How Storm McGrath saved his father's company

Nepotism isn't normally a problem in family business; in fact that's what it's all about. The business is either a member of the family or a family servant, either way succession is usually a family affair.

The only time that's controversial is when it's a public company, listed on the stock exchange but controlled by a family, like News Corporation, for example, or Kip McGrath Education Centres.

Bit of a difference in size and profile there of course -- KME is a Newcastle-based franchised tutoring operation, capitalised at about $13 million, although, like News Corp, it is global, with 553 centres around the world -- and most of them outside Australia.

Its CEO is Storm McGrath, 44, son of the founder, Kip McGrath who, at 68, is still chairman of the board and owner of 36 per cent of the company.

The son's tenure as chief executive has been, if you'll pardon the obvious pun, stormy, to say the least.

In fact, in 2011, four years after he took over, the share price had fallen from $1.50 to 2c as Kip's initial backers all fled. It seemed the company would not see out the year. Storm and the board were being accused of nepotism and poor governance.

In fact, as it turned out Storm McGrath saved the company.

The big problem was the exchange rate, the Australian dollar appreciated 10 per cent between late 2006 and early 2008 and since most of the revenue was coming from overseas, KMEC's profit was crushed.

The fall in the dollar in the second half of 2008 didn't help because revenue itself collapsed as a result of the global recession, and then in the following two years, the exchange rate appreciated again -- by 60 per cent. KME was on the ropes.
 

Storm McGrath then raised $1 million in convertible notes from a company called Editure Ltd. (His mother was unwell and didn't want to put in any more money. She eventually passed away last year).

Editure happily sold out earlier this year for $3m and a New Zealand private equity firm named Pie Funds came in.

More importantly, Storm fundamentally changed the business model. The business that Kip and Dagnija had created basically left the teacher franchisees to themselves and collected $12,000 a year from them, adjusted for CPI. They were unaccountable for the product and the brand, and with costs rising faster than inflation, the business was going backwards.

Storm has spent five years and $3m changing the franchise fee to a percentage of revenue (10 per cent for existing franchisees, 20 per cent for new ones) and modernising the system with technology.

He can now see in real time how each student is going and how each franchisee is performing, and hold franchisees accountable. Not all of the teachers were happy about that and there has been a significant amount of franchisee churn.

Kip McGrath started the business in the late 1970s with his wife Dagnija. Both were teachers and Kip had been posted to a series of small schools around NSW before realising that teaching was never going to pay very well, so he started tutoring kids with learning disabilities, in clients' homes.

That went pretty well -- he was a good salesman -- and he ended up with a dozen or so teachers working for him after hours, tutoring kids with problems. Then, he started tutoring in his garage, but the neighbours complained about all the cars coming and going through the evening, so he set up in a local shopping centre in Newcastle. In 1981, he ran a TV commercial and the business took off. Kip and Dagnija found themselves running six tutoring centres in Newcastle and the Hunter Valley.

That's when teachers who were working for the firm started asking about opening their own centres, so Kip decided to move to a franchise model. He put an ad in the local paper looking for franchisees, and, what would you know, one of the first responses came from his father, a retired and bored teacher living in Ballina.

Between 1990 and the early 2000s, Kip McGrath Education Centres expanded rapidly, opening 100 centres in Australia and then moving to New Zealand, the UK, South Africa and Singapore. Australia and the UK are controlled directly by Storm McGrath while NZ, South Africa and Singapore are run by master franchisees.

The share price is now around 30c and, while still a shadow of the $2.60 it got to in 2004, it's definitely looking healthier.

Storm says he has a point to prove now -- that he did deserve to be appointed chief executive and it wasn't nepotism. He also feels a great responsibility towards the 50,000, and growing, kids under the care of his business, all of them disadvantaged in some way.

In any case, as an only child (following the death of his brother), he will inherit his father's 36 per cent. Presumably it would be nice to get that stake back to being worth $20 million or perhaps even $30 million again, rather than the $5 million it's valued at now.