Organization. Workflow. Communication.
10 Warning Signs you may Have a
Problem Portfolio Company
Farid Naib, Founder and Chairman of DocDep
Document Depository Corporation (DocDep)
[email protected]
800.872.9394
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Organization. Workflow. Communication
Summary
Most investment managers have had a portfolio firm lose its way, and enter into a spiral of bad
decisions and disappointing results. While there can be many reasons for this, sometimes a
management team, despite the fact they deal well with growth, have a difficult time dealing with
problems in the business and therefore add to the problems rather than solving them.
In this paper, I point out some common warning signs that signal a portfolio company is going off track
and that there is a management problem that must be addressed.
Note that every company will experience some of these issues periodically, and the presence of a few of
these issues does not indicate a serious problem. However, if a company exhibits seven or more
warning signs and is not performing, then there a good chance that problems exist.
Also note that these signs are only applicable to later stage, revenue-producing companies. Startup
firms have a different set of challenges.
The 10 Warning Signs
1. Easy Rationalizations / It was out of our Control
Problem portfolio firms blame factors that are out of their control for disappointing
results.
When things do go wrong, the management at a problem company may make the case
that the cause of the problems was due to factors that were “out of the management
team’s control”. As most CEOs are bright and constantly think about their business,
they are typically able to come up with a believable explanation for any problem, which
will probably be at least partially true.
This is a very dangerous generalization as it moves the problem to “things that are out
of our control” as opposed to things that the company can address and fix. Problem
companies often use this generalization as a way to avoid making any changes, and a
way to avoid dealing with the situation.
2. Hero CEO
Problem portfolio companies often revolve around a single individual in a leadership
role, usually the CEO. When problems develop, the CEO will try and solve them by him
or herself, without involving the full management team, or if they do involve the
management team, tend to not consider their input.
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For some companies, the CEO takes on an omnipotent role, making the company
revolve around that person. The CEO is constantly and single-handedly solving
problems. He or she runs into every burning building to save the baby, as opposed to
making sure the buildings don’t burn themselves. The CEO frequently uses terms such as
“I took care of it” or “I handled it”, without any discussion with the management team
and without delegating any part of the answer.
This is a problem, of course, because it forces the disempowerment of the management
team, and means that all solutions must come from one individual.
This trait often goes hand in hand with number 3.
3. Crisis / Firefighting
Problem portfolio companies often go from crisis to crisis.
Some companies move from crisis to crisis and are always in firefighting mode. This is
typically the sign of an immature team. Their constant firefighting can mean a lack of
progress towards their stated objectives.
Most businesses face continuous challenges. A management team that treats every
challenge as a crisis will spend all of its time in handling those crises, instead of focusing
on growth. Business issues do come up from time to time, but a well-run firm will
identify problems, institute steps to resolve them, and continue moving forward on all
fronts.
It also should be noted that the management team should work to understand why an
issue came up, and what needs to be done to ensure that the problem does not recur.
4. Revenue that Consistently Misses Budget / Declining Revenue
Problem portfolio companies consistently miss budget and/or have declining revenue.
This is an obvious indicator, of course, but it is still a good sign that something is not
working, either in the budgeting process or in revenue generation.
An even better indication of a problem is a constantly evolving budget where the
company misses one budget and then creates another one, which they then miss as
well.
Some care must be taken to see if the budget was realistic initially. A company may be
doing well, even while missing budget forecasts as a result of a too optimistic and
immature team creating an overly optimistic budget. While working with one company,
I heard a frequent complaint that the company always missed budget, which was true.
However, the budgets forecasted 80% growth which was unrealistic. The company,
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while pivoting its business model, was generating 40% growth and holding costs steady,
which was acceptable, given the circumstances.
5. Lack of Clear Planning / Milestones / MBOs
Problem portfolio companies have difficulty defining clear milestones for reaching
corporate goals and, as such, lack an effective feedback mechanism.
Most companies are constantly working at new initiatives designed to either grow
revenue or to improve performance. For companies that are underperforming, it is
important that there be a clearly defined plan with milestones and assigned
responsibilities.
If a clear plan does not exist, then it is doubtful that the company will make any real
progress. Well-defined milestones provide the company and the board with a feedback
mechanism for strategies that are working and those that are not.
6. Budget vs. Actual Difference are not Explained / Large Miscellaneous
Lines on Income Statement / Income Statement does not Reflect
Operations
Problem portfolio companies often do not provide guidance or feedback, on a line item
basis, between forecast performance and actual performance. They also frequently
have income statements that do not provide enough detail on business operations.
Miscellaneous lines that are over 0 .5% of revenue can be a particular cause of
concern.
The budget is an easily understood manifestation of the business plan. Comparing actual
to budget is a useful tool in analyzing what, if anything, went wrong with the operating
plan. If the portfolio company does not give a clear and understandable analysis of the
difference from budget to actual on a line item basis, a valuable feedback mechanism is
being lost. Note that this is both on the expense and revenue side.
The income statement should be detailed enough to reflect the company’s operations,
meaning that the specific line items should make sense for that particular type of
business. Miscellaneous lines that are large, and named lines that equal almost zero,
can be a sign of an issue. As a rule of thumb, no “Misc.” line item should be more than
0.5% of revenue. For amounts above that, the miscellaneous item should be broken out
and identified.
The income statement is a useful management tool and one that does not fully describe
the business indicates that management is not using it to manage the business.
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7. Late Board Packages / Late Monthly or Quarterly Financial Reports
Problem portfolio companies frequently are late either with board package or
financials or both.
Board dates are known well in advance. Consistently late board packages indicate that
the firm is unable to deal effectively with planned events. It also shows that the
company may have even more trouble in adapting to unplanned events that inevitably
occur.
The same is true for interim financial reporting. The inability to produce audited
financials on a regular basis also plays into this.
8. Inconsistent board packages / Lack of continuity
The board package for problem portfolio companies will frequently be inconsistent in
format and content.
If the board package layout changes greatly at each board meeting, and/or there is a
lack of continuity from package to package (for example, a large problem discussed in
the January board meeting is not mentioned in the April package), it usually indicates a
process issue.
9. “Our Business is Unique” / “We can’t Bring in People from the Outside”
Problem Portfolio companies are often resistant to taking outside advice.
Some company CEOs and Management Teams believe that their company or business
model is unique and that they do things in a special way. This usually means a
reluctance to bring on new employees in a senior management role.
This causes some dangerous inbreeding and means that the business will likely reinvent
the wheel constantly. By filling senior management positions with insiders, the
company is deprived of the benefit of managers who have acquired talent elsewhere,
often at a larger company that has already dealt with the problems the company is
going through.
Note: Young Presidents’ Organization (YPO) forums are great for fixing issues like this.
10. Open dialogue / Candor / Reflection
Problem portfolio firms often have a lack of candor about problems, ignoring them as
long as possible.
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Do management meetings have any real dialogue or discussion? The management
meetings of troubled companies, instead of being forums where the company can
openly discuss issues, become “yes” type meeting, where everyone agrees with the CEO
or the current plan. These meetings often lack any real interaction between
management members.
Are the company’s issues discussed honestly at the meetings?
What to Do?
If your portfolio company displays these warning signs, then there are a few corrective
measures that can be taken. Note that each one is worthy of its own paper, this is just a quick
list.

Change the Management Team
Change the management team in some way, by replacing staff, changing
responsibilities, creating new positions, or new reporting relationships. You have to
change the variables to get a different result.

Hold an Offsite to Discuss Problems
One of the best ways to deal with problems is to admit them. One technique is to have
an offsite meeting, and have each management member answer the question, “What
are the three biggest problems at the company?” The very act of talking about the
problems is often liberating. For the issues that get the most hits, an action plan can be
created to solve the problems, with tasks clearly assigned. The goal is to meet in one
year and, having effectively dealt with the old issues, tackle new problems only.

Empower the Management Team and Make Them Accountable
Create specific objectives for each member of the management team and make it clear
to them that their job depends upon getting these tasks or objectives done.

Create Process and Feedback Mechanisms
Hold weekly mandatory management meetings where progress on the weekly goals are
discussed. Several members of the management team should participate, rather than
allowing only the CEO to pontificate. A board member may want to attend the first few
meetings to elevate the events’ importance in the management team’s eyes. Problems
should be openly discussed. I also recommend ending the meeting with a question such
as “Is there anything else that we should discuss, any problems that we did not cover?”
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Of course, while none of these steps are guaranteed to get a stuck company growing again, they
should serve to build more confidence in the management team, and allow the company to do
better within their business model and market.
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