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Who’s In Control?

I recently sat through three very interesting meetings which focused, in very different ways, on the realities of control.  They pointed out, once again, a lesson which is worth understanding: one needn’t always own a majority of the stock, or equity, of a company to be able to control it, at least in key ways which influence its behavior and future prospects.  I’ll describe each situation, protecting the names as usual, in order to illustrate control issues that everyone --- but especially growing, entrepreneur-driven businesses -- needs to keep in mind.  You’ll note that I don’t mention very many specifics about the companies, because these situations can occur in myriad places and forms.

The first is a company just about to raise a fresh round of equity from new investors -- but it’s had to put the capital-raise, and the expansion that capital raise is intended to fund, on hold.  The reason: the company is being sued.  Companies get sued every day, but generally are able to go on with their plans.  However, this suit is particularly timed (and, an outside observer might say, planned) to disrupt, because it centers on the value of the stock issued in a previous transaction.  Because the suit is as yet unsettled, it brings into question the proper value of the company’s stock today, which makes it almost impossible to enter into any new stock-related transactions.  As a consequence, the company’s behavior and strategy, for the time being, is driven by someone other than the company’s management or board.

The second is a strong, rapidly growing company.  It’s not a restaurant company, but could be.  Its catalogue consists of a variety of offerings, but there’s one component which is used in almost every item, and that one component is a big part of the company’s uniqueness and success.  Turns out the company gets that component from only one source, and that source recently went through a change of ownership which has led to a change in its production, delivery, and pricing.  That one supplier is, for the present, controlling not only the profitability, but the likelihood of future expansion, for the company we’re discussing here.  Until either another supply source or an alternative component can be found, the company is no longer in charge of its destiny.

Lastly, our subject is a franchisee of a well-known brand.  Like many franchisees, this one has used substantial amounts of outside capital -- leases and debt -- in its expansion.  Its performance overall has been strong, although a couple of its units are struggling.  It recently refinanced all its debt with a new lender willing to support further growth, which the franchisee both desires and requires.  However, like many franchisee lenders, especially those dealing with relatively levered borrowers, the lender has “approval rights” for any new location where the franchisee wishes to expand.  (Like many franchise systems, the franchisor in this case also has approval rights.)  For their own reasons, both the franchisor and the lender want the franchisee to be successful and grow; neither has any intention of hindering its performance.  Still, they’ve each assumed a control position with regard to the single most important decision (or decisions) facing that franchisee in the coming years.

None of these is necessarily avoidable in all cases, although there are ways for managements and boards to look ahead and try to minimize such risks before they become roadblocks.  As the man says, “I’m not sayin’ ... I’m just sayin’”!

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