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Practical articles to help small business owners when selling and buying small businesses.

Exit Planning for Founders of Social Enterprises and For-purpose businesses.

Michael Kerr - Friday, September 13, 2019

The Social Enterprise & For-purpose Business sector continues to take on and beat everyday problems. In effectively solving problems and creating employment it is also creating businesses of value for the founders. 

But how many founders started out thinking they were potentially creating a business of value?

And how many have thought about their exit plan?

One of the commonly used predictors of the potential viability in a for-profit business is the extent to which the entrepreneur;

  1. Has clearly identified a potential customer problem, and
  2. Has the solution to the problem, and
  3. Has validated there are enough customers with the problem to underpin a viable business.

The Social Enterprise & For-purpose Business Sector (SEFB Sector) is comprised almost entirely of entrepreneurs in businesses doing just that.

The momentum that has developed in the last 10 to 15 years within the SEFB Sector has been driven by individuals and small groups who have taken the initiative and had a crack at tackling a problem that they connect with and want to solve.

“Social enterprise in Australia is on the rise. We are well on the way to seeing social enterprise as part of the mainstream, recognised for its contribution to a diverse economy, providing innovative solutions to employment and access to services for disadvantaged Australians". David Brookes, Managing Director, Social Traders (www.socialtraders.com.au), 2016.

How many Social Enterprises are there now?

Social Traders in conjunction with Centre for Social Impact (www.csi.edu.au) and Swinburne University of Technology (www.swinburne.edu.au/research/social-impact) produced the 2016 Finding Australia's Social Enterprise Sector report (FASES 2016) and found;

Based on pre-existing research data and information from our survey, we estimate there are at least 20,000 Australian social enterprises. This estimate takes into account some not for profit organisations have multiple business ventures, and not all social enterprises are incorporated as not for profits. As the population of social enterprises remains largely unknown, measuring growth of the sector is challenging. The FASES 2016 data suggest that, while the social enterprise sector includes many mature organisations, we are seeing growth in new entrants to the field, with 33.8% of the study’s sample being between two and five years old.

There are plenty of problems to fix so the opportunities for entrepreneurs are bigger than ever. Fuelled by global initiatives like the Sustainable Business Development Goals (https://sustainabledevelopment.un.org/) and a host of other factors that make starting a business just that much easier and more attractive to entrepreneurs I expect the strong momentum to continue.

I also expect this will bring greater focus to the ‘normal’ small & medium business (SMB) challenges that will confront this growing pool of SEFB founders;

  1. How to move successfully through the initial startup phase, and
  2. How to access the additional resources necessary to make a bigger dent in the problem they are trying to solve.

To survive they will need to;

  1. Access funding (a challenge across the entire small business sector),
  2. Deal with founder burnout,
  3. Deal with competition,
  4. Set and continuously reset their business strategy, and
  5. Decide whether or not to scale and grow.

We only need to look forward a few more years, as thousands of existing SEFB’s mature into 10, 15, or more, year old businesses to see the scale of challenges coming for these SEFB founders.

What is my exit plan? And will it be any different to that of a for-profit founder or owner?

On the first question, and as with the large majority of for-profit business owners, the exit plan is far from the founders mind when starting. So for most an answer will be triggered by an event, rather than prepared for and dealt with by a formal exit plan. Founders can still achieve good exits, even if triggered by external event, with the right advice and support.

My hypothesis is that the answer to the second question is yes.

 And yes fundamentally because SEFB founders, and in turn customers and suppliers, have a deeper connection to the business. Later in the article I cover how I think these unique challenges can be dealt with.

But to set the scene I wanted to broadly outline at least 4 of the different potential ‘exits’, that are common in the SMB sector, that an SEFB founder should understand.

1. Trade Sale.

From the growing pool will emerge more and more successful, and sellable, SEFB’s. Prompted by a trigger, rather than a formal exit plan, the founder will begin to see that the time and energy spent building the SEFB may have a payoff in the form of  valuable and sellable business. Driven by a range of normal, natural human considerations spanning age, health, family, personal finances, career aspirations, the founder will inevitably contemplate;

  1. Changing direction and doing something new,
  2. Whether them staying in the business is best for the business,
  3. How the business would survive if they weren’t there,
  4. Whether there is value in what they have created,
  5. How they can extract the value, and
  6. Whether they should extract that value as a tangible reward for building the business.

2. Mergers & Acquisitions.

SEFB’s that are innovative, have a strong competitive potential or are already experiencing especially fast growth, and this can happen in a short time frame, may get an early and unexpected exit option thrust upon them.

As happens all the time within the for-profit sector the founder might get an approach to sell from a bigger SEFB, not-for-profit (NFP), corporate or entrepreneur. Underpinning their approach will be their belief that they can potentially fix one of their problems more quickly by acquiring you and, excuse the financial lingo, adding more value or otherwise extracting efficiencies or synergies.

The more the SEFB Sector flourishes the more likely ‘mergers & acquisitions’ (a definition of mergers & acquisitions) will make sense to existing players but also  increasingly to companies who aren’t existing SEFB’s or NFP’s but are looking to;

  1. Broaden their corporate or CSR profile,
  2. Enter the SEFB Sector more quickly by buying an established SEFB,
  3. Buy businesses, including teams, that understand how to deliver a blend of financial and non-financial outcomes.

Under the general Mergers & Acquisitions heading would also fall partial sales (to an investor or business partner) as well as sale of shares to key employees.

3. Business as a Job (BaaJ).

A purposeful, conscious choice by a founder to operate the business with no-employees is to be applauded. Whether it is full time or part time these businesses, incorporating a blend of the usual risks and potential upside, also provide an income to the founder while also making an impact on the problem they are tackling.

The ‘soft’ pressure that often emerges is to transform the business into a ‘real’ business by adding employees, and customers, and products etc.

I reckon the idea of running or buying an SEFB, or any SMB for that matter, that is ‘BaaJ’ should be championed. Who said a growth agenda is mandatory? A ’ BaaJ’ style SEFB that provides you, and only you, a job and control of your own destiny, is to be admired, where it is a conscious decision.

For SEFB’s this could involve finding and tackling a niche problem. It could be about bringing a different approach to an existing problem. If you can identify and solve a niche problem (call it ‘micro-probleming’ or ‘problem-niching’) and can build a ‘BaaJ’ style SEFB then consciously go for it.

You can always turn it into a ‘real’ business later :)

Greater acceptance of the idea of ‘BaaJ’ will foster an environment in which new entrepreneurs are incented to start their own SEFB and make a dent on their micro-problem or niche problem of choosing, and find their feet by contributing to tackling bigger problems in bits.    

On the other hand if you want to scale and make a quicker and bigger impact on your problem of choice go for it. Same rules apply here for any growth orientated business. There is big upside but it’s also demanding, competitive, uncertain et al.

4. Closure (liquidation).

Where the business just doesn’t cut it financially and the founder has exhausted their financial resources the best option is often to cut the losses and close the business.

In order to pay ongoing bills there is an immediate imperative to do something different.

If the founder considers ‘getting a job’ their direct experience starting and running a business can bring a lot to their role as an employee. But being an employee again isn’t for everyone.

Some will startup again and have a crack at another problem bringing valuable experience with them to the new startup and the SEFB Sector eco-system.

So given there are at least 4 traditional types of exits that would challenge any owner what unique factors will make it even trickier in the SEFB Sector?

What are the unique challenges in exiting a Social Enterprise or For-purpose Business? And how should founders deal with them?

I’m sharing the following based on first hand experience as an;

  1. Adviser to owners of SMB’s, SEFB’s and NFP’s, and
  2. Past Director of the Bonsai Social Firm (BSF, 2007 - 2010). After acquiring a for-profit business, converting it to a Social Enterprise  (that created meaningful employment opportunities for sufferers of mental illness) and then operating it for 3 years we came face to face with some difficult commercial questions. We could continue to run the business as is, or merge it with a larger Social Enterprise or NFP in the nursery industry who could extract greater outcomes (financial and non-finanical) than we could as a stand alone operator. Having bought the business and successfully transformed it to a Social Enterprise it was a tough decision, but the right one, for the board. And  in 2009 we successfully merged BSF with Knoxcare Ltd’s Yarra View Nursery.

The Bottom Line is not the Bottom Line.

SEFB’s are started with a mix of financial and non-financial objectives.

While some owners of for-profit businesses start and run businesses for more than just financial reasons, and some get very personally attached to their business, in the main these businesses are about making money along the way (profit) and on exit (sale value). And if the owner is successful in increasing the value of the business it would be generally accepted that they have earned the right to the financial upside.

I dont think it is anywhere near as clear cut when it comes to the founders of SEFB’s. While there would have been aspiration to be financially successfully to enable them to fund the resources necessary to tackle the problem of choice, there wouldn’t have been a singular profit motive.

Because founders of successful SEFB’s have set up their business with very clear (and public) non-financial objectives any sale, and the resulting crystallisation of the business value, could;

  1. Test their own personal values and integrity leading to a challenging question. Am I selling out?, and/or
  2. Attract additional personal and reputational attention from peers, customers or suppliers. You are selling out. 

More founders will be challenged like this in coming years, and they will need  personal support as well as smart business advice.

A major part of this will involve redefining the idea that they are ‘selling out’. In support of these founders and to help them rationalise and feel right about a decision to start and then sell a successful SEFB I’d be saying;

  • Founders take risks in starting and are entitled to a reward for that,
  • With new energy and a fresh approach SEFB’s can go on and be even more successful in tackling the problems originally identified by the founder,
  • Founders staying in their SEFB, for fear of being seen to ‘sell out’, could undo create a lot of personal stress, and/or all the good work,
  • Recognition that successful SEFB founders can have an exit, with personal upside, is an endorsement of the SEFB Sector and it’s value in solving previously unsolved or unrecognised problems,
  • Successful SEFB’s have been a successful vehicle to create sustainable and meaningful self employment opportunities for founders. Creating business value from selling is the next evolution,
  • When personal financial upside from creating an SEFB with sale value is more common, more innovative founders solving more previously unsolved problems will be incented to start.

As selling SEFB’s happens more it will become more ‘normal’. But before then selling founders are going to go through some anguish and introspective questioning. But as true innovators they might take some comfort that they are paving the way for others to follow.

Business is personal and that can make the Business better.

SEFB’s are underpinned by deep personal connection from the founder, but also the customers and staff.

The founders of successful SEFB’s that I’ve met and others I’ve read about take ‘taking it personally’ to a whole new level. The problem they want to solve is often triggered by deeply personal experiences or concerns that go far beyond the for-profit model of identifying and solving potential customers biggest and most profitable problems.

So letting go can be extra hard. The key for founders is to embed that passion deep into the employees, the customers etc. When the time comes to exit that effort should make the founder more comfortable that others will continue on with the important work they started.

Welcome SEFB’s to the world of Goodwill and Intangible Value.

The actual cost of doing business for SEFB’s can be higher for a host of unique reasons.

A typical example might be the higher cost of buying ethically or buying in small batches.  

Actual bottom line profit could also be lower because the business model is about sharing or reinvesting some of the profits, as they are an ongoing cost of doing business.

Nevertheless and despite a lower ‘profit’ SEFB’s might still achieve higher sale prices than typical SMB’s.

A major reason for this relates to ‘goodwill’.

In very simplistic terms a successful SEFB might have higher ‘goodwill’ because it’s brand and reputation is linked to helping a cause or solving a social problem and that can attract more ‘sticky’ and engaged customers. Long term, loyal customers of the brand create more ‘goodwill’, and that can directly translate to a higher Multiple and in turn a higher sale value. 

If you aren’t familiar with the term Multiple and how it relates to the value of a business read about it here.

There is real value at stake here for founders of successful SEFB’s, and this is only a very cursory overview of a complex topic..

As the  opportunities to sell SEFB’s and 'cash out' increase founders will need to better prepare.There are different and more complex metrics for ‘goodwill’ which would drive a higher Multiple. To uncover them the analysis needs to move towards strategic and intangible components such as influence, reputation, brand, committed followers & fans. This is where specialist advice will pay off.

In the meantime as the founder / owner you will experience tiredness, risk running out of resources, face competition, question your business model, change your life priorities, realise there is another way etc etc. This is all a natural part of the founders journey. To help avoid making any reactive decisions here are some  challenging questions to kick-start founders thinking on when and how to better exit their SEFB when the time comes.

10 questions to help founders better exit their Social Enterprise or For-purpose Business.

  1. How well are you and the business positioned to continue to impact the problem you set about fixing?
  2. Can the purpose or cause be more effectively served by a new owner?
  3. How much fuel do I personally have in the tank?
  4. Is it time to change problems?
  5. Are there conditions I would want to impose on the sale?
  6. Is another SEFB or NFP your natural buyer? And can they maximise sale value and/or ‘soften’ the pain of ‘selling out’?
  7. Are there any buyers you wouldn’t sell to?
  8. Is there any potential for misunderstanding between the public perception of and the actual outcomes being delivered by my SEFB? For example a promise to donate a set ‘percentage of profits’ can easily and innocently create misunderstanding. The final ‘profit’ number declared in any year can be impacted by a whole range of subjective factors. So being really clear on the definition of numbers is critical. Whether or not your fans & followers ‘buy the story’ is probably the most legitimate acid test
  9. Who are the stakeholders that would be impacted by the sale e.g. staff, partner organisations you support and when and how would you talk to them about a potential sale?
  10. What is my message to stakeholders and will it ‘hold water’ so that my personal reputation and integrity aren’t negatively impacted?
Until next time, Michael 
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