Does a founder leaving impact a company’s value?

Julian Dunkerton clearly thinks he knows the answer to the old question of  “does a founder leaving impact a company’s value.” As co-founder of once-upon-a-time cool clothing brand Superdry, he’s currently, and amid controversy, trying to reinsert himself back onto the company’s Board.

Much to the horror of the CEO and reportedly, the rest of the Board.

Why the comeback attempt now?

Well the share price has continued to plunge and impact the value of his remaining 18.5%stake in Superdry. He pocketed £71m back in July 2018 after selling 6.7% to institutional investors which valued the company at just over £1.0bn (1,250p per share).

A broad valuation of Superdry from based on accounts filed to April 2018 yields an enterprise value of £1.045bn with an industry mix adjusted to reflect the actual business mix. So broadly in line with the market cap back in July 2018.

Right now (April 2019) the current market capitalisation is hovering around the £450m mark (circa 550p per share) – a significant and worrying drop in company value by any measure. A drop sufficiently serious to spur one of the founders into action.

It’s one of the things that most worries an Investor be they HNWI, Private Equity or Institutional. How much of the value of a company is tied up in the personality and drive of the owner and/or founders? Should they depart will the business still be worth the value placed on it?

Back in 2018 the day before Julian Dunkerton announced he was stepping down as CEO of Superdry, the company was trading at 1,652p per share – the day after, it was down 6%, knocking nearly £100m off the company’s valuation. Clearly, the market judged that Superdry’s ongoing value as a company was closely linked to the participation of Mr Dunkerton.

So, market sentiment judged the loss of Julian Dunkerton as the CEO in [2014] as a bad thing, while now, conversely, the shareholder sentiment seems to be going against the very same man, who on the face of it, so far appears to have done nothing wrong. Although we await further developments.

For any category of investor looking to invest in a business of any size, the past, present and future behaviour of the founder(s) is of keen interest. From the odd skeleton-in-cupboard (a legacy of more cavalier times) to the current state of the relationship between founder and the management team, any serious investor is keen to understand the motivations, competences and peccadillos of the founder or founders.

A buyer will take steps to legally protect against the most obvious ‘bad behaviour’. Non-compete, confidentiality, indemnity and warranty clauses, combined with earn-outs can make it financially painful to ‘mis-behave’. Founders, considering a round of fundraising or an exit take note.

Ultimately, if there is any belief in Investors’ minds that the founder and the value of the business are too intertwined, they won’t be buying.

One thing we can be sure of is that Mr. Dunkerton’s decision regarding when to step down and when to sell a large slice of his shares was neither a spur-of-the-moment nor a rushed decision. The wise founder prepares both the company and him or herself well before embarking on the pursuit of funding or a sale.

On a final note, Julian Dunkerton’s concern for the company he founded may be partly driving his current behaviour. However, the most likely explanation is that he is highly motivated to get the Superdry share price back above the 1,000p per share level, given that he still holds a very substantial 18.5% of the company. What founder in similar circumstances wouldn’t?

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