Canadian-based Cumberland Entertainment (a pseudonym for a real venture) had done very well for itself by finding and exploiting a niche market in North American music distribution. But major US clients had started producing their own titles, and were now direct competitors. What was worse, distributors had also started focussing on lower-end products from other suppliers. Cumberland's modus operandi was suddenly unsustainable.
CEO Tom Smith felt the only sensible course of action was for Cumberland to take over the distribution of its own products, both in order to defend its market position and to ensure higher margins. But this was a risky manoeuvre, and would demand substantial capital. The company had three choices: private equity, bank financing, or organic growth.
Rudolph and Valeria Maag Fellow of Entrepreneurship Christoph Zott recounts the challenge Cumberland faced in ultimately making its decision. Even after lengthy negotiations, however, the initial agreement between management and investors proved quite unsatisfactory. The shareholder agreement failed to consider what should have been at the front of everyone's minds in an expansion stage equity deal - to wit, what might happen if any planned expansion did not materialise for whatever reasons?