A Life In Numbers

If you have yet to attempt to complete an online Annual Return for Companies house then you may need to set aside a good chunk of time and have a few painkillers to hand.

If you have a business that is a simple private company with just a few shareholders and only one issue of shares all at the same price then you shouldn’t have too much trouble.  However, anything more than that and you could find yourself facing some serious frustration.

With good reason, Companies House is encouraging companies to submit their Annual Returns online and the cost for doing so is half that of a paper submission.  And, to their credit, some good changes have been made such as allowing more that 99 shareholders to be added (a limit not made explicit until you tried to manually enter the 100th and found you just couldn’t any further and then needed to repeat the process on paper) or the inability to handle low nominal values for shares (compounded by an inability to understand this was an issue) which has now been fixed.  However, I’m also hearing of instances where paper forms are being rejected because online ones have been started and this means the online version has to be useable and practical.

Where are the major issues now?

Firstly the requirement to update your directors details with the Country/State of Residence.  Not too complex in itself but it feels like repetitive information which is already included in the address.  When you select the country then you are prompted for a “date of change” which is not abundantly clear as most of your directors will not have had any change.  The answer here, according to Companies House, is to put the date of the Annual Return.  Also, although there seems to be an implication that you will also have to complete a 288c for this change, I’m assured that this is not necessary (as there’s been no change!)

The next challenge comes by way of the “Amount paid up on each share:” which has clear notes stating “The amount should include the share premium.”  Unfortunately, if you are a company, as many are, which has had more than one issue of the same class of share at different prices (multiple financing rounds either up or down) then the single box allowed for the submission of this data seems woefully inadequate.  Now, admittedly there is a later note which says “Multiple amount paid and unpaid details within the same class of share.  This form is not currently able to capture multiple paid or unpaid amounts for the same class of share. This information can currently only be provided using the Software Filing service or by submitting the paper version of the form.”  and they seem to be adding this sentiment liberally across the site, so it is obviously causing some consternation. 

The main issue here is that it smacks of a set up that has not been fully thought through.  Unfortunately, it seems it’s also not been communicated clearly to the help desks at Companies House.  I’ve had two separate calls today where I was told “just put the paid up share premium” and when I enquired how I should handle multiple values I was told “just put the current one”; then “put the total share premium”; then “just put in what’s needed to pay it off”; then “I’m not sure I understand this” then “sorry the technical department is busy” and finally “we can’t give you guidance on this and you’ll have to take your own legal advice”.  Our lawyers have confirmed this is a complex issue.

A little more digging has confirmed that the BIS (Business Ideas and Skills department) of BERR (which once upon a time was the DTI) have identified this as an issue.  This link BIS Paid Up Capital explains a little more and they are referring people to ICSA ICSA Guidance for more guidance.  The ICSA essentially say do what you can to provide information but if it’s too complex then ultimately just dividing the total share premium account by all shares should do the trick. 

I understand Company Lawyers are currently advising clients to go the paper submission route and submit all relevant details.  Ultimately it looks as if there is a realisation that this aspect of the Companies Act 2006 needs a little more work and there is talk of a change being made.  If you’re stuck with the online (which you will be if you’ve selected the “Proof” option then you’ll probably need to follow the ICSA guidance.

The next challenge to be faced is the Prescribed particulars (of rights attached to shares) which provides a relatively small box for a whole lot of potential information. 

Here the challenge may come for small companies, where they only have Articles of Association and no Shareholders Agreement and they will have to pick their way through understanding what’s relevant and ensure they don’t include information relating to Directors instead of shareholders.  For companies with more complex structures and detailed Shareholders Agreements as well as Articles, it’s unfortunately not possible to just write “as detailed in the Articles”.  You have to go to through and select all the relevant information and cut and paste it into the boxes in some coherent format. 

I’ve seen indications that there might be a limit on the amount of data that can be input but I haven’t found out whether that is actually the case.

There have been some interesting questions as to the objective of this particular request, as excerpts from Articles and Shareholders Agreement will never tell the whole story and for any potential or existing shareholders they would be better off getting hold of the complete documents.  So for small and medium private companies this does seem an extra burden that serves no real purpose.

 The details that have to be extracted for each class of shares are as follows :-

(a) particulars of any voting rights, including rights that arise only in certain circumstances;
(b) particulars of any rights, as respects dividends, to participate in a distribution;
(c) particulars of any rights, as respects capital, to participate in a distribution (including on winding up); and;
(d) whether the shares are to be redeemed or are liable to be redeemed at the option of the company or the shareholder and any terms or conditions relating to redemption of these shares.

There are a lot of beneficial changes coming out of the Companies Act 2006 but there is still a need to make sure companies can operate and continue without being overburdened by bureaucracy.  For many SMEs it feels like government departments assume you have as many administrative staff as they do.  There’s still a real need to reduce these burdens on hard pressed SMEs, even more so at a time of cost reduction when many are doing their best to get by and keep their staff employed. 

The new Companies Act is a decent step forward in many areas and it’s helping to simplify matters but at the same time its brought in some extra demands that do need more consideration as to how appropriate they are for certain types of companies, especially when it comes to SMEs.

I was having a discussion recently with a business partner of mine about whether the value of companies in the Web 2.0 sector is fully understood.

Back in the days of the dotcom boom we sold a company called Smartgroups to Freeserve for £60m. At the time we had very little revenues and certainly no profit. But we had a very good piece of software, a fast growing customer base and a great idea about how to generate revenues off the back of the service. Luckily, in Freeserve, we found a number of key individuals who completely understood what our company and service could bring to their business. Applying our software and service to their customer base could generate huge value for the business and that changed the way that the value of the company was viewed.

Now it would be easy to write off this deal as just another (for a change successful) example of internet euphoria. However, the priciples are still intact today and companies are still being valued and acquired on the basis of the future value they can bring to the acquiror.

If you read any academic or financial books on valuation of companies (and I’ve read a lot!) they invariably go down the route of valuing companies through variations on discounted cash flows (with or without terminal values), NPVs, revenue and profit multipliers (with much debate about the relative appropriateness of EBIT, EBITDA, EBITDAR, PBT or PAt), p/e ratios, betas and other more complex calculations involving variants of the Black-Scholes model or the Modigliani-Miller theorem.

However, in the past 20 years of working in this field, I’ve found there is a more fundamental valuation technique that seems to be known only to a handful of financial alchemists and some of the highest performing sales people.

A company is worth whatever the buyer is to prepared to pay for it.

All the financial analysis is generally used to justify the valuation (or at least give it some credence) after the event. Sometimes it stacks up, sometimes it doesn’t.

If you’re a large company, especially a quoted plc, who is looking to acquire a company that will simply add revenue and profit to your bottom line then looking at your own p/e ratio and applying that to the profit that will be added through the acquisition is a perfectly rational method of valuation.

However, if a company is being acquired because it brings new technology or IPR, because it solves a problem that has been holding back sales or development or because it brings a business advantage that can be applied across a much wider customer base, then the value needs to be considered in terms of the additional value it can bring to the acquiror.

A company like Oracle, for instance, with a Market Capitalisation of over $100bn may see that buying a company with a technology or business application that could enhance their profits by 0.5% could add $500m to their market value. This means that, although there would doubtless be some shrewd negotiation, the value of that acquisition and the price they might be willing to pay could rise up to $499m and they would still come out on top. Of course in practice this would be unlikely given all the risk factors involved but it allows you to see acquisition values in a different context. And if you have a software company that is just breaking even then it might encourage you to think wider than just achieving a high multiple of your profits.

After all this, the conclusion we came to (following the discussion at the start of this post) was that many people, even experienced financial experts and business people, still don’t fully understand how valautions are achieved. And after last week’s episodes in the financial markets they might be even more confused.

Remembering the old adage of chaos theory that says when a butterfly flaps its wings in one country it can cause storms in another. I wonder if there’s any connection between the switching on of the Large Hadron Collider in Switzerland and the collapse of Lehman Brothers on Wall Street.

It’s just a theory!

Whilst I’m on the case of dodgy dealing, I’m just in the middle of a bad ebay experience. Normally I find it’s great with only one experience of an item not being sent. Luckily I hadn’t paid for it as I got suspicious when I couldn’t contact the seller and their phone number and address turned out to be a hotel in Bristol. The latest one is someone who was selling an item that I now see used the same photo and description as another (reputable) seller. Having not received the item and after numerous conflicting email responses and another false phone number, I’ve decided to raise it with ebay’s dispute console.

I thought I was fine on this because I paid with Paypal and they make a big thing about the Paypal Buyer Protection Program where you’re supposedly covered for up to £150 on purchases. Now that I need a refund I’m reading the small print in more details. It seems that you’re covered providing the Seller still has money in their Paypal account. Now given that you have to go through a period of correspondence, waiting and chasing before you can chase for a refund and then Paypal take another 30 days, it seems likely that a Seller with malicious intent will have cleared out their paypal account before you get the issue resolved. And that would appear to mean no money for you.

If anyone has had a different experience then I’d be interested to hear it and I’ll keep you posted on what happens to my dispute.

There seems to be an element of suprise at the recent departure of the Flickr founders, Stewart Butterfield and Caterina Fake, from Yahoo. They sold the company to Yahoo 3 years ago and they’ve now fulfilled their earn-out, taken the cash and moved on.

This is a very common scenario for any acquisition. And it makes total sense. An entrepreneur is invariably someone who has chosen to leave the corporate world and make it on their own. They go through the challenges and obstacles of starting their own business, raising funding, generating sales, marketing and promoting the products or services. And throughout that process they have to make fast decisions, all the time knowing that the buck stops with them. They don’t postpone a decision awaiting a feasibility report. They don’t assign a manager to run an investigative project to analsye outcomes, they don’t schedule endless meetings to discuss the possible ramifications of the decision. They look at the facts and take action. If they don’t, their business quickly stalls.

It’s challenging, it’s exciting, it’s scary and it’s satisfying. When it works it feels fantastic and when it doesn’t work it’s excruciating. But there’s no time to dwell on either outcome because when you’re running your own company you have to keep moving. Spend time patting yourself on the back or kicking your own rear end and the competition will take you out. It’s all about fast paced, quick thinking, flexible, dynamic, focussed decisions and actions.

And then you sell the business. After the flurry of excitement, anger, trepidation, joy and pain that is the exit (especially due diligence and the interminable wait for lawyers to agree contracts) you find yourself somewhere new. Your company feels the same, and the same people are still there but something’s changed. Now you have to report to someone. You’re no longer in charge (although you’ll try to kid yourself you are). You’ve spent a good portion of your recent life growing your precious business and now someone else owns it.

And so you swallow your pride and wait for them to tell you what they want you to do. You know you’ve got some earnout targets (and hopefully you’ve negotiated smartly to make sure you’re in control of achieving them) so you make sure you do what’s needed to complete those. But you think there must be something more that the new owners want to do with you.

So you start asking and probing and pushing. And you begin to find that the new owners hadn’t really thought past the point of acquisition. Buying your company seemed like a good idea at the time and it certainly stopped anyone else getting their hands on it but now they’re in a bit of a quandary. You work in a different way, and they’re worried that changing that might harm the business. Equally, they don’t want you causing too much change in their business in case that ruffles feathers. The management team of your new owners are all a teeny bit jealous because, whilst they now own your business, it’s you who’s actually getting the cash. And although there’s a grudging respect for what you’ve done they can’t help feeling that it should have been them and you’ve just been lucky. This always causes a somewhat strained relationship.

And as all this continues, you begin to wonder whether it was all a bit of a mistake. Selling up and getting the cash was great but the sense of dynamism seems like it has gone from the business. It feels a lot more like a job now. And that was what you were trying to get away from in the first place.

So you make a decision. You decide to focus on the earnout, earn your extra cash and move on. You’ve already done the hardest bit, which was letting go of the business when you originally sold it. So now moving on is a lot easier, especially with the buffer of an earnout bonus. Now you’re free to begin the whole process again.

This scenario recurs over and over in the business world. It can run at different timescales but it’s always a common theme and it’s indicative of the entrepreneurial nature. It pushes against the boundaries and is stifled by being caged. It shouldn’t be taken as a negative indicator on the acquiring company, although they do need to make the most of what they’ve bought whether the founders stay or go.

Whether you’re an entrepreneur or an acquiror, you should expect that this will be the way of things and plan accordingly.

In the case of Yahoo and Flickr, there are a whole lot of issues going on with Yahoo but the Flickr founders would have gone whether those issues were there or not.

Today’s acquisition of Bigpoint, a German online gaming site, by Peacock Equity and GMT, highlights the growing interest in online gaming by private equity. It also offers an interesting perspective on internet business models. Bigpoint allows free online access to games, priding itself on the fact that you don’t have to download anything and you play through the browser. Once you’re playing the games (and 24m have registered to to play so far) then you can buy virtual goods and special features at a premium subscription. BY their very nature the games and service are viral and the virtual goods can certainly play to the Long Tail theory, as can the special features.

The company also provides advertising opportunities for in-game product placement and advertising (essentially like buying a hoarding at a football match). It’s an interesting use of the subliminal positive association that TV producers and Film makers have used for many years (and not always admitted).

So what are the current buyers trying to get? The gaming community has many high spending, early adopting members who are willing to spend significant amounts onthe latest games, gadgets and technologies. They are also an extremely exacting crowd, who will decide very quickly if a game is not up to scratch. This has been the case since the early to mid 1990s when I was involved in the market with Philips Media. Even then game development budgets often ran to $2m and could stand or fall on the first week of reviews. Anything less than a 9/10 by the main magazine meant the long awaited game was rapidly destined for the bargain bin. And today’s development budgets have grown massively and the users are no less demanding.

The gaming community have also been at the forefront of communication with forums, blogs and IM. So news travels fast amongst them. They’re a great group if you can get them onside but you can get in big trouble if you upset them.

The question here is whether this model can easily be applied to other internet businesses that are serving different communities. Many companies are still trying to crack the revenue model, including the major social networks, and they need something with the addictiveness of gaming and, more importantly, the desire to be better, faster, stronger if they really want people to spend money with them. Free content is still an obvious route to fast growth, especially with Web 2.0, but the paid for back end needs to be populated with “have to haves” rather than “nice to haves” and outside of gaming that’s still proving a challenge.

www.marshallkeen.com

Whenever I’m approached by someone claiming to be the best at Search Engine Optimisation (SEO) or Search Engine Marketing (SEM) and telling me how they can rocket my companies to the top of Google I always say “just to check how good you are I’ll type Search Engine Optimisation into Google and check that you come out on top, thus proving that you can do what you say”.  They invariably go quiet at this point.  Until last Friday that is, at the Yahoo/FreshBusinessThinking Internet Marketing workshop.  I met two companies in the SEO/SEM sector that were presenting and discovered that they do actually come top of the list on a search for those terms (admittedly after wikipedia but it’s still pretty good).  I have to say I was impressed and it some what blew a hole in my standard retort.  I’ll let you discover them for yourself (just search on Search Engine Optimisation and Search Engine Marketing to check that they’re still doing their job).

It was a great example of companies excelling at what they say they do.  And that seems more and more rare these days.  I’m not saying we’re the absolute best in every area but meeting people who are delivering on their promises inspires me to make sure that we continue to improve every day.  In the era of the credit crunch it’s got to be one of the best ways to survive.

 www.marshallkeen.com