Bad hire? Fast fire!

By James S. Cassel

Imagine: You hire a new employee but after a few weeks, you realize you made a bad choice. What to do?

Whether the problem is competence or chemistry, or anything else in between, the best advice is to be decisive and act — fast. Some business owners hesitate to pull the trigger because they do not want to admit they made a mistake. Unfortunately, the mistake magnifies with time and does not get better. It is OK to admit you made a mistake in hiring someone. Not terminating sooner rather than later is a bigger mistake.

Firing employees can be difficult for many reasons. As Warren Buffett said: “It’s pure agony, and I usually postpone it and suck my thumb and do all kinds of other things before I finally carry it out.”

Regardless, it must be done. As many of my clients have told me over the years, when you keep around a bad hire or employee it only gets worse the longer you retain them. Moreover, when you terminate a senior-level hire, such as a CEO, and you bring back a former CEO on an interim basis, most of the time that interim CEO will find things worse than they were when he or she left. If things were the same, then you probably would have kept the new hire.

Former General Electric Co. CEO Jack Welch — distinguished as one of history’s most famous managers, and noted for turning the struggling GE into a global giant during his 20-year tenure — was not called “Neutron Jack” for no reason. Indeed, he was known for his aggressive approach to categorizing and promptly terminating employees he ranked in the bottom 10 percent of his workforce, encouraging leaders to automatically fire their lowest performers as part of an annual corporate improvement process.

As part of his “rank and yank” system, managers were asked to group all team members into A, B, and C categories: the top 20 percent, the middle 70 percent, and bottom 10 percent. According to Welch, the middle should be coached and groomed to move up to the ranks of the top 20 percent. The bottom 10 percent, according to Welch, had to go.

Welch innately understood what many business owners neglect to realize: Keeping around poor performers becomes a major drain on your company, costing you money, time and energy, not to mention morale. It also makes things worse for the bad hire. I tell you this from experience.

So, how long should you wait before pulling the trigger? There is no cookie-cutter time line, and you should do it as soon as you realize it.

However, while it is never too “soon” to fire a bad apple, it should not come as a surprise to the person being fired. As Welch said, they should have had an opportunity to hear and respond to feedback. Make sure your employees have well-defined job descriptions and expectations, so they know what is required for success and can minimize the likelihood of failing.

When firing someone, the key is to take ownership of your hiring mistake and implement the right strategy to reposition your company. It is always good to consult with human resources specialists and labor attorneys.

As it relates to high-level terminations, communicate properly with your internal (employees) and external (clients/customers, vendors, partners, etc.) stakeholders. Provide reassurances the company is on track and will continue moving forward as planned. Also, identify what lessons can be learned to avoid the same problem with the next hire.

Bad hires or bad employees are part and parcel of doing business, for any company in any industry. We all make mistakes. Business owners who take timely, decisive action are protecting the best interests of all parties involved — including the bad hire, who is now free to find employment somewhere that he or she will be a better fit.

 

James Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle- market companies. He may be reached via email at jcassel@casselsalpeter.com or via LinkedIn at https://www.linkedin.com/in/jamesscassel.

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Why more banks are launching IPOs

By Jackie Stewart

A bullish outlook on the financial sector encouraged more banks to go public this year.

A number of banks were eager to take advantage of investor optimism after last year’s presidential election. Several had compelling stories built around high flying niches, while others were looking to provide liquidity for investors or create a currency for acquisitions.

Eleven banks have held initial public offerings this year, excluding mutual conversions, or almost double the number that took place in 2016, based on data from Sandler O’Neill. Though down from the 15 IPOs conducted in 2014, a year when post crisis investors pursued exit strategies, momentum could continue if bank stocks remain hot.

“I think the stock market is a factor, but also which banks will have a good earnings growth story,” said Vincent Hui, a senior director at Cornerstone Advisors who oversees the firm’s risk management and M&A practices. “People will buy into you if you have a good earnings growth story. But we will have some headwinds.”

The KBW Nasdaq bank stock index is up about 16% this year, which has spurred more investors to pump more money into bank stocks, industry experts said.

Banks also have cleaner balance sheets and stronger operations compared to the post crisis years, said Brian Sterling, co head of investment banking at Sandler O’Neill.

“If you put together good stories, you’ll get increased activity,” Sterling added. “I do think you have some unusual business models [of banks that have gone public] and different approaches with good management teams.”

Banks with unique business models are also appealing to investors.

Esquire Financial looked at the IPOs at Triumph Bancorp in Dallas and Live Oak Bancshares in Wilmington, N.C., as it was preparing to go public, said Andrew Sagliocca, the Jericho, N.Y., company’s president and CEO.

Triumph, which focuses on factoring and other nontraditional businesses, held its IPO in 2014; Live Oak, a major small business lender and technology innovator, went public the following year. Triumph’s stock is up more than 25% this year, while Live Oak’s shares have increased by roughly 35%.

Executives and directors at Esquire, which has a specialization in offering services to law firms, began mulling an IPO in early 2016 to create liquidity for shareholders and allow employees to take an ownership stake in the company. A publicly traded stock also allows the company to access capital markets more efficiently, Sagliocca said.

“We were in a true inflection point,” Sagliocca added. “There were a lot of institutional investors that wanted to invest in a unique business model. The market conditions were stronger than in the past.”

An increasing number of banks with less than $1 billion in assets are bucking conventional wisdom by going public, said Rory McKinney, managing director and head of investment banking at D.A. Davidson. Such institutions can make the leap if they have strong management teams and returns that are beating out larger rivals.

“Investors are always looking to invest in different types of new stories,” McKinney said. “There is interest in the sector as a whole … because of the bright lights economically across the country, tax reform, reg relief. Those things come into play from an investor perspective in connection with an IPO.”

Esquire, with $480 million in assets, was familiar with the view that banks of its size may be too small to go public, Sagliocca said. Investors, however, seemed more concerned about the company’s business model and performance metrics.

Esquire’s stock price has increased by more than 25% since its June IPO.

“The proof is we have been successful,” Sagliocca said. “Based on the stock price, there’s interest I would assume.”

M&A is another factor. Aspiring acquirers can benefit from having a stock to offer a target.

“Banks need a currency to do deals,” Tom Michaud, president and CEO of Keefe, Bruyette & Woods, said during a recent panel discussion at the University of Mississippi. “Cash can’t compete with a bank that can offer stock trading at 2.5x tangible book.”

While there is an expectation that IPO activity can remain steady next year, some constraints exist. The number of banks is down 7% from the end of 2015, providing fewer candidates for public offerings. At the same time, there are only so many management teams that have want to go public and have a constructive use for extra capital.

Earnings stories could also be challenged for executive teams that relied heavily on cost cutting to boost the bottom line, Hui said. Some institutions, which have run into concentration limits in areas such as commercial real estate, could face challenges as they try to diversify their portfolios.

Investors could also turn bearish based on a domestic or international shock, noted James Cassel, chairman and co founder of investment bank Cassel Salpeter. “There’s no reason next year shouldn’t be good for bank IPOs — but with an asterisk,” he said.

“My view in general is that time is never your friend with an IPO because so many things are outside of your control,” Cassel added. “If you want to raise capital in the third quarter of next year, you might want to have your head examined as to why not now.”

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Norquay has been acquired by MPD Chemicals, a portfolio company of Addison Capital Partners

  • Background: Norquay Technology, Inc. (“Norquay”) is a specialty chemical manufacturer with over 30 years of expertise in providing the scale-up and production of advanced proprietary custom materials, including organometallic, inorganic, and organic molecules. Norquay’s product line includes chromic, electronic, catalyst, ligand, medical adhesive, and UV performance products, with a customer base that ranges from startups to large multi-national corporations.
  • Cassel Salpeter:
    • Served as financial advisor to the Company
    • Ran a competitive sales process, identifying and contacting over 60 financial and strategic partners
  • Challenges:
    • Balancing owner’s objectives to maximize value while preserving company culture
    • Complexity of the specialty chemical industry and navigating the strict environmental regulations
  • Outcome: In December 2017, Norquay was acquired by MPD Chemicals, a portfolio company of Addison Capital Partners, broadening MPD’s specialty chemical manufacturing capabilities; Norquay’s owner now holds a minority equity stake in MPD.

Trucker Path has been acquired by Renren

  • Background: Trucker Path, Inc., is a leading software platform for the trucking industry. Trucker Path’s core product is the Trucker Path app, a trip planning companion for truck drivers, enabling a large driver community to assist each other in updating the real-time status of relevant points-of-interest on their route. Expanding on the success of the Trucker Path app, Trucker Path also introduced the Truckloads app, a mobile marketplace providing freight load matching with over 3 million loads posted monthly.
  • Cassel Salpeter:
    • Served as the exclusive financial advisor to the Company
    • Ran a competitive sales process contacting approximately 50 potential strategic acquirers, resulting in 6 indications of interest
  • Challenges:
    • The Company had a solid user base and software platform, but had not monetized the assets well
    • Company management and board dynamics
  • Outcome: In December 2017, Trucker Path was acquired by Renren.