Raymond restructured his firm to allow his loyal employees a stake in the business and to give more time to R&D, but his 'happy ship' ended up in stormy waters.

IN THE early 1990s, with the Irish economy emerging from the bleak recession of the 1980s, Raymond Jennings decided the time had come to start his own business. A mechanical engineer by training, he had a wealth of experience in R&D. He also had an old school friend working in the dairy food industry and while chatting about their respective jobs over a quiet pint, the germ of a business idea struck Raymond.

His friend was the head of new product development at his company and had to seize opportunities to run batch tests on new formulations between production runs. These runs were booked in advance but were often cancelled at the last minute as the competing demands of production took precedence over development.

Each test was a major logistical exercise, undertaken somewhat grudgingly by the head of production. Innovation might be the lifeblood of the food industry, but to the production manager it was a distraction he could do without.

Raymond spotted that being able to replicate accurately the trial process on a much smaller scale within a lab environment would allow his friend to run infinitely more tests in any given month. It would also allow more products to be tested and would significantly reduce product development time.

By asking around, Raymond quickly found similar situations prevailed in many companies, and not only in Ireland. Over the next seven months he spent his evenings designing small-scale testing equipment and preparing a business plan.

In 1992 he set up his business using a combination of family savings, borrowings secured on the equity in his home and a small-business loan. He was determined to both design and manufacture the equipment. This would give him control over quality and flexibility to produce bespoke pieces. Some of the machine tools were acquired secondhand but all the key precision and CAD (computer-aided design) equipment was new and bought with leasing finance arranged through the bank.

Raymond's testing equipment proved to be a big success and word of its merits soon spread within the relatively small dairy food development community both in Ireland and overseas. Jennings hired a sales rep to share the sales load and regarded his full order book with quiet satisfaction. He also began looking at applications of the equipment in other industries.

By 2003 Raymond had a healthy business employing 10 people. This included former sales rep Peter, now sales director; Phil, head of engineering; five skilled engineers and tool operators; a financial controller; and two administrative staff. Staff retention was excellent and Raymond often referred to himself as "the captain of a happy ship".

However, he recognised it was unrealistic to expect this situation to last forever. At a personal level he felt the needs of the business had pulled him away from where his true interest lay, in engineering R&D. For the business to progress it needed to generate fresh ideas and he was the best person to do that. The small team he worked with, furthermore, was so close it was almost like an extended family and Raymond wanted them to have a stake in the business.

He decided to restructure the operation to give Peter and Phil more responsibility for the day-to-day running of the business and a direct equity stake. Both were highly enthusiastic about the prospect. More discussion followed and soon a rough idea formed to provide profit sharing for all employees with over five years' service.

Raymond was delighted with the progress. He now had broad agreement on restructuring and the beginnings of an exit strategy for himself which would allow him to retire at some point in the future and pass the business on to the "family".

Confident the difficult part of the plan had been completed, he turned to his solicitor and his accountant to put together a comprehensive proposal. When this was presented to Peter and Phil both blanched. They had not expected to be asked to put up hard cash. They had assumed their stake would be funded from profit sharing over a period of years. Coming up with cash would involve borrowing or re-mortgaging their homes which made the idea much less appealing.

The end result was agreement on a much diluted package, with the two partners subscribing for fewer shares and at a lower valuation than first proposed. The general employee profit-sharing agreement was parked. Raymond agreed, somewhat reluctantly, to proceed with the deal and parted with a 36 per cent stake in the business.

The whole episode left an aftertaste but over the next two years the new arrangements seemed to work well. Once Raymond made it clear that he did not expect all decisions to be referred to him, as before, Peter and Phil seemed to enjoy their expanded responsibilities. Peter took over all new client relationships, leaving Raymond free to focus on R&D. The company continued to show strong growth and good profits.

Then disaster struck. In 2007 Peter was hit by a car and killed instantly as he was walking back to his hotel during a sales trip abroad. This was a personal tragedy not just for his wife and family but also for this close-knit company. It also had some serious consequences for the business.

The company had "key man" insurance on its top executives but soon discovered the limited cash payout made little difference. In Raymond's view the crucial problem was, paradoxically, that Peter had developed such a close relationship with his customers; he was irreplaceable.

When Raymond had been spearheading the business he knew his customers well and had continued to meet them when Peter was a young sales executive. But as Peter's responsibilities had grown within the company Raymond had backed off and no longer knew many of the company's more recent customers personally. With Peter gone, Raymond and Phil felt as though they were a three legged stool with one leg missing.

Raymond did his best to fill the gap until a replacement could be found. A younger and less experienced successor was recruited and it quickly became apparent it was going to take a year, and possibly a good deal longer, before the successor could speak with real knowledge and authority to technically savvy customers. It meant Raymond had to relinquish his R&D plans, at least in the short-term.

A bigger financial quandary also emerged. Now that Peter was no longer around to provide for his family, his executors wanted to realise his stake in the business. They argued the valuation should reflect the true value of the business at current prices, well above the price originally agreed.

Neither Raymond nor Phil wanted to short change Peter's widow, but at the same time it meant between them they would have to buy back his 23 per cent stake. Phil was not happy with the prospect of another mortgage on his house and the result was considerable anxiety. Peter's executor had also suggested that if agreement could not be reached legal action would be taken to seek liquidation of the company.

Raymond is now wondering if his best option is to sell the business, lock, stock and barrel. He has been approached on two occasions in the past by companies interested in acquiring the business - one in Germany and one in the US. But he knows their real interest lies in his patents and in his company's significant market shares - not in the business per se. Such a sale, therefore, would almost certainly result in the closure of the company and the loss of all jobs. Fifteen years on this is not a prospect Raymond is willing to face.