ExI Corporation (A)
1
ExI Corporation (A)
By
Daniel F. Jennings*
Texas A&M University
College Station, TX XXXXXXXXXX
XXXXXXXXXX
Lane Batson
ECP Solutions Corporation
Houston, TX 77003
XXXXXXXXXX
Aaron Schrems
North of 80, LLC
Chicago, IL 60647
XXXXXXXXXX
Southwest Case Research Association (SWCRA)
2016 Annual Meeting—Received “Runner-Up” Award for Best Case
Fe
uary, 2016
*Contact Author
__________
This case was made possible by a corporation that prefers to remain anonymous. All names and locations
have been disguised. It is prepared as a basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation. All rights are reserved to the authors and SWCRA ©
2016 by Daniel F. Jennings, Lane Batson, and Aaron Schrems.
mailto: XXXXXXXXXX
mailto: XXXXXXXXXX
mailto: XXXXXXXXXX
2
ExI Corporation (A)
Introduction
As Kenneth Davis, majority partner of ExI, pulled the rental car into ExI’s
parking lot he turned to his passenger; John Nelson, president and owner of
Nelson Consulting and stated: “Ronald and Portia will be surprised to see us. Let
me do all the talking. I want you to observe Ronald’s behavior during his
conversation with me”. Ronald Maak, minority partner of ExI, was responsible for
managing ExI while Ronald’s wife, Portia, supervised the financial and
administrative services aspect of the business.
After entering ExI’s lo
y, Kenneth waved to the receptionist as he and
Nelson entered Ronald’s office. As always, Kenneth felt uncomfortable in that
office. A large metal knight stood in one corner while the adjacent corner
contained the mountings of several large swords and a crossbow. Two dual
monitors were a
anged in such a way that made it impossible for anyone sitting
or standing across from Ronald’s desk to observe him. Kenneth thought silently
to himself: Ever since Ronald began managing ExI, he refe
ed to his office as
the “Fort”
Kenneth and Nelson entered the “Fort” before Ronald was aware of their
presence. Quickly, Ronald left his chair and moved around the large office table.
“Kenneth, I’m surprised to see you here in Grand Prairie.1 You don’t normally
visit us without letting me know your schedule and your agenda.”
1 Grand Prairie is a Dallas, Texas subu
.
3
Kenneth responded: “Ronald, I want to introduce you to John Nelson who
is the owner of a consulting firm. I’m leaving shortly for Comanche Peak2 and I’ve
asked Nelson to spend several weeks here in Grand Prairie observing ExI’s
operation. Please answer any question that he asks and give him access to all
our sales and financial information.”
Ronald did not indicate any apprehension about Nelson’s visit and quickly
eplied: “I’ll contact Portia, immediately, and she can take Nelson to our spare
office. Kenneth, do you have a few minutes to discuss an important issue with
me before you depart for Comanche Peak.”
After Nelson and Portia left the “Fort”, Kenneth advised Ronald that he
was available to discuss whatever was on his mind. Ronald began: “I’ve hit all
the milestones that we agreed upon to obtain 49 percent of ExI. That
achievement is ahead of schedule. I now have the option to purchase your 51
percent ownership. I’m really concerned. Six months ago, I made you an offer
and you indicated that you wanted to wait for “a while”. I asked you to advise me
what amount you were expecting. However, you never responded.”
Kenneth explained: “Ronald, I didn’t respond for several reasons. First, let
me say that, by any measure of performance, you’ve done an excellent job in
managing ExI. However, you’ve been well compensated for your efforts. I don’t
know many high school graduates who are earning an annual seven figure
income and have the degree of autonomy in running a business that you have in
managing ExI. As I was preparing a response to your offer, I was contacted by
2 Comanche Peak is a 2300 megawatt nuclear plant located in Glen Rose, Texas about 80 miles southwest
of Grand Prairie.
4
Joshua Cain who is threatening legal action over an alleged under-payment of
his sales commission. Also, I’m concerned about ExI’s capacity to handle the
increased sales volume that you’ve generated. Remember, I mentioned my
concern about the decline in gross margin during the last three years. As you
ecall, gross margin during that time period declined from 66% down to 61%” 3
Ronald addressed Kenneth’s gross margin decline comment by stating:
“We’ve discussed gross margins during a telephone conversation several months
ago. I mentioned that during that same time period time, operating income had
increased from 13% to 15%.
Ronald then stated: “You just show up unannounced with a consultant and
inform me that he is going to examine everything that is happening at ExI. What
future role is that consultant going to play at ExI? Don’t you trust me? Also, why
do you always
ing up my lack of a college education whenever we discuss ExI’s
future? I know that I have just a high school education. I know that I didn’t
graduate from the Naval Academy and I don’t have an MS in Engineering with
‘great honors’ that you have. But it’s not many people who have achieved what I
did at GE and at ExI. “
Kenneth spoke very calmly: “I asked John Nelson to come to ExI for
several reasons. First, I wanted him to examine ExI’s financial statements and its
operation and then to determine a fair market price for ExI. I believed that your
first offer of one million dollars was too low. In fact, I was insulted by how low it
was. Ronald, you’ve done an excellent job of running ExI. But, you just can’t
continue to be a one man-show. You need support. I’m thinking about naming
3 Gross margin percentages are presented in Appendix 3—ExI’s Income Statements.
5
Nelson a vice president and putting him in charge of ExI’s support functions
including finance. Nelson has an undergraduate degree in industrial engineering,
an MBA, and owns his own consulting business. Nelson can take a lot of things
off your plate and play a big role in the background ensuring that ExI is ready for
the next growth stage. By
inging Nelson on board, it will free you to focus on
the strategic direction of the business and to continue building the customer base
and working on the technical side.”
Ronald looked at Kenneth for what seemed a long time before speaking:
“I’m interested in maintaining our original bargain. That bargain was that if hit my
milestones you would give me 49% of ExI. Then you would sell your majority
interest in ExI to me. You’ve done well, Kenneth. You gave me one and a half
million dollars to start ExI and you’ve taken nearly three million dollars in cash out
of ExI in the six years we’ve been in operation. I’m not the financial wizard that
Nelson probably claims to be, but you’ve doubled your investment in six years.”
Again Kenneth spoke calmly: “Ronald, I appreciate your feelings, but there
are many things to consider, I’m the majority owner of this business. Without my
financing and guidance you would be driving a KIA to your old job rather than the
ig Lexus that now drive. I have a vested interest in the health of the business,
not from just a financial perspective, but from a personal perspective. Our
employees and customers depend on us and we need to make sure that we are
proactive in putting things in place to ensure that those obligations are met.
Then, there is the question of who controls ExI. You run the business, your wife
6
handles the finances, and your best friend is the sales manager. From my
perspective, it is important to
ing in a neutral third party.”
Ronald’s tone hardened: “Kenneth, this is my business. Sure it was your
money and guidance that got us started. But I built ExI. While you were away
doing whatever you do, I was working 100 hours a week. I have the customer
elationships and I have the knowledge of the business. I’m not interested in
playing a diminished role in ExI and I don’t want someone here who is watching
over my shoulder. I’m interested in buying you out. If you really believe that
Nelson needs to be here, let him run the show. If you really believe that Nelson
needs to be here, then I won’t stay at ExI. If I leave; Portia and Jason Henry, my
sales manager, will follow me.”
Kenneth began talking in a soft voice: “I hear what you’ve said today. You
know my concerns. I have to be in Comanche Peak in the morning. I’ll take
Nelson back to the hotel where he is staying. Let him come back tomo
ow and
egin his determination of the fair market value of ExI. After that, we’ll work out
the specifics of you acquiring my share of the business.”
Ronald replied: “We needed to clear the air. You need to know where I
stand. I have dreams about making ExI my company. Nelson can stay for three
weeks. At the