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Exiting a business...the wrong way

Last updated
29th April 2022
Written by
Sam Simpson

Backdrop

On the 9th anniversary of the collapse of 2e2 (2-e-who?! More on that soon...) I thought it worth sharing the first in a number of posts detailing the various perspectives and types of exits...How a positive exit feels from a founder, how it works for an investor. But first, lets look at a worst case exit.

This 'exit' was bittersweet - and brutal. It was an incredibly painful process, but also put pushed me to become an 'accidental entrepreneur'.

For context, I was 'Director of Project Services' at 2e2. I was director in title only, I wasn't a statutory director and reported to an Ops Director, who reported into a UK Board, who reported to group board CEO. In short, I was middle management but still had responsibility for £200m of projects and ~130 staff.

Note: this was originally published in the The Register back in Feb 2014.

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The story

“Sam, I need you in the Heathrow office early tomorrow morning,” read the panicked text from my line manager on a Sunday night.

The UK subsidiaries of 2e2 Group entered administration a year ago. I had a unique vantage point from where I sat within the crumbling company through the brutal process of administration and seeing the distress of colleagues, panic in customers and dismay in suppliers. All had much to lose.

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When 2e2 collapsed, I was Director of Project Services and had responsibility for delivering all programmes, projects and managed services transitions within the business. During the process I was involved heavily with the administrators to try to salvage as much as possible for the creditors and was eventually the joint most senior person to be transferred to one of the companies that acquired 2e2’s assets.

A year has now passed, the dust has settled and many ex-2e2 colleagues and customers have moved on. I think it’s a good time to reflect upon the administration from this unique vantage point and to discuss what lessons could be learned to avoid “being 2e2’d” in the future – or at least make the process less painful. First I’ll give some context for the 2e2 collapse then some lessons for employees, customers and suppliers.

How did it happen?

From its inception in 2002, 2e2 had a strategy to grow by acquisition, with the acquisitions being funded by a combination of bank debt and Private Equity. The 2e2 board had employed this "buy and build" strategy before with 4Front – they had built a business with a turnover of $250m via acquisitions and then subsequently sold it to NCR. 2e2 took a similar path – it had acquired over 15 companies. Some were bite-size purchases. Some, like the acquisition of Morse for £70m in 2010, were much more substantial.

Fast-forward to late January 2013 and 2e2 employees could see that tough times were ahead. Suppliers were refusing credit but 2e2 had been in challenging circumstances before and always managed to muddle through - usually by acquiring another company, which allowed a restructure of the funding position to obtain further working capital.

However, this was the first time that senior members of the management team were openly stating that banking covenants had been breached and that the bank could take exceptional measures to correct financial performance. We had assumed that this would involve the banks dropping in their own executive management team (they had in late 2012 in fact), by cost cutting or at the most extreme, by selling parts of the company as a going concern – this outcome was unthinkable but was actually mild compared to the action taken.

Come Friday 25 January, 2013, the 2e2 Board were with the banking syndicate to get a £20m lifeline to fund 2e2 while a more permanent financing deal was reached. The panic text from my boss on Sunday evening requesting my presence at a crisis meeting to be held first thing Monday however indicated that something had gone awry at the meeting.

On 28 January, 2013 2e2 entered voluntary administration and the interim UK MD, who had only been in place for a month, and the interim FD – who had been in place for even less time – were let go by the end of the day.

The now well-documented implosion had started: 319 colleagues were made redundant on the spot – no pay for January, no payment of long overdue commission or bonus, no notice period, no redundancy payout... Nothing. A further 627 colleagues left a week later when the administrators claimed that a sale of the complete business was impossible and certain elements of the business, such as the Business Applications and Flexible Resourcing units, couldn’t be sold standalone.

Four groups of 2e2 employees avoided redundancy during the administration process:

It is still somewhat puzzling that the banks and Private Equity firms refused to provide any more funding for 2e2. They had hundreds of millions invested but wouldn’t provide another £20m working capital to facilitate an orderly breakup and sale of the useful parts of 2e2 (the UC unit was profitable, as was the Flex Resourcing, Data Management and Security practices).

Instead they appointed a "cost effective" administrator, FTI, and walked away from their investment.

Lessons

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So, what lessons can be drawn from the 2e2 experience? For me the first and most surprising lesson was that administrators have a unique and surprising ability to rip up any existing arrangements and contracts. Their ability to ignore contracts of employment, customer contracts or POs raised on suppliers was truly eye-opening.

Lessons for employees:

Lessons for customers:

Lessons for suppliers:

Lessons for the 2e2 executive team, and anyone else running a similar business:

Lessons for private equity Firms and banking syndicates loaning large amounts of money:

How did it end?

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