CASE STUDY:Before the current recession hit Tom Murphy had seen his business through the tough times of the 1980s. However, his son, who took over the business in the high times, has no such experience of downturns

THE CURRENT recession may have come as a shock to some people but those raised in leaner times have survived downturns before. Tom Clancy set up his healthcare components manufacturing business in the mid-1970s full of expectations and enthusiasm. But a few short years into the venture the economic crisis of the 1980s struck.

With falling sales and astronomically high interest rates Clancy struggled to keep his fledgling business afloat. He pared back costs, cut staff and seriously thought about packing his bags for greener pastures. What kept him here and encouraged his fight for commercial survival was the fact that he wanted to bring up his two young sons in Ireland.

The experience of seeing his business nearly go to the wall made Clancy cautious. Subsequently he took a very conservative approach to developing the company and was content to see it grow organically at a steady pace. He never assumed that his sons would want to join the family firm and was pleasantly surprised when his older son, Mark, a business studies graduate, expressed an interest in doing so in 2000.

Mark was bright, eager and ambitious. He had a lot of good ideas and was prepared to work long hours, but he was inclined to be headstrong and had little of his father’s caution. In the early days of their business relationship Clancy trod a fine line between keeping his son under control without totally dampening his entrepreneurial spirit.

Initially he encouraged Mark to take on self-contained projects that would not harm the core business if they went wrong. If Mark was aware of this strategy he never mentioned it and was unstinting in his efforts to be successful. Several of the projects provided a tidy boost to sales and, with his 65th birthday looming, Clancy began to draw Mark more into the general management of the business.

Having done most of his growing up at a time when Ireland was ostensibly prosperous, Mark had assumed that the unprecedented economic growth was both real and sustainable. He said his father was hanging on to the legacy of the past to the detriment of the business’ development and that taking a risk looks a lot less scary in one’s 30s than it does to someone close to retirement.

Clancy conceded that there was some truth in his son’s argument and, having discussed it with his wife, decided the time had come to hand over the reins to the next generation. Having heard stories about owner-managers who supposedly retire but proceed to “haunt” their successors, Clancy made a clean break from the business and Mark took over as managing director.

He inherited a well-run company with a seasoned, motivated workforce who knew their jobs. Mark’s view was that the company needed to make a quantum leap forward and that the only way to do this was by taking several bold steps in one go. In particular he wanted to break into the lucrative US market and to make quite a sizeable acquisition that would almost double turnover.

His father had left the company in good financial shape and, with a strong trading track record behind it, Mark experienced no difficulty raising funds. In fact the bank pretty much offered him as much money as he wanted. The company borrowed heavily against its property (in a prime location adjacent to the M50) and also dipped into its cash reserves.

Mark paid top dollar for the acquisition which traded strongly during the subsequent 18 months. However sales had been artificially boosted by the economic boom and as the market began to decline so too did the company’s performance. Within a short space of time the acquisition began to look very expensive. Earnings slumped leaving the company with a huge debt. For day-to-day purposes the acquisition was effectively living off overdraft facilities extended to the original company.

The financial controller warned that the problems were mounting but Mark wasn’t listening. He was busy commuting back and forth to the US and repeatedly cancelled meetings called to address the issues.

The financial controller was doing very well to keep the bank at bay but he knew that once the banks had time to focus on their loan book in sectors other than property, the company would be brought to heel pretty quickly. He frequently e-mailed Mark urging him to make an appointment with the bank manager and to put his cards on the table but Mark’s argument was why bring the bank down on his head before he had to.

To compound the situation, earnings in the company’s core business had also begun to fall while the timing of the foray into the US couldn’t have been worse.

Initially Mark expected that the situation would improve in line with the original business projections and that he would be able to trade his way out of the difficulties. But as the market became more and more competitive, and margins were cut to the bone, he at last accepted that the business was in serious trouble.

Suddenly he was plunged into a blinkered survival mentality. In theory he knew all about running a successful business. In reality he felt entirely unprepared for making life and death decisions in such a hostile and uncertain climate.

His initial reaction was to slash overheads by cutting jobs. He explained the cuts to his father (who was not impressed) as some necessary rationalisation to cope with the downturn. This provided some temporary respite but did little to improve the overall situation. He also stopped developing the US market and reduced the company’s operation there to little more than a tick-over operation.

Mark now recognises that these measures are not enough and that the business is going to have to be fundamentally restructured if it is going to survive. However he is now so stressed by managing day-to-day that he does not know where to start. He has no experience of managing in a downturn and, while he realises that everything about the business now needs to be challenged and re-evaluated, he is finding it very difficult to respond to situations with anything more than short-term, knee-jerk reactions.

Salvation appears to have been offered by a so-called “business angel” who has expressed an interest in becoming involved. However the terms of the deal would mean parting with a majority stake in the company.

Mark’s initial reaction was to jump at this but following a long-overdue heart-to-heart with the financial controller (who has worked for the company for over 20 years) he has put a decision on this on hold and has reluctantly told his father how bad things really are.

Tom Clancy is naturally bitterly disappointed with the turn of events and blames himself for not monitoring Mark more closely. He also feels a tremendous loyalty to the staff, many of whom are very long serving. Tom has told Mark that he expects him to knuckle down and focus on saving the company and as many jobs as possible and that he should only consider big steps such as selling out – or even going into liquidation – as last possible resorts.

Mark still believes that unfortunate timing is to blame. He is convinced that his expansion plans were sound and it was simply bad luck that the global markets turned when they did.