Chapter 11 -
Management strength

A weak general can doom a military campaign, even if his army is better equipped and trained and outnumbers the enemy. The same is true in business. That’s why lenders and investors want to know the background and performance history of owners, officers, directors and other key personnel.

Financial backers look for more than whether management is qualified. They are concerned about possible conflicts of interest that distract managers from their professional responsibilities to your trucking company. And they want to be assured that key people will remain for the long haul.

Investors are probably pickier than secured lenders about management strength; some business plan formats merely ask you to include resumes of principals. But it’s your goal to satisfy an investor. If you don’t like your answers to some of these questions, maybe your own equity is at risk. But you may decide that it’s unwise to put some of this information on paper. If you don’t need to disclose this information in order to obtain debt financing, it’s up to you whether to include it in your business plan.

Management description
Resumes often don’t answer all the questions a lender or investor might have about your management team. By compiling the information on key people yourself, you can fill in gaps and provide a more complete picture than a resume provides.

Officers and other key persons. Include in your business plan information on all officers — chief executive officer, chief operating officer and chief financial officer — and anyone else who contributes significantly to the company’s business. For a small trucking company, a key person might be an operations manager, maintenance chief or safety director. A key person isn’t necessarily an employee; he could be an independent contractor or consultant.

For each officer and key person include the following information:

• Name
• Age
• Title
• Office street address
• Telephone number
• Names of employers, titles and dates of positions held during the past five years, including a description of duties
• Education (degrees, schools and dates)
• Whether or not he is also a director of the company
• If part-time, how much time he spends on company matters

Listing only a manager’s title won’t tell the business plan reader much about what he does. For each officer and key person, explain his responsibilities and discuss why his abilities and past experience are important to the position.

Be sure that the five-year work history accounts for all time within that period. Don’t omit, for example, positions or ventures that were short-lived or unsuccessful or periods during which the person was unemployed. A gap in employment history may raise an unwarranted red flag for lenders. If you were selling stock, failing to disclose a low point in an officer’s career might even be a securities-law violation.

Education generally shouldn’t include honorary degrees or training certificates, but in trucking, a particular type of certification might be more relevant and important for some positions than an undergraduate or graduate degree. If that’s the case, say so.

If an officer also is a director, state whether he is serving a specific term. If an officer spends less than full time on company matters, explain why. Is it because the company can’t afford to pay a full salary? Is it because the officer is involved in other ventures? If he is involved in other ventures, is that activity a conflict of interest? An affirmative answer to these questions might suggest a risk factor.

Directors. If you have a board of directors, indicate how many you have, how they are elected and how often they are elected. If they are elected under a voting trust or similar arrangement, describe the arrangement. For each director who isn’t an officer or key person, provide the same information you provided on those individuals. Describe how each director’s background and experience are relevant to his directorship.

Consultants. If a key person is a consultant, explain why he isn’t an employee and describe your contract or agreement with him. Does the agreement allow the consultant to work for competitors? Are there any past relationships between the consultant and any officer, director or key employee of the company?

Stability
Having a solid management team isn’t enough. Financial backers want some assurance that it’s a long-term management team. Does the company have employment contracts with officers, directors and key persons? What is the compensation if the person resigns, retires or is terminated?

Some companies use non-compete agreements to ensure that if officers, directors and other key persons leave the company, at least they won’t compete with the company. State whether your company has such arrangements and, if so, whether there are any exceptions. What are the terms of the non-compete agreement and how might the company enforce it?

A bigger worry for many small trucking companies probably is the death or disability of a key manager. Discuss what would happen, for example, if the chief executive/owner suddenly couldn’t perform his duties. Disclose any relevant factors, such as age or health, that might increase the risks. Has the company made arrangements to replace a key person in the event of death or disability?

Has the company purchased “key person” life insurance? If so, state who is covered and for how much and to whom the proceeds are payable. How does the company plan to use any insurance proceeds it would receive?

Compensation
One concern for financial backers is that compensation of key persons be reasonable but competitive. In addition, compensation sometimes can be an indicator that a particular individual has a greater role in the business than his title and job description would suggest.

List total compensation — except benefits generally available to all employees — for each officer and key person during the last fiscal year. Also, disclose total compensation paid to any individual that was greater than that paid to officers or key persons.

Prior experience
Under the management description section you listed the five-year work history of all key persons. But financial backers want to know whether any officer or director ever worked for or managed another trucking company. This will be a greater concern for a startup company than one that’s operating, but investors still would want to know about all past involvements in trucking — especially unsuccessful ones. They also want to know whether these individuals have ongoing relationships that might represent conflicts of interest.

Detail any prior officer or director experience in trucking, including:

• Person’s name
• Company
• Position held and areas of responsibility
• Whether the company still operates and, if not, why not
• How this prior experience might help your company
• Whether the person still has a relationship with the company

If none of your officers or directors have prior experience in trucking, you need to point that out. You obviously should list that weakness among your risk factors.

Legal proceedings
Nothing says more about management strength than whether the company or its key persons have faced insolvency or criminal, civil or regulatory proceedings. For investors, legal proceedings may be even more of a concern if they haven’t been resolved.

Financial backers aren’t necessarily looking for a spotless record. After all, if one of your trucks is involved in a fatal accident, you can expect a lawsuit. For that type of litigation lenders and investors just want to make sure there isn’t a pattern of unsafe operations. The same probably applies to Department of Transportation civil penalties. Unless the sanction is unusually large or you start incurring a significant number of fines, your banker won’t pay too much attention to it.

Of greater concern are proceedings that involve financial management — insolvency or bankruptcy proceedings involving the company and/or its key persons, especially in the past five years. Investors also want to know about proceedings involving key persons’ personal finances and about proceedings that occurred while they served in key positions at other companies.

Disclose whether any key person has ever been convicted in a criminal proceeding, excluding traffic violations and minor offenses, and whether any are subject to pending criminal proceedings. Explain all situations fully. For other kinds of legal proceedings, describe those involving the company or any key persons in the past five years and their resolution, if any.

In Summary
Financial backers know that a company is only as strong as its management, and they look at various indicators to assess management strength. The experience and capability of the managers are important, and so is stability. Lenders and investors look closely at recent legal proceedings, particularly those relating to insolvency and bankruptcy.