Culture of transparency

I’ve been asked a lot lately about how transparent employers should be with employees. This is a fair question because business owners often feel like they need to protect their employees in the downtime and that it’s not the employees’ burden to bear. There is also a fear of losing good employees if they know how bad things are. Further, when things are going well, the business owner might be concerned about the employees knowing how much money the business is making. Any of these relate to you? If so, you might benefit from instilling a culture of transparency.

The need for a culture of transparency

I’ve had businesses that were doing super well and businesses that were on the brink of collapse. I now believe there is hardly a time that you could be too transparent. But this is in part about communication. In bad times, I agree, it’s not your employees’ burden to bear, but don’t kid yourself; your employees know when things aren’t great. They know by suppliers calling, your tone, and general rumours. In small towns or communities, this is significantly increased.

Control the message to reach a culture of transparency

The best thing a business owner can do at this point is to communicate. “Yes, things are bad, but we are doing x, y, and z to try to survive” is a good approach. It’s up to you to control the message, and the best way to do that is to provide the information yourself. People get anxious when there is a disconnect between what they know and don’t know – help them with that. You will lose some people, but chances are if your business is struggling, so are many others in your industry. You will also gain significant engagement from the good ones on your team because they want to help you make it through the hard times. Make a note of those people.

Transparency in the good times

Regarding transparency in the good times, a common misconception about businesses out there, and I think if owners were more transparent, that would help ease the misunderstanding. The illusion being that business owners reap all the rewards. First, business owners should reap some compensation for the risks they take and apply their knowledge to generate the successes they have had. That said, the average net profit for businesses falls below 10%. Assuming that the business owner is paying themselves a fair wage, they get the paycheck plus a few percentages of the overall revenue.

For most of my business life, the employees and suppliers had consistently better income from the company I had than I did. If you then combine that with tough times, and the business owner takes no salary and receives no dividends, the employees are in a good spot comparatively. Maybe helping your employees understand the financials and being more transparent might shed some light on what is going on. At the very least, assisting employees to understand the financials will develop them into eventual managers and leaders. Empowerment is a good thing and very rarely comes back to haunt you.

Encouraging information flow

But wait, there’s more. There is a hidden gem to having a culture of transparency. Although I’ve mainly talked about financial transparency, I think having an overall transparency culture is critical. For example, I’m against safety awards that award going a certain period without an incident. However, I am all for safety awards that encourage reporting of relevant hazards. As a business owner, I don’t want to be blindsided. Having a culture of transparency helps with that in the short-term.

Organizational learning

In the long-term, a culture of openness encourages organizational learning (and individual learning too). If we have a culture of transparency and allow people to fail, and encourage them not to hide it, they will embrace failure. They will also reflect appropriately on the failure in a state of curiosity instead of a state of fear. Embracing failure with curiosity and a hunger to learn will allow the employee (and organization) to reflect on the event and learn from it properly. Further, having transparency does something similar for wins too. In transparent organizations, people are more likely to reflect on success versus just celebrating it, maybe bragging about it, and then moving on in a hurry for another win.

What do you have to lose?

Here’s the reality right now though, if you are in trouble, struggling to survive, you probably have nothing to lose by trying to be transparent. I suspect the results will surprise you. You’ll see a loyal core team emerge that take ownership. You’ll see who your future managers and leaders are. And finally, you’ll see an increase in engagement.

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Business survival guide

In this video, I take you through a three step process in business survival. You need to deal with the immediate issue of survival before considering growth opportunities. Once you have dealt with business survival, you are better equipped to focus your energy on taking advantage of the opportunities that might exist.

For more information, contact us now.

Toys ‘R’ Us’ aggressive capital structure

Toys “R” Us filed for Chapter 11 bankruptcy protection in the US and the similar in Canada. A lot of people have been speculating about the position TRU is in. Many speculate that e-commerce is the culprit of TRUs pain. I don’t necessarily agree. Toys ‘R’ Us was doomed in large part due to its aggressive capital structure. A structure that didn’t provide wiggle room. My historical information on TRU can be accessed at https://en.wikipedia.org/wiki/Toys_”R”_Us.

Steering into the aggressive capital structure

TRU started, as a toy store in 1957 by Charles P. Lazarus (earlier than that as a furniture store). It was bought out in 1966 by Interstate Department Stores. Then it went public (offered on the stock exchanges so that the general public can become shareholders) in 1978. Finally, it was taken private (bought back from the public) by a consortium of private equity players in 2005.

When TRU was taken private by Bain Capital, KKR, and Vornado Realty Trust, the group paid $6.6 billion using only $1.3 billion in equity. The rest of the deal was in debt. The company reported net earnings of $252 million for the fiscal year ending January 29, 2005 (accessible most recently on Form 10, at https://www.sec.gov/Archives/edgar/data/1005414/000119312508100880/d10k.htm). To the net earnings we should subtract off a $59 million income tax benefit and add back $130 million in interest expense.

This gets us something closer to what the company had to service debt with. Servicing debt means to be able to pay that debt. This means that TRU, based on the January 29, 2005 earnings would have $323 million available for debt servicing. The trouble is, from 2006 to 2008, TRU would pay anywhere between $401 million to $530 million in interest alone. Thus, meaning that based on the 2005 earnings before taxes and interest, TRU was not able to service its new debt.

Private equity comes to play

When TRU was taken private, the private equity would have known without significant changes the company would be in danger (because of the inability to service the debt). So why would the group take this amount of risk?

TRU was bought at $26.74 a share when it’s all time high had once been $45. If the group was able to restore some level of profitability and lustre to the TRU brand and take the new TRU public at the equivalent of $45 a share, there is a significant windfall. It would mean that a go public at $45 a share would see a little over $11 billion to the group. The group pays back the debt of $5.3 billion and receive $5.7 billion for their equity (which was originally $1.3 billion). Thus, making a 438% return – ideally occuring in under 5 years. This is a prime example of a leveraged buyout – something Bain and KKR do regularly.

Challenges of such a structure

Toys ‘R’ Us is a prime example of why capital structure (the mix of debt and equity) is something to look at very carefully. On one hand, with more leverage (more debt) there comes the opportunity for more gain. On the other hand, with more leverage there comes more risk of untimely demise. Such a demise leads to nothing for the equity holders.

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