Google a company called Motion and you’ll find news articles with headlines declaring “massive growth” and interviews recounting how Motion aggressively penetrated an already saturated market.
Yet type in the URL and the website of the company – once billed as South Africa’s largest multibrand office automation supplier – and it cannot be displayed. Motion, which in September this year had 350 employees and 13 offices nationwide, is no more. Entrepreneur investigates what went wrong.
In August 2007, the first time I went to Motion’s head office in Bryanston, I remember driving past a huge billboard advertising the company in vivid red. Quite impressive for a business that supplies printers and copiers, I thought.
Shortly thereafter I reached its head office, a striking building with landscaped grounds and a stylish, calm interior complete with plasma screens and piped music. Its founder, 37-year-old Brett Furlong, was cheerful and confident, informing me almost immediately that he had started the business in 1999 and built it by hiring only the best people. Furlong had been working as a salesperson in the office automation sector for over four years when he decided it was time for a change because, he said, he wanted something new.
“You can’t continue to do the same things and expect something different to happen. I knew that there were opportunities out there and I wanted to grab them.”
He bought into a franchise and became a single brand vendor on Johannesburg’s West Rand. “I had no access to finance and being a typical salesperson, I had the car and the boat, but no fixed property with which to secure a loan. To get the business going I maxed my credit card.
That kept me, my partner and our receptionist afloat for a week or two until we closed our first deal, which came about as a result of a referral from a neighbour.” From that point on, he funded his business’s growth through trade, continuously ploughing profits back into the company.
Furlong kept the franchise going for a number of years, but he realised that he was not going to achieve the level of growth he wanted. “We were confined to a small area which we had saturated, the margins were extremely conservative, and for every machine we sold, we had to cede the service contract to the principal. This last factor was significant as it meant we could never establish annuity revenue.”
Based on the reputation he and his team had built, they had no trouble getting Motion off the ground. Furlong invested a lot of money in marketing and advertising, and it showed – it was difficult to miss the striking black, white and red branding, particularly in an industry as staid as office automation.
“We launched a concerted marketing drive in 2004 and watched the business grow by 240% in that year. From 2005 to 2006, we experienced a further 60% growth,” he recalls.
2004 was also the year in which Furlong decided to franchise the Motion business model, a move that was driven by a need to build critical mass and get the channel up and running so that the business would present an attractive opportunity for an equity partner.
“Franchising allowed us to create a solid foundation for growth so that we could begin to look for the right partner, someone who wanted to contribute actively to a vibrant and growing business.”
He points out that he chose to go the franchising route because of his belief that owner-managed businesses just work better. “The franchise model also enabled us to create opportunities for people to share in Motion’s wealth around the country.”
According to Furlong, the single best business decision he ever made was to focus on people. “I recruited the best people and I paid above the standard for their talents,” he said. “I believe you have to offer a carrot if you want top people. By doing so, you know that you can trust them to drive the bus.”
Another reason for hiring the best, he said, is that great people come with lots of strong attributes. “When you are building a business, you need to have people who know how to dress, how to talk to different kinds of clients, why it’s important to be at work on time, and why commitment to the company goals is vital.
You don’t have to teach them these fundamentals.” It’s the people factor that enabled him to differentiate Motion in a highly competitive industry. Furlong attributed the business’s early successes to the quality of people the company had at the front end, and the guaranteed services it provided for customers.
“Product is one thing, but it’s the levels of service, honesty, trust and integrity that truly distinguish a business,” he adds.
How it all Went Wrong
When I returned to Motion two months later, the business with a turnover last year of R200 million, and R240 million projected for 2007, had gone out of business.
Its customer service base was taken over by Canon SA and the company itself was in liquidation. Furlong, who lost all his personal assets in the process, was keen to share his experiences and talk about ways that other entrepreneurs can avoid similar failures. It all started with the back office, that area that is largely unseen by customers and where tasks dedicated to running the company itself take place.
The back office includes the IT that keeps a company up and running, human resources and crucially, finances and accounting.
“It was in the back office that Motion was at its weakest,” said Furlong in hindsight. “I did not have the knowledge or experience required to take control of the finances and that is where things started to spiral out of control.” Controlling finances is a function of management and an integral part of the overall process of managing operations. Furlong pointed to the following back office failure.
1. An inability to identify and evaluate the exposures to loss in diverse spheres of operation.
Motion had always been highly geared and carried a huge amount of debt. Gearing is the ratio of debt to equity capital. If a balance sheet shows R10 million of total assets and a debt of R6 million, the gearing is 60%. In a secure economic climate, high gearing can fuel growth; ultimately, however, the higher the gearing, the greater the exposure to changes in circumstances and in the market.
2. Neglecting to specify and establish policies, plans, and operating standards, procedures, systems, and other disciplines to minimise, mitigate, or limit the risks associated with identified exposures.
Motion had also been overtrading throughout its nine years of existence. Overtrading occurs when a company expands its own operations too quickly or aggressively. An overtraded company typically enters a negative cycle: an increase in interest expenses negatively impacts net profit > leads to a decrease in working capital > leads to increased borrowings > leads to more interest expense, and so the cycle continues.
Overtraded companies eventually face liquidity problems and run out of working capital. In Motion’s case, the market turned soft as a result of rising interest rates and the introduction of the National Credit Act. Turnover dropped by 60% in its last financial year.
3. A lack of practical controlling processes that required and encouraged employees to carry out their duties and responsibilities in a manner that would achieve the control objectives outlined above.
Furlong could not trust anyone in the financial division of the business because there was no sense of ownership. In the first half of 2007, Motion amassed four months of uncollected debtors, exposing the business to enormous risk, simply because there was little sense of accountability and urgency.
The daily pressures and responsibilities of managing a business and dealing with customers, suppliers and partners can often make it difficult for business owners to find the time to deal with financial issues. Taking control of your finances, however, is one of the most important components of a successful business.
“Proper planning, coupled with ongoing control and review of your finances, is critical to achieving a profitable business,” says Furlong. “As the market becomes more and more competitive, and products and services continue to evolve and diversify, the need to proactively manage your finances grows in importance.”
When you go out on your own, he notes, your primary goals are to provide great services to your clients and to feel the satisfaction and fulfilment of having your own business. You are your own boss. You have control over your professional life.
But the advantages may make you overlook the pitfalls. “Our focus was on providing office automation services for our customers at hugely discounted rates, but I lost sight of the need to also take care of the business side of things,” Furlong admits.
“That means you not only have to watch the bottom line, you need to know how to get there. Working hard and being creative often is not enough. Certain fundamentals of business success cannot be ignored.”
Citing some examples of the mistakes he made on the money side, he says it is vital to separate personal and business finances.
Many entrepreneurs finance their business start-ups using their personal credit cards, savings or home equity, as did Furlong, but there comes a time when you have to draw the line between the two. The cleaner your records, the easier it is to maintain them and to know exactly how much your business is earning and spending.
But there’s another key consideration: when you pay for car and household insurance through your business and the business fails, you are left without any history and with no insurance risk rating. This has a negative impact on the future premiums you will be charged in your personal capacity.
Motion’s accelerated growth also had an impact on the HR side of the business. “Because we started small, salaries were structured in accordance with the requirements of a fledgling business when we should have re-structured them in line with the demands of a growing corporate environment,” Furlong said.
In line with what he calls a small business approach, Furlong found himself empathising with staff members; salaries ballooned when he should have been holding tightly onto his cash. He rewarded people with bonuses and gave staff an annual increase even while he was beginning to concede that the business was cash-strapped.
In February 2007, he discovered that the tax bill had not been paid for December and January. “At one point we owed the Receiver R2,5 million, but we met with Sars and came to an arrangement that enabled us to settle all but one month’s worth of the monies owing.”
By March, a competitor had put an offer on the table to buy Motion for R64 million. “It was a mixture of greed and optimism that made me turn down the offer and demand R80 million,” he concedes. Eight months later he was in a R30 million hole.
“My situation had been reversed by almost R100 million. The lesson there is don’t do a deal on price alone – find a partner who can help you sustain and grow the business and make that the basis of the transaction.”
He took a dim view of the commercial banks. “Whatever they may promise in the advertising campaigns, banks are not there for you or your company; they’re only out to make a profit. Despite a successful nine-year relationship with our bankers, they pulled the plug on us and terminated our overdraft based only on rumours they heard in the market.”
He recommends finding private investors as a more viable alternative. With the market becoming tighter and liquidations on the up and up, Furlong does not recommend starting a business on your own. “Experience has taught me that it is advisable to partner with a company that can provide you with infrastructure and administrative support. Industry experience alone is not enough.”
When times are tough, it’s important to handle creditors appropriately even while you are playing open cards with them. Motion made the error of running up big balances on its super sized credit lines. While credit enables you to run your business, it is often far more advisable to go the cash-on-delivery route so that you avoid the risks of building up vast amounts of debt.
Furlong’s advice is to steer clear of group meetings and to rather meet with creditors individually. “Bringing everyone together creates an environment of fear and mistrust that we could probably have avoided had we consulted with our creditors one-on-one.”
At the same time, he learnt that lending money to your channel without having watertight agreements in place can spell disaster. “Never engage in a franchise rollout without having all the paperwork and contracts in place,” he cautions. “No matter how much emphasis you may place on trust and personal relationships, having the documents in black-and-white is vital and protects both the franchisor and the franchisee.”
What lies Ahead?
Furlong acknowledges that with more prudent management of the finances, as well as some long-term planning, he could have avoided losing control of the business.
He is also resolute that Motion did the best it could for as long as possible. “Our competitors were extremely critical about our aggressive style, but our multibrand business model was unique in that it enabled us to offer clients the best value in the market. It was a high-risk, high-reward venture and after nine years I can say that the learning curve was remarkable.”
What about his fiduciary responsibilities? When you become a director, you sign a document declaring that you know how to fulfil your role and that you are fully aware of all the implications and personal risks involved. From that moment on, you will not be able to say you didn’t know.
As a consequence, there are real personal risks involved in holding a directorship. Furlong claims he was able to show that he carried out all his obligations from the time it became apparent that the company was in trouble. “I was able to demonstrate that I did what a reasonable director would have done in my position and I was not found to have acted recklessly.”
Furlong, who was once worth R40 million in assets, and owned a Ferrari and a luxury holiday home, no longer has a thing to his name. Not only did he lose all his possessions, right down to his personal residence, but he also owes R16 million on a loan account he took to finance the business when he realised that things were not looking good. Negotiations with Motion’s creditors are pending.
But there is a light at the end of the tunnel. He has been approached by three listed companies who are looking at ways in which they could adopt his business model, recapitalise it and look after the back office. “On a positive note, they have recognised the success story behind the failure and there may yet be a way of resurrecting Motion in the months that lie ahead,” he says.
How to Avert a Business Survival Crisis
- Do not run up huge credit lines with creditors. It is better to buy products COD and let the creditor pressure you into paying.
- Do not lend money to your channel without watertight agreements.
- The market is tight and liquidations are at a high. Try not to open a business all on your own as the pressure is immense. Look to partners who can offer you financial and infrastructure support.
- Make sure that you keep your financials clean. Do not mix up the personal (cars, property, insurance) with the professional as it becomes very messy.
- Do not put your faith in commercial banks. They will be the first to pull the plug on you when things go awry. Motion had a nine-year relationship with its bankers and they withdrew its overdraft the minute they heard rumours in the market.
- Don’t rely on gut feel. Entrepreneurs are optimistic by nature, but Furlong believes he should have gone to market and sealed a deal with the competition at the first signs of danger.