberately set-up to provide its members with the maximum of flexibility with the minimum of bureaucracy and rules - but it does place a higher premium on the honesty of its members.
The first thing to say is that the CMR fee sharing rules do not apply to private business undertaken by a CMR members. The definition of private business is work obtained directly by the member that:
1) Was not the result of an introduction through CMR or its affiliates, or using CMR marketing materials or products.
2) Does not involve other CMR members.
Section A - Covering most CMR projects.
The standard fee sharing arrangements for CMR projects (unless specifically detailed otherwise) are:
* 10% commission of the gross fees earned will be passed to the CMR member or unit directly introducing the project. The commission applies to all business from that client that is directly introduced by that CMR member/ unit. Commission payments will normally relate to fees and equity charged to the client in the first twelve months from the date of introduction, unless specifically agreed otherwise.
* 7.5% will accrue to CMR Centre to cover admin costs.
*5% will go the CMR Marketing Fund.
* 2.5% will accrue to the CMR Division/Region Director. These payments will be in addition to any fees earned on the project by virtue of any direct involvement they have.
*75% will go to those CMR members directly involved on the project. In the event of the fees received not being directly and fully calculated by reference to the time spent by each participating CMR member (for example; a fixed price contract involving more than one CMR member), then the disposition of that 70% when received will be agreed by all those members involved. In the event that agreement cannot be reached, then the matter will be referred to the appropriate CMR Divisional Director, whose decision will be final.
In cases where there is a 10% investor introduction commission payable, then the above percentages will be calculated on the remaining 90% - this only applies to funding success fees. Other non-success fees charged are not affected by this.
These arrangements apply to fees, equity and other forms of remuneration. Depending on circumstances, equity will sometimes have to be held as a block through CMR, and individual CMR members will not always be able to exercise direct control (for example, not be able to sell individually). In all cases there will be a shareholder's agreement, which amongst other provisions, will normally control the ability of directors to pay salaries and expenses, and will impose a dividend policy - namely that profits after providing for reasonable working capital requirements will be distributed to shareholders.
At this point it is worth noting that CMR projects cannot be 'privatised' without the specific agreement of CMR Centre. There have been cases where a CMR member has obtained funding independently for a CMR project, where the CMR investors so far introduced have turned the project down. This is good news and the member's initiative is to be congratulated in keeping the project on-board and the client satisfied - but the project remains a CMR project and subject to the normal fee sharing rules.
It should also be emphasised that all chargeable work associated with a CMR project is subject to these fee sharing rules.
The New CMR Business Referral Scheme introduced in the beginning of 2007 as it affects commission for introducing new investors, is outside of the fee sharing arrangement detailed above. It was introduced to incentivise both CMR members and outside agencies for the benefit of all in CMR. The investor-introduction commission (usually totally 10%) will be netted-off from revenues received before the usual CMR fee-sharing rules are applied. More details on the CMR Business Referral Scheme can be seen at http://www.cmrworld.com/BusinessReferralScheme.asp
Section B - Interim Management & Recruitment Projects
Fees earned on Interim Management or executive recruitment business will be:
* 50% (of 17.5%success fee) commission of the gross fees charged will be passed to the CMR member or unit directly introducing the business. This commission will be paid only in respect of the first twelve months charges to the client introduced.
* 50% (of 17.5%success fee) will accrue to CMR Centre.
* 82.5% will go to the CMR member providing the interim management services or recruited by the client.
In normal circumstances, for interim management or consultancy work so provided, CMR will invoice the client, and when paid will pass the above money on as detailed above. For permanent positions, non-executive directorships, or in other circumstances when the client wishes to take the CMR member onto the payroll, the client will account directly to CMR for the 17.5% deducted.
Section C - CMR Progressive Company Sale - see page 84
Section D - CMR Members co-opted to work on another member's private project. In these circumstances a 10% commission of the gross fees earned by the co-opted member will be paid to CMR. The prime responsibility to pay this commission falls on the recruiting member, but in the event of a default in doing so, the commission is recoverable by CMR from the co-opted member. There is an obligation on both parties to notify CMR Centre of the arrangement before the commencement.
Section D – CMR’s Business Referral Scheme:
Operation of the Business Referral Scheme
These are guidance notes on how the scheme operates within CMR.
1) All introductions from members must be email-notified to CMR Centre ([email protected]) - they will be acknowledged by email if accepted (NB: introductions must be 'new') and you should check that the email acknowledgement has been received.
2) In the case of investor-introductions there is a legal complication in that the FSA regulations have to be followed requiring individual investors to 'sign' (by clicking-through on our website) that they accept the legal agreement on the CMR website for new investor members. If you prefer to enter those details on behalf of your introduced new investor, we can cope with that provided you forward
to CMR Centre an email from your introduced investor that confirms their acceptance (email must repeat the terms they are agreeing to). The easiest way is to ask them to register themselves, as the CMR system keeps a legal record of all investor acceptances of the terms. The email acknowledgement to members (as in 1. above) will be sent when these requirements are met.
3) An alternative arrangement that is available for professional firm investor introductions, is for the profession firm to be registered as a CMR investor through the CMR website, in which case any propositions will be passed to the professional firm as an intermediary (i.e. CMR will not deal directly with investors introduced in this way). It is probable that the professional firms will not want to deal in this way, as it is then imposing legal obligations upon them. Please note that CMR operate under the 'Sophisticated/ High Net Worth' exemptions of the FSA. Also be aware that your registration of the professional firm only applies to individuals, corporate/fund investors introduced through the person/office with whom you have dealt (this is to preclude a member identifying say Price Waterhouse and claiming all introductions from PW to the exclusion of other members).
Reminder of commission & fee arrangements
We have made some important changes to our recently launched Business Referral Scheme, which enhance the earnings potential of all CMR members becoming actively involved.
The changes:
1) The external commissions payable to outsiders are decreased from the 10% initially announced to 7.5%. See www.cmrworld.com/BusinessReferralScheme.asp. If it is necessary to increase the external commission above these levels then the excess over that allowed in the standard CMR fee split arrangements (7.5% of 10.0%) will be netted-off fees received before calculating internal fee splits.
2) For business, investors or executives introduced directly by CMR members, the commission level will be 10%. This will be for the same time periods mentioned on the website link for each category of referral, except that commissions on investor introductions will continue without limit whilst a full executive member.
3) For business, investors or executives introduced through external agencies, who themselves have been introduced by a CMR Member, the CMR Member will be paid a commission of 2.5%. To qualify for the 2.5% commission the business/investor introduction must come through the CMR Member concerned.
4) Commission payable on investor introductions is limited to ten years from the date of introduction of each investor introduced.
Not a change, but to remind about the effect on internal fee sharing arrangements – the introductory commission for investor introductions is outside the normal CMR fee-sharing arrangements and any such commission paid will be treated as a cost against revenues received on that project, and the internal CMR fee sharing will be calculated on the net amount.
These changes will provide all CMR members with a real incentive to become actively involved in obtaining business and investors, either directly or by promulgating the Scheme to local professional firms and others with the ability to introduce business or investors. Earnings through the Scheme for CMR members could be very substantial.
FEE SHARING PAYMENTS
The general rule in CMR is that when the client has paid CMR, those involved will be promptly informed, and they will submit their invoices as appropriate to CMR, who will pay promptly (time will be allowed for the client's cheque to clear the bank).
Responsibility for assessing the creditworthiness of the client rests with the CMR members involved, and any non-payment will fall on all the CMR parties involved in proportion to the normal fee sharing arrangements. CMR will at its discretion take reasonable steps to recover debts, the costs of which will be paid by CMR but recovered from funds received.
FEE ADMINISTRATION ARRANGEMENTS
Invoices from CMR members to CMR should normally be from a limited company. This is required to avoid future allegations from the Inland Revenue that the member is really an employee of CMR, and that therefore CMR should have been deducting PAYE and NI for the past umpteen months. It is not necessary for a CMR member to form the limited company until he has established a flow of revenue that could be construed by the Inland Revenue as employment remuneration. However, we would recommend that any CMR member undertaking consultancy work does so through a limited company, as it does give worthwhile liability and taxation advantages. Limited companies can be purchased through company formation agencies for as little as GBP30, and the only annual cost is a GBP15 filing fee for the Annual Return to Companies House. Unless the company is making profits of more than GBP1 million, an annual audit is not required. Any member wishing to have advice on forming a company, should contact CMR Centre.
VAT REGISTRATION
UK Members may like to consider being VAT registered, if they are not already. Although there is some (fairly easy) administration involved for the quarterly VAT returns, registration does allow the recovery of VAT on business expenses, including CMR costs. Normally VAT incurred in the six months preceding registration can be recovered.
VAT registration is recommended for those members intending to undertake private consultancy business. Apart from the financial benefits, non-registration would indicate to everyone that your earnings are below the VAT threshold (of just over GBP50,000).
BELONGING TO OTHER ORGANISATIONS
The philosophies behind the creation of CMR included making the organisation as flexible as possible for all its members, and to have the minimum of rules and regulations to affect the way members can use CMR's resources, subject of course, to the ethical undertakings all members agree to abide by.
As a result, there is no general restriction on other organisations a CMR member may belong to, providing these do not represent a conflict of interest or could cause damage to CMR. In these circumstances the member is asked to discuss the conflict of interest with CMR Centre, and to take steps to ensure that the conflict does not damage CMR, its clients or members.
It is also important to state that no CMR confidential information is to be disclosed outside of CMR - even to friends or colleagues outside. This includes the passwords needed for access to the private sections of the CMR Website. We all have an obligation to protect the confidentiality of clients and members, and CMR itself.
The CMR Mentoring Scheme will be of particular interest to those members becoming independent consultants for the first time. It provides private one-on-one counselling to help make the transition from corporate employment to successful independent business life, an easier and hopefully more assured process. Whilst obviously of relevance to those intending to become active on CMR or RMC business, it will also be useful for those intending to establish their own private business or consultancy.
The mentoring/counselling will be given by a number of CMR’s directors and senior managers in a private capacity. The intention is to provide a standard mentoring procedure giving about two hours face to face each fortnight, with up to four 30-minute phone calls per week. There will be a reasonable charge made to cover the time spent, and this will be by arrangement. CMR itself will take no ‘margin’ from the arrangements made.
The standard charge arrangements (which can be varied by agreement) are for a monthly cost of GBP250 paid directly to the mentor. For more details, or to have a preliminary discussion with one of the mentors, please contact Mike Downey.
CMR’s Never-say-Die ProgrammeDo you have funding propositions that have not got funded?
We may be able to help …………. and turn those dead/dying projects into money for you and a positive way forward for the client.
CMR established in 1984 comprises several hundred very senior, director-level executives – together with our own private investor base and access to many thousands of prospective investors worldwide. See www.cmrworld.com
In addition to simple funding operations, we also handle the possible alternative routes of company mergers, sales and MBI’s, technology licensing for innovative projects, corporate recovery for struggling businesses – and our unique Catalyst Group Programme that combines several SMEs into cohesive groups. In addition we provide expert management support.
This means that we can look at businesses not just from a funding viewpoint, but also examine the other possible routes forward for them.
If you have propositions that have not been funded, we are willing to look at them to see if we can help. There is no charge for this review and if we agree with the client to take things forward there may be fees and success fees resulting - upon which we are happy to pay you our standard commission rate (7.5%) on all fees earned from that client.
For you; this can generate revenue from projects that will otherwise die – and help the client.For the company/client; this can give access to a wide investor base and possibly routes forward in other directions.
If you would like to explore this further, please let me know and we can discuss initially by phone or email.
Kind regards,Mike DowneyManaging Director
Cavendish Management ResourcesHead Office: 30 Percy Street, London W1T 2DBAlso: 31 Harley Street, London W1G 9QS, UK Tel: +44-(0)20-7636-1744 Fax: +44-(0)20-7636-5639Scottish Office: Regent Court, 70 West Regent Street, Glasgow G2 2QZ Tel: +44-(0)141-416-2331 Fax: +44-(0)141-333-1116
Financial Status (any other information relevant to an appraisal of the company’s financial strength
Preliminary Recommendation for further investigation (please give a brief summary of why you consider the proposition should be investigated further, highlighting any special features that make it attractive and indicating whether you consider the company to be in a condition to attract investors immediately)
Enclosures (tick or specify) annual accounts / , management accounts (period business plan, other:
Signed (by Originator) Date received (from Originator) Action
For the attention of __________________________________________________date
Dear Sirs,Funding Assistance Agreement
We are pleased to provide assistance in developing your business and that of any associated companies, and may introduce potential investors, financing institutions, guarantors, Leasing funders, Partners or other third parties (“Funders”) to your companies.
You confirm that you will not, either directly or indirectly, make any agreement with any party introduced by CMR without our written permission. We shall have exclusivity to introduce such Funders for a period of six months from availability of an agreed acceptable business plan, and any offers for finance received during that period will not be unreasonably refused. Such exclusivity shall not apply to your existing contacts listed in the attached schedule.
If the granting of finance facilities from Funders introduced by CMR has not been completed within six months from this date, unless this period is extended by mutual consent, we shall make available to you a list of our introduced contacts to attach to this Agreement and to whom these introductory terms continue to apply. Whilst CMR will try to help obtain the required funding, it obviously cannot guarantee that funding or investor interest will be obtained. CMR has a confidentiality agreement with all its registered investors, but if you have especially important or sensitive information, we would recommend that you obtain a direct confidentiality agreement with any investors or other parties introduced through CMR.
In the event that funds are obtained or committed from any source other than your existing contacts listed in the attached schedule during the period of this Agreement, or subsequently from a CMR introduced Funder, you undertake to compensate CMR by a success package comprising a fee and a share option.
The fee component of the success package shall be a variable percentage of any investment funds subscribed or other finance raised, (subject to a minimum of GBP7,500). VAT is chargeable only for UK based clients. Based on the actual amount raised, such percentages shall be:
5% of initial inward funds raised up to GBP500K plus 4% of additional inward funds raised above GBP500K and less than GBP1m plus 3% of further additional inward funds raised above GBP1m and less than GBP1.5m plus 2% on any additional inward funds raised above GBP1.5m
By the option component of the success package, you also agree to grant CMR an option expiring in five years to subscribe at par value for ordinary shares representing 5% of the capital of the company, as part of CMR’s continuing support and future availability to the company.
Payment and option grant will be made on draw-down or within seven days of receipt by you of those funds.
In addition, you agree to pay CMR an initial administration fee of GBP1,500, due and payable upon signature of this agreement.
This fee covers previous detailed review of available Business Plan and initial review meetings and where applicable:
Suggestions of plan strategy change and/or Company re-organization Creating summaries (interactively) for CMR investor submission Inputting data into CMR investor net Handling CMR Investor interest through to client When applicable Facilitate Investor / Client meetings
Where other business services on or off site and / or advice are required these will be prior agreed at a mutually acceptable day or half day consulting rate; the standard rate being GBP400 per half day and GBP750 per full day. This includes revising or rewriting client Business Plans, for which a custom quote can be prepared.
Should you request CMR to prepare Business Plans, attend potential investor meetings with you or to prepare submissions to other potential funding organizations outside the CMR private investor base additional fees may need to be mutually agreed.
N.B. CMR does not take part in negotiation, due diligence, nor legal stages.
This Agreement shall be governed by and construed in accordance with the Laws of England.
CMR look forward to working with you on this exciting project.
All fees subject to VAT at the current applicable rate
Agreement commencement date ___________________
Agreed by and on behalf of Cavendish Management Resources Limited, whose registered office is 30 Percy Street, London W1T 2DB, UK
Agreed by and on behalf of __________________________________________, whose registered office is _________________________ _________________________________________________.
CMR's STANDARD IPR/LICENSING AGREEMENT WITH CLIENTS
Between
and Cavendish Management Resources Ltd, of 30 Percy Street, London W1T 2DB
Background
Agreement
------and CMR have agreed to co-operate together on this venture with the following agreements between them.
1. CMR will, on an initial 18 month exclusive basis, undertake the work and negotiations necessary to properly license the technology as in Attachment 1 (or come to other commercial arrangements), including advising on general business strategy and protection of intellectual property. In all cases, CMR undertakes to use reasonable endeavours to achieve a successful outcome.
2. Prior to conclusion of negotiations for the licensing (or other commercial arrangements) of all or part of the technology, such intellectual property will be assigned by ----------for a nominal sum to a newly formed company (Newco). It is agreed that intellectual property owned by Newco will revert to xxx in the event of the liquidation or receivership of Newco, provided that such liquidation or receivership is not precipitated or assisted the actions, directly or indirectly, of xxx.
3. Newco will then license (or come to other commercial arrangements) the technology to the agreed licensee. It is agreed that all intellectual property associated with the technology, including all improvements and additions, will form part of this agreement, and that ------------- business referred to in this agreement will be exclusively managed by Newco.
4. The shareholding in Newco will be two thirds ----------- (or his nominees) and one third CMR (or CMR nominees)
5. CMR shall be entitled to appoint two directors, of a maximum of four Newco directors.
6. It is agreed that the Company will hold board meetings not less frequently than quarterly and shall not be involved in any activity other than the exploitation of intellectual property in accordance with this agreement.
7. CMR shall use its reasonable endeavours to obtain favourable terms for licensing agreements; the terms of the proposed licensing arrangements shall be discussed with -----------------------and if agreed by all parties undertake that licenses are brought into effect as quickly as possible. ------------undertakes not to unreasonably reject or delay the completion of potential licensing agreements.
8. At the end of the 18 month period -------------------and CMR may agree to extend the period of CMR's appointment on similar terms to the above. In the event that this does not happen, CMR will draw up a list of potential licensees with whom it is in active discussion at that time; for a period of three years any subsequent agreement with these licensees that is substantially similar to that negotiated by CMR shall be treated as if the agreement had been reached within the initial 18 month period.
9. CMR will make no charge for the time spent on licensing and associated support work. Reasonable out of pocket expenses will be reimbursed by Newco when adequate funds are available, including from inward investment.
10. In the event that CMR investor financial input is desired, a commission of 5% of the amount input will be paid to CMR, subject to a minimum of GBP5000.
11. Subject to the provision of reasonable working capital requirements, all available profits of Newco will be distributed to the shareholders each year in the form of a dividend or such other method as may be agreed. No emoluments will be paid by Newco without CMR's written approval, which will not be unreasonably withheld.
12. The shareholders of Newco will not unreasonably refuse to register share transfers from a shareholder to parties associated with or controlled by that shareholder. Shareholders wishing to sell shares to unconnected third parties must first offer them to existing shareholders on terms no less favourable than offered to the outside parties and allow 30 days from receipt of the offer for acceptance or rejection by the existing shareholder.
13. The parties agree to act in good faith to each other. In the event of a dispute arising that cannot be resolved in a reasonable time, the parties agree to submit the dispute to binding arbitration. Each party in dispute will appoint a third party to act as their arbitrator. If these arbitrators are unable to reach a unanimous agreement then they shall appoint by agreement a further independent arbitrator whose decision shall be final and will be binding on the parties.
CMR STANDARD AGREEMENT FOR FUNDING, M&A and COMPANY SALE & CATALYST GROUP PROJECTS
Dear Sir,We will be pleased to provide assistance in developing your business and that of any associated companies, through; 1) obtaining inward investment, or 2) introducing merger partners, buyers or acquisition prospects, or 3) by the formation of a group of companies which will include your business. We may introduce potential investors, financing institutions. guarantors, leasing funders, partners or others (all referred to as "Other Parties”) to your companies.
You confirm that you will not, either directly or indirectly, make any agreement with any 'Other Party' introduced by CMR without our written permission. We shall have exclusivity to introduce such 'Other Parties' for a period of *[twelve] months, and offers from or to those 'Other Parties' during that period will not be unreasonably refused by you. If agreement with those 'Other Parties' introduced by CMR has not been completed within [twelve] months from this date, we shall make available to you a list of our introduced contacts to attach to this Agreement and to whom these introductory terms continue to apply.
CMR shall be paid a fee calculated on the following basis:1) If inward investment is obtained: A fee equal to 5% + VAT of any investment funds subscribed or other finance
raised, (subject to a minimum payment of GBP7,500 plus VAT). As part of CMR’s continuing support and future availability to the company, you also agree to grant CMR an undated option to subscribe at par value for ordinary shares representing 5% of the capital of the company. Such payment and option grant will be made on drawdown or within seven days of receipt by you of those funds.
2) For mergers, joint-ventures or an actual sale arranged; A fee equal to 5% + VAT (subject to a minimum payment of GBP7,500 plus VAT) of the actual or notional sales value (if not sold) of your business on the open market as assessed by an independent firm of Chartered Accountants to be nominated by The Institute of Chartered Accountants in England & Wales. Cost of this assessment is for your account. As part of CMR’s continuing support and future availability to the merged companies or joint venture, you agree to not object to the grant to CMR of an undated option to subscribe at par value for ordinary shares representing 5% of the capital of the merged company or in the joint venture company. Such payment and option grant will be made on drawdown or within seven days of receipt by you of those funds, or legal completion of the agreement.
3) If a group of companies including your business is formed through the actions of CMR, you will not unreasonably refuse to accept the same terms negotiated by CMR with the Other Parties involved, at the time of group formation. For information only: CMR will normally operate on the basis of having a 'free' undilutable 25% equity holding in the Group so formed. CMR will normally appoint the Chairman of the Group, and each participating company will be entitled to appoint one director to the Group Management Board, with CMR able to appoint a minimum of 25% of the Group's directors. Payments to CMR for the provision of executives or other facilities will be as agreed by the Board from time to time. It is normal for there to be three stages in the formation of the Group:
a) The invitation for each selected company to join the Group. Unless otherwise agreed, during this first stage, each company will continue to manage and operate their business as before. A Group Management Board will be established to act in an advisory capacity.
b) Within one year (but may be earlier if all parties agree), each company that wishes to remain in the Group (and is accepted by the other companies), will exchange 51% of their equity capital for a share of the remaining 75% of the Group's shareholding as calculated on the basis of their relative current market value as determined by an independent firm of Chartered Accountants. At this point all companies become subsidiaries of the Group, and will be managed by the Group Board.
c) Prior to a flotation or sale of the Group as agreed by the Board, the final 49% of shares in each company will be exchanged for shares in the Group, on the basis of their relative current market value at the time. CMR's shareholding in the Group shall remain undiluted at 25%. Each company will then become a wholly owned subsidiary of the Group.
All the aspects relating to the group formation will be freely negotiated with all parties at the time.4) A retainer of GBP + VAT , payable within fourteen days of the date of this agreement.5) Consultancy fees at the rate of GBP + VAT per hour/day, payable within fourteen days of invoice date. Out-of-pocket will be pre-agreed with you and invoiced at cost.
The fees mentioned in clauses 1 & 2 above at 5% shall apply to the first GBP500,000, thereafter the fee percentage shall be: 4% of next GBP500,000, plus 3% of next GBP500,000, plus 2% of all further amounts.Yours sincerely,
2.1 To hold in confidence all information supplied by the Company.
2.2 To use such information only for evaluation purposes, and to limit distribution of the information to potential investors and other parties who have signed a confidentiality agreement with CMR.
2.3 To return all information including documents, drawings, prototypes etc. on demand.
3. This Agreement will terminate:
3.1 With the written consent of both parties.
3.2 If the information is found to be in the public domain.
3.3 If the information is published or otherwise becomes part of the public domain through no fault of CMR.
3.4 If the information is already known to CMR.
This Agreement is effective from ..................................................................................
For the Company .................................................Date ...................................
For CMR .................................................Date ...................................
CMR's origins date back to 1984, when Mike Downey founded The Chiltern Investment Group with the objective of providing a forum for private investors to meet, review submitted business proposals, and perhaps syndicate investment in suitable propositions. The Chiltern Investment Group continues to thrive, and now forms part of the CMR investor base.
To understand the background to the CMR organisation as it is today, it is necessary to briefly explain the career path of its founder, and the motivations that led him to establish CMR. Mike Downey has a reasonably wide experience base, mostly gained in blue-chip companies at senior board level, in the UK, Europe, USA, and covering particularly finance, marketing and production disciplines. He was International Finance Director of Wilkinson Sword, then owned by Allegheny International, an American conglomerate and was sponsored by them for the AMP program at Harvard Business School, Boston, USA in 1982. On his return, he was appointed Managing Director, Sunbeam Europe, which had been recently acquired. In 1985 Sunbeam was sold by Allegheny and amalgamated with Rowenta. He then established a new venture capital named Inventure Ltd., which had the objective of investing in, and commercially developing through international licensing, innovative products and processes, particularly those that could be patent protected. In 1988 this work was expanded to also help small innovative companies who had financial or other difficulties, and during this time he became Chairman of many such companies.
It was apparent to him that so many small/medium-sized businesses had great difficulty in accessing the financial and management support needed to ensure that their growth potential could be realised. So many just struggle to survive, when with some help from outside, they can grow and prosper into the future. In 1990, Mike Downey formed Cavendish Management Resources Ltd., specifically with the objective of bringing skilled management expertise and private investment funds to bear on this situation. Over the next three years about twenty executives joined CMR, which operated with a relatively loose structure, with various CMR members coalescing for specific projects then de-coalescing afterwards. Whilst the structure worked satisfactorily for specific projects, it did not provide for the development of CMR's future plans in a cohesive way. CMR Ltd., which had only operated as a membership vehicle, was dissolved in 1993 to allow the formation of Harvard Corporate Resources Ltd., to continue the CMR name, but promote the original philosophy and business objectives in a far more co-ordinated and positive way.
With the formation of Harvard Corporate Resources Ltd., CMR has been able to expand its operations both in terms of the scope of its activities, and in terms of size. Since then CMR has grown into a quite exceptional and unique organisation, with the capability of providing all the financial, management and business services support so badly needed by small to medium-sized companies in the UK. It combines the skills of several hundred very senior & highly experienced executives, with several hundred private investors keen to invest into the smaller company sector. CMR's objectives are to continue to grow by attracting particularly gifted senior executives, and expanding further the investor base available to it.
CMR's PHILOSOPHY
It is a truism to say that the majority of privately-owned small/medium-sized companies in the UK could benefit greatly from having better access to funding and good management support, enabling them to profitably grow faster, in a more controlled and managed way.
It would also be true to say that the resources needed are not generally available to these companies. In fact one could go as far as to say that until recently they have been denied the help they need by the Government and other agencies:
1) The banks largely withdrew from supporting this sector, bringing many viable businesses down in the process.
2) Many venture capital companies are not interested in investments below GBP500,000, and in any event do not like this sector because of the poor management base often found.
3) The Government has made it so difficult and expensive to raise money by public subscription, that there are no generally available investment funds for this sector.
4) Large consultancies are not interested, because they perceive (rightly) that this sector will not pay high fee levels for ordinary consultancy work. Smaller consultancies can sometimes help, but usually lack all the resources needed (especially access to funding).
Overall, this is a fairly depressing set of circumstances faced by the sector, which has also of course, been savaged by successive recessions. We are however, talking of a very major part of British industry, consisting of several hundreds of thousands of companies in the GBP1 million to GBP30 million category. The challenge and opportunity this presents is of awe-inspiring proportions.
CMR's central philosophy is to provide the resources needed by this sector, in the way it is wanted. We recognise that the requirement for funding is likely to be the trigger-point for companies to make contact with CMR in the first place - very few companies in this sector will normally embrace and ask for help from 'ordinary' management consultants, except for specialised, limited tasks. Whilst a funding requirement will be the initial reason for contacting CMR, many of these companies will actually require help in many other directions, and in fact some may not actually need or be able to attract funding. It is important that CMR has the skill and resource base to help those companies in whatever way is appropriate for their special circumstances.
The operational concepts upon which CMR is based are:
1) CMR firstly provides advice on the funding request received. Very few companies are fundable as they stand - many require some degree of strategic redirection, and some need a major re-structuring before they can be invested-in.
2) In many cases, it is not straight funding that's needed, and other assistance may be more appropriate - for example, it may be better to internationally license a patented product than to produce it oneself. Whatever the way forward, CMR will be able to provide the expertise needed from CMR's team of very experienced executives. It is an important aspect of CMR's philosophy that management/consultancy support is supplied by CMR executives who have real on-the-ground experience, and can relate totally with the client. CMR does not employ theoretical consultants.
3) Only when CMR is happy with an investment proposition, will it be introduced to its investors. It will be presented at face value, together with CMR's candid opinion. Legal caveats apply, and the final decision is the personal responsibility of the investor.
4) In many cases, there is an ongoing need for management support - sometimes as a condition of the investment input, and sometimes at the request of the company's management. CMR will provide whatever support is needed, from its executive membership.
4) In all cases CMR will act in an ethical manner. Our objectives are primarily long-term, and whilst fees are charged, our primary objective is to achieve long-term profitable growth for our clients. Our willingness to
defer fees onto a performance-reward basis is a central part of our philosophy. We want to have the same motivations for success, as do our clients.
CMR's OBJECTIVES
CMR is a quite unique organisation, with many innovative aspects to its operations. We want to continue to set the standards and by our sheer professionalism and creativeness, become the pre-dominant agency for providing the financial and executive resources enabling small/medium-sized companies in the UK to realise their full potential. Specifically we aim to:
1) Set the standards in providing financial & management support for SME's in the UK. We want to be regarded as the smaller company's friend - not a soft touch - but people that understand and can help.
2) Provide our executive members with a stimulating and rewarding environment in which they too can realise their own potential. CMR will never be a soft option, but for those prepared to extend themselves, CMR will provide access to opportunities that provide satisfaction and material well being.
3) To develop other areas of opportunity that allows CMR in total, and its members individually to fully exploit the business and interpersonal skills possessed. We have the ability to both change the established way SME's are considered, and to develop catalyst and other business activities that extends the value of what we do way beyond our present level of comprehension.
4) To provide an operating environment that allows all CMR members to share thoughts and ideas for improving and expanding our collective business, and to provide a forum for the efficient networking of the skills we all possess.
APPENDIX 7BEYOND REALITY: TOWARDS THE FUTURE ORGANIZATIONby Christopher Barnatt. To be published by John Wiley & Sons in the Spring of 1997.
From Chapter 7 - Totally Free to Fly & Totally Free to Fall - concerning new relationships between workers and organisations.
SYMBIOTIC RELATIONSHIPS
The shift away from a work/command structure based around employees and employers, and towards one focused upon free agent workers and core organisational brokers, will present many management challenges. Perhaps most significantly, perceptions of the power relationship between worker and organisation will need to change. Far less frequently will managers be able to exert control in their old ‘I’m the boss and you are the underling who must obey’ fashion. In theory, of course, few if any modern managers operate with such a mindset. In practice, as we all know only too well, many still rely heavily upon the bureaucratic omnipotence of their role.
To break the ‘you’re lucky to be here’ mentality of many managers may take decades. However, stick-in-the-muds will be increasingly likely to encounter future workers who will retort that an organisation is lucky to be enjoying their services. A symbiotic relationship between worker and organisation will in future be required: a relationship across which both worker and organisation perceive and accrue synergistic benefits through mutual co-operation. Granted, shoddy workers who do not deliver on quality will be lucky to gain employment. Yet strong, creative labour talent will be like gold. New models of worker-organisation relationship will be needed. Indeed, in some quarters they have already arrived.
Cavendish Management Resources (CMR) is a UK company with an investor base in excess of GBP200 million. Run by Harvard graduate Mike Downey, the company has also been operating as a model for many a Future Organisation since 1984. Despite its size and range of activities, CMR only employees a handful of secretarial employees at its central office in London’s Harley Street. However, around this core, over 300 free agents provide national and international expertise in fields ranging from intellectual property protection and licensing, through to corporate recovery and executive training.
Each of CMR’s free agents (or ‘members’) pays a monthly fee in order to be linked to the core. Whilst this payment does not guarantee any work, it does enable members to capitalise upon CMR’s image, client list and reputation. Members of CMR also gain access to the expertise of all other members. They may also distribute ‘individual’ workloads across the organisation. This helps to alleviate the problems of under- or over-trading which plague many an individual businessman. Newsletters and regional dinners, together with a skills database, keep CMR members in touch. Within the organisation, loyalty and mutual respect are a completely two-way street, as CMR needs talented members just as much as its free agents value their attachment to a fluid but united whole.
Unencumbered by the shackles of traditional employment relationships, CMR provides a fresh model for human resource management. Enjoying ultimate manpower flexibility, the organisation is empowered to provide the very best for its customers. Individual CMR members also enjoy widespread flexibility as they are free to trade outside of the CMR alliance. As a trailblazer for worker and organisation married in a new state of symbiosis, we are certain to witness many more organisations like CMR in the future.
IN SEARCH OF A VIRTUAL ORGANIZATIONTHE CASE OF CAVENDISH MANAGEMENT RESOURCES
The concept of a “virtual organisation” — of a transitory network of non-exclusive portfolio individuals coupled together by advanced communications technologies — continues to grow in prominence. One problem in analysing the potential of such a model concerns the lack of well-documented, real-world case examples. This paper provides a study of a UK-based company — Cavendish Management Resources (CMR) — which has for many years exhibited the characteristics of a “virtual” model of human, technological and capital resource integration. A literature review concerning the “virtual organisation” phenomenon is also included as a précis to the case. As a result, this paper may provide both practical and theoretical insights into future flexible organisational forms.
INTRODUCTION
The forces of uncertainty — be they economic, social, regulatory or technological — continue to reign supreme. Even though it is now well over a decade since the commencement of widespread descaling across the economies of the West, the desire for ever-increasing flexibility in business operations remains as prominent as it did in the early- to mid-1980s. However, within many organisations, many resources are already approaching “optimal” utilisation. There therefore seems little left to downsize; few enough employees remaining for headcount to be further reduced. Widespread outsourcing and intra-organizational networking are also standard practices in many business sectors. It is therefore hardly surprising that business interest is growing in the concept of the “virtual organisation” — of an extremely loose web of individuals, capital and technologies which may operate in amalgamation as the ultimate flexible organisational form.
Whilst business interest in virtual organisational theory is undoubtedly continuing to develop, many sources of academic literature remain somewhat sceptical of the benefits to be reaped from a broad organisational “virtuality” (see, for example, Chesbrough and Teece, 1996; Porter, 1993). The overriding objective of this paper is therefore to provide evidence of how such organisational rethinking has already started to take form in actuality. In particular, much of the content herein is devoted to a case study of Cavendish Management Resources (CMR). A UK company coupling together around two hundred and fifty
free agent individuals with an investment base in excess of GBP200 million, CMR has already been operating in what may be termed a “virtual organisation” mode for over five years.
THE VIRTUAL ORGANIZATION PHENOMENON
Governments, practitioners, and academics from a range of genres, have for several years been vying to be amongst the first to be associated with the emergent “virtual organisation phenomenon”. Virtual organisations will, so their proponents claim, prove to be far more flexible than even the so-termed “dynamic” agent-broker networks popularised as the next-big-thing in organisational construction by Miles and Snow in 1986. Dynamic networks are patterns of productive activity formed around a central core or “broker” organisation which outsources specific sub-tasks (such as manufacturing or distribution) to other “agent” organisations. In contrast, emergent virtual organisational models tend to be based around an even looser coupling of free agent individuals to a lean management centre. Drawing together largely freelance personnel across space and time, “virtual companies” may thereby benefit from an incredible inherent responsiveness to change in the business environment. They may potentially also become free to harness the power of market forces in ways which fully-integrated organisations with dedicated resources will be unable to duplicate (Chesbrough and Teece, 1996: 65).
One of the prime arguments put forward in support of virtual organisational flexibility concerns the way in which such business webs may electronically interconnect people and distributed resources across previous physical divides. As an influential report upon the creation of “virtual companies” predicted over five years ago, future organisations may become fluctuating “electronic mosaics” (Lehigh University, 1991).
Many analysts from a range of disciplines and persuasions have suggested that developments in computing and communications technologies over the past couple of decades have played a major role in instigating a post-industrial revolution — in marking a clear “industrial divide” — which signals our entry into a “New Age” wherein the dominant resource will prove to be knowledge or information (see, for example, Bell, 1973; Toffler, 1980; Piore and Sabel, 1984; Barnatt, 1997). Under such a scenario, there will be the potential for new modes of organisation focused around the processing of information into knowledge, rather than the transformation and combination of physical resources. With firms, their inputs and outputs, and their employees, increasingly dispersed around an interconnected world of information systems, there will therefore be the potential for totally electronic, virtual organisational forms with no clear real-world physical identity. Under such a scenario, virtual organisations may thereby emerge as productive business systems with little or no dedicated physical infrastructure. Rather, virtual organisations will come to operate as “software entities” across the emergent “global hardware platform” now being created as the technologies and infrastructures of most popular information and entertainment media converge (Barnatt, 1995: 11-12).
As children of the much-hyped “information age”, virtual organisations will principally trade in knowledge and in expertise. Gone, so the post-industrialists contend, are the days when organisations could only add value by combining the traditional economic factors (of land, labour, and capital resources),
in order to produce physical goods or first-hand-delivered services. As Stonier so nicely puts it, information has now “upstaged” land, labour and capital as the key input resource for modern productive systems (1983: 8). Indeed, it can be argued that “we now mass produce information the way we used to mass produce cars” — with knowledge having become the new driving force of the economy (Naisbitt, 1984: 7).
Many variants of virtual organisation are likely to emerge to capitalise upon the new prominence of knowledge and information as the key inputs and outputs of an increasing number of business processes. Due to the intangibility of the resources they will process, there will be no necessity for many virtual organisations to exhibit or support a definite physical architecture nor a clear bureaucracy; a tight employment structure, nor a dedicated resource base. However, as the case of Cavendish Management Resources will later demonstrate, organisations lacking such traditionally-critical constitutional elements have already become capable of mobilising traditional physical resources as and when their clients demand.
CMC TECHNOLOGIES & NEW WORKING RELATIONSHIPS
One of the most cited reasons for the potentially explosive flexibility of future virtual organisations concerns their likely transparent application of cutting edge technologies for computer-mediated communication (CMC). Computer-mediated communication systems — such as electronic mail, network conferencing facilities and PC video links — enable remote individuals to engage in computer-supported co-operative work (CSCW). Some office workers, for example, may already opt not to travel to their company's locality. Instead, they may choose to “telework” by using a PC and a modem or an integrated services digital network (ISDN) link to connect to their co-workers and to company data sources.
Teleworking initiatives allow an organisation’s workforce to become highly dispersed. They also permit many forms of work to be released from the traditional constraints of a common geographic location, and from the time constraints of a preset working day. Indeed, experiments in teleworking have proved highly successful across a range of organisations. American Express has reported savings in the region of $30,000 per employee per year where teleworking has been taken up, whilst Burger King and British Telecommunications have also reported substantial cost savings (Pancucci, 1995: 78-80).
It must be noted, however, that simply engaging in a teleworking initiative does not necessarily constitute a move towards running a truly virtual organisation. Nor does empowering workers into “virtual teams” by providing them with the technology to timeshift, to “hot-desk”, or to “hotel”, as pioneered by companies like Chiat-Day and Ernst & Young (Handy, 1995: 212; Sprout, 1994: 67). Rather, evolutions toward virtual organisational forms more significantly require a change in the relationship between organisations and their human resources. New forms of flexibility require new forms of human resource control based upon synthesis and mutual synergy rather than the traditional management jurisdiction of command and obey. As organisations start to spawn (or to re-engineer) towards such ends, patterns of loyalty and of organisational culture will undoubtedly therefore need to evolve.
Virtual forms of organisation will be constituted around radically new patterns of human resourcing involving substantial freelance and sub-contractual personnel attachment. Within virtual organisational structures, human as well as technical and financial resources need to know no traditional boundaries in order to become totally fluid in productive application. As a consequence, most of the people working within future virtual organisations will come to operate as free agents — as what Charles Handy has termed “portfolio people” (1995: 200) — to be knitted together only as and when mutual necessity dictates. In this sense, the virtual organisation phenomenon represents a further human resource downscaling of the dynamic network organisational model.
With outsourcing occurring at the level of the individual rather than the partner organisation, moves towards virtual structures will come to have a far more significant impact upon traditional employment patterns than did transitions towards more network-styled models. Downscaling towards a dynamic network model left many employees with a new (if less secure) employing organisation. In contrast, emergent models of virtual organisation will leave lone individuals to fend entirely for themselves within a cut-throat, hyper-competitive labour market.
Whilst in ancient times masters traded in slave workers as property, and at present organisations attempt to purchase their employee's time and loyalty principally in return for monetary reward, so in future many people will “both own themselves and trade themselves in a market of increasingly-free individual agents” (Barnatt, 1997: 86). Charles Handy continues to predict that fifty per cent of the workforce will be effectively “outside” of traditional employment relationships by the year 2000 (1996: 27). Nicholas Negroponte, Director of the Media Lab at MIT, concurs — offering the prediction that, by the year 2020, the largest employer in the developed world will be “self” (1995: 237).
In Handy's terms, the “public ordering” of organisational affiliation is being replaced by the “private ordering” of the individual (1996: 33-35). Couple such an employment transition with the development and the application of CMC technologies within the world of work, and one encapsulates the essence of the virtual organisational forms of the future. Look for such patterns of human resource and CMC integration within the real world of today, and one can hold up the case of Cavendish Management Resources as a clear example of a virtual organisational form functioning within the present.
A BACKGROUND TO CAVENDISH MANAGEMENT RESOURCES
The origins of Cavendish Management Resources (CMR) date back to 1984 when Harvard graduate Mike Downey founded the Chiltern Investment Group. His objective at this time was to provide a forum within which private investors could meet, filter and review business proposals, and perhaps syndicate investment packages. Since this time, the Chiltern Investment Group has been amalgamated into the broader organisation now entitled CMR. This company provides a wide range of consultancy and management support services in addition to investment funds for small- and medium-sized businesses seeking expansion.
The experiences of CMR's founder when working at a senior board level within blue-chip companies in the United Kingdom, Europe, and the United States, had led him to believe that many small and medium sized enterprises (SMEs) had great difficulty in accessing the financial and management support needed to realise future growth potential. In particular, Downey noted that SMEs with a turnover in the range of around GBP1–GBP30 million generally exhibited two expansion handicaps. Firstly, they were often undercapitalised. Secondly, they were also often under managed, with a particular lack of management expertise appropriate for the progression of innovative projects with extremely high growth potential. There was therefore the problem that some exceedingly promising opportunities within the SME sector were not being realised. An opening therefore existed for a consultancy organisation prepared to offer a complete range of developmental, strategic and financial management skills targeted towards the SME sector.
The Chiltern Investment Group, and later CMR (formed in 1990), were created in response to the above state of affairs. CMR's rapid expansion has not only demonstrated that a great demand for funds exists, but perhaps more notably that many SMEs seeking to realise growth potential are often in as much (if not more) need of specialist management expertise than they are of additional financial resources. Indeed, several of the clients whom CMR has served in recent years have been found to be lacking only in management experience rather than in capital provision. Hence, whilst CMR now offers clients potential access to funds from a GBP200 million+ capital base derived from several hundred private investors, its business is now also that of a provider of consultancy and management support services. To this end, CMR has expertise on offer in intellectual property protection and licensing (both nationally and internationally), extensive experience in assisting corporate recovery, the facility to provide executive personnel for interim and permanent management positions at short notice, a phased company sales programme for owners of companies seeking to retire, and a range of executive training programmes.
To provide management services to its clients, CMR draws upon the expertise of around three hundred and fifty members who have gained business experience across a wide range of industry sectors. All members are former senior managers and executives who have now opted to offer their professional skills within CMR's broad virtual network. However, no member is actually a CMR employee, nor do they have access to an office or any other physical resource. Indeed, CMR's geographic base is limited to a single co-ordinating office in Harley Street which employs only secretarial staff. Despite these apparent constraints, CMR remains a flourishing and expanding business enterprise.
In order to research the case which follows, the author was permitted access to a wide variety of material concerning the operation, structure and strategy of CMR. Such material included promotional client documentation, together with internal policy statements, electronic and paper based member communications, and company newsletters. Access to an actual CMR member, as well as to CMR's founder and managing director, Mike Downey, also proved invaluable in gaining an insight into the history and the philosophies underpinning the organisation’s functioning and evolution.
Every CMR member has to be an independent business-person (preferably operating through their own limited company) to be entitled to join the organisation. In essence, this makes CMR a wide portfolio of sole traders and small-firm owner-managers. The company is therefore a perfect example of a virtual organisation staffed by portfolio people, as all members are free to trade individually and within other networks in addition to operating as members of CMR. The limited company membership restriction is in place to ease contractual difficulties, and specifically to simplify arrangements for the payment of members as free agents rather than as employees.
CMR members have three potential sources of work activity open to them. These comprise:
Business generated by themselves but in the name of CMR (a proportion of the income generated from which has to be returned to CMR),
Business allocated to them as a CMR member which has been generated elsewhere within the organisation (either by the centre or by another member),
Business generated by themselves as individual traders which involves no CMR affiliation.
Inevitably, therefore, CMR members come to find themselves managing a portfolio of activities (with some members also being participants within additional CMR-style virtual organisational consultancy alliances).
Every CMR member pays a monthly fee in return for their attachment to the parent organisation. However, it should be noted that an application to become a CMR member in no way guarantees recruitment to its ranks, and hence that member fees are therefore required in addition to individual success within the CMR selection process. What's more, payment of CMR's membership fee does not guarantee that any work will be allocated to an individual. However, fee payment does enable members to capitalise upon CMR's image, client list, and reputation, when seeking work by themselves but in CMR's name. In particular, members are provided with a variety of CMR stationery and marketing brochures, including an individual CMR business card. In the marketplace, CMR therefore comes to be presented as a unified organisation, so effectively allowing sole trader individuals to present a scale of operations which they could not achieve in isolation. CMR members also gain access to the expertise of other members, hence increasing the range and quality of the services which they may to offer to their clients. A skills database of members is maintained for this and other purposes. A newsletter from Mike Downey keeps all members in touch with developments across the organisation.
As indicated within the second bullet point above, by becoming a member of CMR, portfolio individuals are also presented with the opportunity of equalising their own workloads by involving other members in their individual projects if required. As a result, the erratic workload peaks and troughs so often experienced by consultants and other sole traders when working alone may cease to be quite so problematic. In other words, when demand for their services is high, CMR members do not have to worry about overtrading as excess capacity is likely to be available elsewhere within the collective. On the other hand, when little work is available, it may be that other members are being presented with business
opportunities which may need to be spread across the wider organisation in order to ensure their timely completion.
CENTRAL AND REGIONAL STRUCTURES
CMR's basic operating framework is organised into twelve geographic regions, which are grouped around a central co-ordinating core. The two major roles of the centre are seen as to co-ordinate the activities of the regions, and to promote the organisation as a whole to potential clients. The combined role of the regions and of the centre is to develop an overall business structure, hence putting the organisation as a whole in a position to deal with increased enquiries stemming from central promotional activities. As such enquiries increase, the centre is becoming more and more capable of generating work to be allocated out to its members within the regions. In addition to the above, each region seeks to obtain its own collective identity, and to develop its own marketing strategy. At the time of writing, possibilities for increased cross-regional networking and work-swapping were under investigation.
Dinner meetings are organised on a monthly basis within each region in order to allow members to get to know each other. These occasions also allow members to build up their contact-base and knowledge of the expertise available to them across their operating area. By meeting regularly, a sense of identity with an organisation larger than themselves is also fostered — something which many members may have missed since becoming sole traders after previous periods of long-term employment within more traditional organisations. Monthly regional meetings may therefore help to overcome the isolation and the loneliness now noted as one of the great “sadnesses of portfolio life” (Handy, 1996: 79). As reported not by a CMR member, but by a teleworker interviewed within a recent television documentary, “the only buzz in this [home] office is the hard disk on the computer” (cited from Harrison, 1995). Even the portfolio activities of the most talented individual will become more effective when tempered by the constraints and tribulations of operating within a wider, social whole. By providing some degree of cohesive focus for the members within its regions, CMR at least attempts to provide a “real” organisational home to which its distributed member base may belong.
COMMUNICATIONS TECHNOLOGIES AND MEETING SPACES
In order to provide a coherent client service, as well as to maintain effective communications across the organisation, most CMR members utilise increasingly advanced computing and communications systems. A large number of CMR members use electronic mail (e-mail) to send messages and to enable the rapid sharing of word processed documents and spreadsheet files. With the majority of these individuals using CompuServe as their service provider, electronic access to a range of data services (such as Dialogue) is also only a key press or mouse click away. The need to be able to quickly swap documents and data sets electronically necessitates the use of common software packages for file compatibility. Hardly surprisingly,
Microsoft Word and WordPerfect have become the standard software exchange formats for document processing, whilst Microsoft Excel is CMR's default spreadsheet standard.
In addition to the use of “basic” e-mail communications facilities, at the time of writing there were plans for a CMR bulletin board upon the Internet to replace part of the current programme of regular newsletters. The executive skills database was also being upgraded (using Microsoft Access), to be made available to each region on disk or via network linkages as appropriate. Given the prominence of computer technology adoption in much of the virtual organisational literature, it is perhaps interesting to note that, whilst most CMR members use computers and network links to help them work more effectively, CMR as a model of virtual organisation was not constituted around new developments in computing technologies per se. Rather, the primary driving force behind CMR's innovative structure related to its adoption of a new worker-organisation relationship. Therefore, whilst CMR may be thriving as a child of the “information age”, it was most definitely not new information technologies which led to the conception of its current strategies and organisational form.
Regardless of the role played within their work by computing and communications systems, there is still the need for CMR members to engage in face-to-face meetings with either clients or other members on a regular basis. With only limited office/meeting room availability in London, this may at first appear to present a problem. However in practice it does not, as much of the work is actually undertaken at the client’s premises, or members simply use hotels. Often plush lobbies suffice for meetings, as these offer tables which members may occupy for several hours in return for the purchase of tea or coffee. For longer or larger meetings, actual conference rooms are booked. Either way, the cost is minimal compared to the upkeep of dedicated company meeting facilities. What's more, some clients have even been noted to thank CMR members for “going to the trouble of meeting them in their airport hotel”. Aside from CMR, an increasing number of other organisations are now using hotel lobbies and conference rooms — public houses, coffee shops and motorway service stations — as locations for business meetings. As more and more people come to work as portfolio free agents, the demand for convenient, quality meeting spaces looks set to rapidly increase.
FLEXIBLE PROGRAMMES AND SERVICES
The near-frictionless fluidity of its own member and resource base not only allows CMR itself to operate in a virtual organisation mode. In addition, many of the management services offered by CMR also enable its clients to benefit from the flexibilities inherent in CMR's philosophy of operations. The provision of such flexibilities may be most readily identified within CMR's programmes for interim management recruitment and for progressive company sales.
Interim management servicesFollowing the headcount-reduction mania of the last decade-and-a-half, there are now thousands of competent executives available upon the job market. However, traditional senior recruitment methods
have generally not adapted to this new labour reality. Rather, executive recruitment continues to be extremely expensive, very protracted, and to take far too much managerial time. Hence, whilst many organisations today recognise the value of using short-term contracted “interim managers” to run specific projects or to solve short-term problems, labour market inflexibilities often prevent this from occurring. The current state-of-play in executive recruitment is simply stacked against any fluid trade in portfolio executive skills.
As its answer to the above dilemma, CMR operates in association with a company called Harvard Executive Resources (HER) in order to offer companies the opportunity of recruiting senior interim managers (and even permanent managers) quickly, effectively, and at low cost. It does so by maintaining a database of pre-interviewed executives. By searching this facility, a short-list of quality candidates may be offered to a company within a few days of their recruitment request. What's more, clients are not only provided with a curriculum vitae and psychometric test evaluations, the career details including a photograph of each candidate can also be accessed through CMR’s Internet Web site, greatly speeding the process and accuracy of deciding which candidates to interview in person.
Once employment commences, HER manages the whole employment process, with the client organisation able to dictate the timescale involved. Clients even have the opportunity of converting interim managers into permanent personnel if desired, with all statutory and administrative employment expenses avoided until such a decision is made. Portfolio executives hence gain more and faster assignments, whilst employing organisations reap major time and cost savings within the recruitment and selection process.
The progressive company sale programmeCMR's progressive company sales programme is designed specifically for company owners wishing to retire or to realise the full value of their business. Whilst selling a business today can prove both difficult and time-consuming, the CMR programme allows owners to gradually withdraw from their enterprises on a timescale which suits their own individual requirements. A small continuing role within “their” organisation can even be accommodated if required.
Once a price is agreed for a company, CMR provides a management team to run the business under the direction of the owner for however long he or she wishes to provide such direction. As certain percentages of the agreed price come to be paid to the owner, the balance of management power shifts towards CMR, until it has 100% control and ownership of the enterprise. The progressive company sale programme thereby allows retiring owner-managers to be flexible in ceasing work (and in realising retirement arrangements). CMR members may also benefit in being provided with work from the centre as part of the management team of the purchased organisation.
MANAGEMENT VS. MEMBER PERSPECTIVES
From the perspective of the centre, the key challenge in managing CMR is to maintain the interest (and the loyalty) of members in periods when they are not being allocated any work. In addition, management has
to be sensitive to the fact that not all CMR members have the same motivation to remain as part of the organisation. Approaching fifty per cent, for example, are involved in a significant portfolio of business activities outside of CMR, and are hence mainly paying their monthly membership fee to become part of a broadly-based skills and industry forum. Such individuals are therefore as much seeking a contacts network and an organisational identity from CMR, as they are new work opportunities.
On the other hand, many other CMR members have joined the organisation in the hope that work will be allocated to them from the centre or from other members. They therefore have very different expectations for short- rather than long-term gains from their affiliation. The “trick”, from such a member's perspective, seems to be to be prepared to invest short-term in CMR by participating (financially unrewarded) in promotional/marketing activities for the centre, in return for more rapid medium-term gains in the form of subsequent work allocations. Effectively for many individuals, membership of CMR therefore becomes a “club” for the group promotion of one's own expertise within a marketplace which trusts scale, and within which a single individual will always remain “contact-challenged” in comparison to a larger collective with more ears to put to the ground.
CONCLUSIONS
Clearly CMR and its members offer a certain type of management and financial service within a particular market sector. However successful CMR becomes, it would therefore be foolish to suggest that in future the vast majority of portfolio people will be working for identical modes of virtual organisation. There is a limit, after all, to the percentage of the workforce who may labour as management and finance consultants. This said, the existence of CMR does prove that patterns of virtual organisation are already more than idle theoretical speculation. We may also draw lessons from the CMR case concerning the working relationships likely to be exhibited within a wider variety of virtual organisational structures.
Probably the most common concern voiced by those sceptical of any organisational arrangement involving homeworking relates to the potential lack of control available over remote personnel. To put it bluntly, worries are raised concerning the supervision of people “whom managers cannot see”. Or as Charles Handy argues, “the trust is the rub” (1995: 212). However, by looking to the case of CMR, we may quickly conclude that the above fears are based upon traditional and now outdated notions of worker-organisation relationship. Indeed, the CMR case effectively demonstrates that the “rub of trust” causality may in future be turned on its head.
Key to this conclusion is an analysis of CMR's policy of charging individuals a monthly fee in order to allow them to remain members of its virtual organisational collective. By doing so, CMR is dramatically altering the traditional worker-organisation relationship. Consequently, the organisation does not have to worry about whether or not its “out of sight” members are pulling their weight. Indeed, concerns are more likely to flow in the opposite direction, with members having to trust the organisation to be providing them with value in return for their monthly fee.
Whilst many people — many current employees — may baulk at the prospect of having to pay for organisational affiliation (effectively to have to pay for their job), such an arrangement may in some senses be seen as beneficial in both directions. From the organisation’s perspective, by having members pay a fee to work through them, labour monitoring costs may be substantially reduced. The overall cost effectiveness of the business may therefore be improved. From an individual standpoint, flexibilities and fresh opportunities may also become available — with members of CMR, for example, being free to trade inside and outside of the organisation as they so choose. Additionally, with a free agent mentality having already been bred into a significant proportion of the population by those who have allowed them to buy out of the welfare state, it may only be a matter of time before quite a few portfolio individuals come to expect to purchase their own job on their own terms. Many people have already accepted the need to pay for private pensions, private medical care, private education for their children, and private old-age nursing provision. Is it therefore not likely that such portfolio-minded individuals will seek to purchase a similar control and flexibility over the work-command relationship which will govern a far larger proportion of their lives?
Whatever the causalities, CMR's model of a virtual collective into which individual members non-exclusively buy-in seems likely to be mirrored across other organisations in the future. As this occurs, and more “virtual organisations” proliferate, an increasing number of traditional notions of the work-command relationship — of trust, of employee control, and of dedicated organisational allegiance — will be forced to evolve. Knowledge and information (and in time pure imagination) may indeed become the raw materials which in future will add most value. However, the structures and management philosophies of many a Future Organisation will be driven by the flexibilities and the economies of transforming labour markets, rather than by abstract collections of meaning derived from raw data patterns. Or to put it another way, the structure and management philosophies of most future virtual organisations will be determined not by the consensual hallucinations of cyberspace, but rather by the flesh-soul-and-coin realities of human and economic necessity.
CMR was originally created with two primary objectives:
1) To provide small to medium-sized companies with the resources they need for profitable growth, and in particular the funding, management and specialist expertise not normally available to them.
2) To provide high-ability senior executives with the opportunities and support network to enable each to optimise their potential as independent business people.
CMR's organisation was designed to be particularly attractive to those executives who want to be pro-active in building business activity, and importantly, have the personal skills and ability needed to be successful. Obtaining business and revenue through CMR is not automatic, and success does require effort and ability to be input. CMR provides the most comprehensive range of resources for SME's in the UK, opening doors to many companies and entrepreneurs. Those CMR members able to relate to clients, understand their problems, formulate solutions based on all the resources and expertise available within CMR, and effectively communicate with the client, will be successful. Those CMR members lacking the ability to do this, will not be so successful, but will be able to work alongside those that are. CMR provides every assistance to help new members become effective through training programmes and the very supportive network and regional/affinity group arrangements. However, the bottom line is ultimately dependent on how active and how good the executive is personally. An entrepreneurial streak is a positive benefit!Business comes to CMR through four main channels:1) Companies approaching CMR Centre directly, usually looking for funding!2) Through marketing and networking connections made locally by the CMR Region.3) Propositions referred by CMR members from contacts they have made privately.4) Through direct member contact with companies using CMR’s telemarketing service.
The amount of business handled by each CMR Region will be partly a function of geography (London and surrounding areas seem to have a disproportionately higher number of budding entrepreneurs), and partly on the proactive effort put in by regional CMR members. There is a direct relationship between the effort put into building local network relationships, and the business subsequently obtained. Regional business levels vary considerably for those reasons. A review of CMR’s Website (Business Exchange section) will give a feeling for the disposition of the several hundred projects and propositions being handled by CMR at any one time.
Some executives joining CMR from senior positions in major companies find it difficult to relate to the different environment of independent business life and the operating modes of many smaller companies. The need to personally create and develop opportunities has not necessarily been part of their career experience, and frankly some cannot make the change successfully. CMR membership is therefore not a guaranteed path to riches, and it is a reality that some members will fail to earn money or get as much from their membership as others. CMR membership benefits are however quite wide, and because of the very low cost of membership, there will be few not finding it worthwhile, even amongst the less successful. As a policy, the cost of being a member of CMR is kept to a minimal level, not just for the monthly membership subscription, but also for the training programmes and other facilities, which are all provided at or below actual cost. Those taking advantage of CMR’s Private Healthcare Scheme with BUPA will find their CMR membership is actually at negative cost! Even the least able CMR member should find CMR to be good value for money, whilst those with real ability will find CMR to be the springboard to many opportunities.
CMR OPERATIONS MANUAL SUPPLEMENT
HANDLING CMR CLIENTS - CASE STUDY REVIEW
GENERAL CONSIDERATIONS
Many of the propositions coming into CMR are from entrepreneurs and companies looking for funding. Their initial, primary focus is on acquiring the funding they think they need for developing their business enterprise in the way they think they should.
That is usually our starting point – and it is on that basis that our discussions with the client will commence. It is quite likely that their actual/true need for funding is going to be different from what they currently think – and it is also probable that the strategy and actions they see as appropriate may not in fact be the right or best way forward.
Our objectives are that we want to assess their business model to see if we agree with their beliefs (that the business has merit), that they have the right/best strategies, if there are other routes forward that should be considered, if there are any significant problems/ weaknesses that are likely to impact on the business’ future success, or if their attractiveness to potential investors can be improved.
If we decide that a funding route is appropriate, we then want to assess if the business is or can be made attractive to external investors, if there are any impediments that are likely to turn-off prospective investors, if there is a well-presented business plan that will stand-up to critical review (by investors) – and what sort of investor is likely to be appropriate for this type of business; will it be a business angel, an institutional investor (VC, etc) or a trade investor (perhaps through licensing) – or is the business suitable for a public listing (IPO)?
And of course, we want to look at all those things with an eye on how we, CMR, can be involved to help the client and to earn a good return ourselves!
So, to summarise our actions:
1) Firstly we will make personal contact with the prospective client and hopefully build a rapport.2) We will then start our review process as if we were an investor – looking at the company,
understanding the business model, probing their assumptions and predictions – deciding ourselves if they have a potentially viable business. Asking ourselves whether this business could have sufficient ‘excitement’ for an incoming investor – that is the single most important item because if nobody can get excited, then the project is unlikely to attract external investor interest.
3) If OK to this stage, then we want to move onto looking at their development strategy – is it the best way forward or are there other routes that should be considered? Are their operations sound? Are there weaknesses that need addressing before exposing the business to outsiders? Is the business properly planned and well presented?
4) On the basis of the above, we will make our own assessment of what we think the client should be doing and how they should be doing it. We will then talk that through with the client (in a
non-selling way) and discuss with them the plans for moving ahead, plus how CMR can help them, and how we would suggest being rewarded for our efforts and successes.
Not every business seen in this way will become a revenue-generator for us. Some businesses will rapidly fall off the list if we decide early-on that it is unlikely to be viable. Some will fall because we fail to reach agreement with the client – although in many cases in the past, clients who initially disagree with us will often come back either because they have re-thought their plans or have failed to achieve success by going their own way! The essential message here though, is to always handle the client pleasantly and professionally – even if the initial meetings do not result in business. Very often business will come later either from the client or a referral from them.
The other main item that needs considering, is that the meetings and time spent talking to a prospective client are speculative until they have agreed to pay or contract with us. Remember that prospective clients will usually take whatever free time/help you are prepared to give them. The mark of an experienced, successful consultant is the ability to move a prospective client into being an actual fee-paying client – quickly and without appearing to be pushy!
CASE STUDY 1 – Biosensores (Spain)
For details see: www.cmrworld/ProjectCaseStudy/BiosensoresPresentation.pdfwww.cmrworld/ProjectCaseStudy/BiosensoresBusiness Plan WOLA January2012 (2).pdf
This company is seeking funds of about €3.5M over a five year period to commercially develop its new patented technology for assessing water quality. The technology has already been verified as being scientifically viable by the EU’s official ‘Promote ETV’ organization.
Our handling of this project should follow these steps:
1) Obviously, make contact with the company. The purpose of phoning, apart from introducing oneself, is for you to be able to make a decision on whether this is worth your time/expense in visiting the client. Clearly if the client is nearby, then probably a meeting will be worthwhile – but if they are a long way away then you should try to handle by phone/email at least initially.
2) CMR will usually have circulated all members with the project summary, asking those with particular experience/input/connections to make contact with you. This can be invaluable in handling the client.
3) You need to quickly decide if the technology is commercially viable and constitutes a potentially worthwhile business. Does it address a big enough market? At the right price level given the competitors? Answer in this case is probably YES – but needs assessing.
4) Next, assess whether the product(s) are suitable for a standalone company, or whether it needs to be marketed and supported through other more established industry players? Can that be achieved through partners/distributors as they seem to be planning, OR should it be through a
licensing deal with one or more major players? The outcome of that assessment will greatly influence the investment size needed.
5) Next assess the IP (Intellectual Property) position – in this case because of the obvious intelligence of the client company, and their EU ETV clearance, I would assume the patents are OK – either granted or professionally searched (to make sure there is no affecting prior art).
6) If you decide that funding is probably the right way for the client, then there are two primary things that need consideration:a) Is the business plan/ presentation good enough? My own view on this is that the business
plan has all the features that text books say you should have – but it fails to adequately communicate why an investor should get excited. For industry experts and perhaps VCs, the business may be well-understood – but for more ordinary investors it might be less meaningful. For example, their Executive Summary states that a benefit is that water analysis using their system only costs €1 instead of €48 conventionally, with a considerable time saving. Just saving €47 might not be important if you only do it occasionally, and the time delay may not matter. I suspect that these factors do matter a lot – but it doesn’t say and it doesn’t explain the implications.
Taking a slightly ineffectual business plan around to potential investors is a complete waste of time. If it doesn’t clearly and simply communicate the commercial advantages and why customers will buy, then most investors will walk away. That is why it is worthwhile for the client to have an external expert, like CMR, to handle their project – we look at all those things and advise on changes to be made.
b) To which type of investor should this project be introduced? Should it be:i) Business Angels/Private investorsii) VCTs (UK)iii) VCsiv) IPO
In this case the answer is i. and iii. (not VCTs as it’s in Spain). Because of its hi-tech nature it could appeal to VCs although the funding need of €3.5M may be too low for many of them. It is worth also trying private investors – but taking the point made above, as most will probably not be industry-experts, they will need to understand why this is likely to be an outstanding commercial success. It is also possible that some EU/Governmental grants or assistance might be available, perhaps alongside other investors?
7) This all needs to be discussed with the client to persuade them that CMR should be involved in getting the proposition to an investable state, which would involve revising some parts of the business plan & presentation – and then in introducing the proposition to the investors thought to be suitable.
In this respect, if there is work involved in us preparing the company & its proposition so it can be properly introduced to investors, then we would normally negotiate a fee to be paid irrespective of whether a successful outcome is achieved (i.e. it will be usually paid upfront). We will also negotiate our success fee – this is usually 5% of the first GBP500K (or equivalent), then reducing in GBP500K stages to a base of 2%. If it’s appropriate, we will sometimes also ask for an option to subscribe for 5% of the client’s shares at par. We will also usually ask for a period of exclusivity whilst we search for the right investor(s) for them.
Whatever deal is negotiated, this needs to be confirmed in writing and signed by the client. Suitable standard draft agreements are in the CMR Ops Manual.
8) We can then introduce the proposition to CMR’s investors through the standard FundEx route. As a matter of policy, if we are charging the client an upfront fee, we will always include the special fee agreed with AIN for introducing our client’s proposition to their investor base (reputed to be 15,000 strong – although we have some doubts!).
In this particular case, the VC market is appropriate and the proposition should be introduced to those VCs who appear suitable for this type of investment.
9) Our role is to prepare clients/propositions and then to introduce them to suitable investors. It is not our role to undertake due diligence (it is up to the client & investors to appoint their own professional advisors and undertake their own due diligence). We can assist our client (probably for an extra fee) in their negotiations but we must never give advice that could lead to any comeback on us. It must always be THEIR sole decision.
10) In this case, there is another possible route forward, other than looking for an external investor – that is looking at the International Technology Licensing possibilities. This is usually only an option if there is worthwhile, commercially-viable technology/invention that has (or can get) solid IP (patents, copyright, etc.). Please read the section in the CMR Ops Manual for a full explanation on the process.
11) Final comments about the client. We have had similar clients in the past – where they are established ‘switched-on’ people, probably also with many connections. They probably think they know everything there is to know about business, how to raise funds, etc., etc., and may even have done it several times before. They have probably come to CMR purely because they see us as a potential source of inward investment – they quite probably will not consider they need any advice on how to run their business, nor on how to present and promote it. So apart from purely using us as a funding source for which they will only be prepared to pay us our success fee, there is a high probability that they will not be prepared for us to be otherwise involved, especially if charging a fee!
Whether we succeed in bringing the client onboard in a fuller sense, will depend on whether they can be convinced they actually need us. If they can be lead into the realization that perhaps they aren’t that good in presenting their company/proposition in a way that will make it attractive to investors, nor that they have the ability to look properly at the other sources of funding that might be available, nor to properly assess the other potential routes forward for them (like International Licensing) – THEN we have a good chance of bringing them onboard as a client.
If that fails, then you can offer them the facility of putting their proposition onto Fundex as a ‘public’ entry, without our special assistance or our special referral through to filtered CMR investors. There is no upfront cost to that – just a smaller success fee – and probably a smaller chance of success!
