Mercia Coaches: Whose Company Is It Now?
Mercia Coaches is a family-owned bus operator with 34 vehicles on 19 routes, 210 staff and revenue of USD 11.4 million. Its founder, who held 55% of the shares and made every operating decision personally, died eight months ago. His son holds 30% and wants to sell the whole company to a national operator that has offered USD 6.2 million; his daughter holds 15% and wants to keep the rural routes her father started.
The bank covenant requires debt below 1.5 times equity; the company stands at 1.4. The local council pays USD 0.42 per kilometre on seven rural routes that lose money, and the subsidy contract is reviewed in nine months. The profitable urban corridor is losing passengers to ride-hailing apps at about 4% a year. The company has 18 unfilled driver vacancies, average pay is 9% below the regional average, and two of the four remaining non-family directors have resigned.
1. Explain why the objectives of Mercia's stakeholders have come into open conflict since the founder's death.
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Root cause: the founder was the governance system. He held 55% and made every operating decision, so shareholder objectives, management objectives and community obligations were reconciled inside one person's judgement. His death removed both the controlling shareholder and the decision-maker, and nothing replaced them: no managing director, no family council, no shareholder agreement.
Mapping the divergence.
- Son (30%, wants sale): his objective is liquidity and value maximisation - USD 6.2m × 30% = USD 1.86m in cash now, versus an illiquid minority stake in a business losing passengers.
- Daughter (15%, wants survival and service): her objective is continuity and the non-financial utility of the rural routes, worth USD 0.93m to her under a sale.
- Employees: pay 9% below the regional average with 18 vacancies is a de facto strike by the labour market. Their objective is higher wages and job security, both of which consume the cash a buyer would pay for.
- Bank: its interest is the 1.5 covenant, which caps borrowing and therefore caps the investment needed to halt the 4% passenger decline.
- Council and passengers: rural service, which depends on a subsidy reviewed in nine months - a subsidy that is itself a taxpayer objective.
Why conflict is now structural. The shareholders' objectives are zero-sum: every dollar retained to raise wages or subsidise rural routes lowers the sale price. That is a principal–agent problem with two principals, not one. The resignations signal that the remaining directors will not arbitrate, so the deadlock will be resolved by whoever moves first - the bank at covenant review or the council at subsidy review.
2. Evaluate the USD 6.2 million offer from the perspective of each shareholder group and one non-shareholder stakeholder.
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Son (30%). Proceeds USD 1.86m, immediate and certain. If EBITDA is around USD 1.1m, the offer is roughly 5.6× earnings - a fair multiple for a regional operator with declining like-for-like demand, but a strategic buyer can extract depot, fuel-procurement and head-office synergies worth more than the standalone value, so there is room to negotiate towards 6.5–7× (about USD 7.2–7.7m). Accepting the first bid is leaving money with the buyer.
Daughter (15%). Proceeds USD 0.93m. Sale ends the rural service she values, and a national operator will almost certainly re-time or withdraw seven subsidised routes because they are loss-making without subsidy. But staying exposes her to the covenant (1.4 against a 1.5 ceiling), meaning no borrowing capacity to invest against ride-hailing.
Employees. A national operator typically consolidates depots and head office, so job losses are likely in administration rather than driving - and 18 vacancies show drivers already have outside options. Their leverage is high; the buyer's integration plan depends on them.
Council/community. The subsidy is reviewed in nine months. Sale gives the council a single large counterparty that can credibly threaten withdrawal, weakening the council's position - the community may get a worse timetable than under family ownership.
Overall judgement. The offer is not obviously generous or obviously cheap; it is premature. A non-family managing director plus a route review could stabilise the urban corridor and lift the multiple, but the daughter must be bought out or given a written route-protection guarantee, otherwise the deadlock destroys value for both.
3. Recommend a course of action to the board, with reasons and an outline timetable.
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Immediate (0–30 days): stabilise governance. Appoint an independent non-executive chair and an interim managing director with route-scheduling experience. Without a single decision-maker, the bank will treat the resignations as a risk event and tighten the covenant.
0–90 days: create a real option, not a binary choice. Open negotiation with the national operator but do not sign. Simultaneously (a) commission a route profitability review separating the seven subsidised rural routes from the urban corridor, and (b) test the market with the council for a longer subsidy term. Two credible alternatives convert a take-it-or-leave-it bid into a negotiation.
90–180 days: address the labour constraint. 18 vacancies at 9% below market is a self-inflicted capacity cap. A staged rise to market rates, funded by withdrawing the two most loss-making unsubsidised routes, costs less than the revenue lost through cancelled services and protects the operating capability the buyer is paying for.
180–270 days: resolve the shareholder deadlock. Options in order of preference: (i) company purchase of the son's 30% funded by a modest equity injection rather than debt, keeping the covenant intact; (ii) son sells to an outside investor with a drag-along/tag-along agreement; (iii) sale of 100% at a renegotiated price with a written undertaking on rural routes for 24 months.
Justification. Every option costs money the company does not have under the covenant, so sequencing matters: governance first, then information, then negotiation, then capital. Doing the sale first would price the company at its weakest point - during a leadership vacuum, with unfilled vacancies and an unresolved subsidy review.