national gathering of social entrepreneurs december 2002 social enterprise exit strategies

National Gathering of Social EntrepreneursDecember 2002

www.virtueventures.com

Social Enterprise Exit Social Enterprise Exit StrategiesStrategies

©Virtue Ventures 2002. All rights reservedNational Gathering of Social EntrepreneursDecember 2002

Many for-profit exits don’t Many for-profit exits don’t apply to social enterprisesapply to social enterprisesWho: Investors and owners exit How: Raise additional capital through secondary offerings from other investors

Sell company to third party* Initial Public Offering (IPO) shares of the company are sold to “take out” original investors


Social enterprise exitsSocial enterprise exitsWho: Funders and parent organizations exit How:

Access new funders Earned income Debt financing Merge Spin-off Transfer Franchise Close ESOP Sell


Reasons for ExitsReasons for Exits

Donor requirement Opportunity Divestment Self-sufficient Need new funding Strategy


Preconditions for ExitsPreconditions for Exits

Good leadership and managementIncluding the ability to plan strategically

Solid organizational structure A track record of meeting objectives

Positive social outcomes and evidence progress toward achieving mission

A clear vision for the future


Exits relate to capacity...Exits relate to capacity...

PilotStart Up

GrowthExpansion

MaturitySustainability

Governance

Impact

Management

Operations

Structure

Vision


……. and funding needs . and funding needs

Investor Perspectives, Tuan, Emerson, Roberts Foundation 2000


… … and timingand timing

"My work is done. Why wait?"

— George Eastman, founder of Kodak,

in his suicide note


Funding Needs

Exits are not single events, but rather a series of steps

Seed Capital Start up Primary Secondary Mezzanine Mainstream

Pilot Start up Growth Expansion Maturity Sustainability

A social enterprise may A social enterprise may experience several exitsexperience several exits

Development Stage


Before you start Before you start

Valuation Due Diligence Partnership Assessment Risk Assessment Legal Structure Ownership Human Resources


How exits workHow exits work

Two case studies:Spin-offMerger


Spin-off processSpin-off process

1. Incubation

4. Track Record & Success

2. Capacity Building

Parent

SE Project

3. Infrastructure & Systems

7. Exit

5. Sources Technical Assistance

4. Diversify Funding

6. Separation


Pros and cons of spin-offPros and cons of spin-off

Pros definitive exit separate legal entity

actualizes own culture, priorities and growth

market/customer driven

mission focused continuity for target population

frees resources for other programs

Cons difficult to cut ties with parent

process can be drawn out and emotional

risks collapse if systems or management are weak

requires major capacity building

parent has little control

must raise own money


Spin-off lessonsSpin-off lessons Need methodology Prepare for spin-off at the outset

Separate office, staff, systems Know intricacies of capital markets Understand legal frameworks Define roles and relationships of players

Specify post spin-off parent/new venture relationship in writing

Keep process transparent


Merger process Merger process

Merger

1. Introduce idea

2. Leadership buy-in

3. Negotiation

4. Legal issues

5. Process planning

6. Due diligence7. Team building

8. Incorporation

9. Merger complete


Pros and cons of mergersPros and cons of mergers Pros

combines resources (human, financial, asset)

leverages synergies cost savings increase likelihood of success

continuity for target population

may eliminate competitor

increase possibilities for funding

Cons tension around leadership, decision-making and sacred cows

post-merger fallout some jobs lost larger enterprise may tax management/capacity

threat of watered-down mission

fragile process


Merger lessonsMerger lessons Clarify issues of asset ownership and revenue at the beginning

Hire a third party to negotiate and facilitate process

Allow time for planning, process and post merger settling period

Allocate merger budget Human resource issues are the most sensitive and delicate

Process is fragile can fall apart any time Personalities/cultures matter Involve all stakeholders Keep process transparent


Mainstreaming exits will Mainstreaming exits will take a coordinated efforttake a coordinated effort

Social entrepreneurs:Take long-term vision (beyond funding cycle)Plan strategically for funding and capacity building

Funders and social entrepreneurs: Plan exits at the beginning of their relationship. Align exits to capacity building & financial milestones.

Advocate to create enabling legal environment. Funders:

Develop financial products and niche markets.Transfer investees to funders in different markets.Support capacity building.


Final thoughts on social Final thoughts on social enterprise exitsenterprise exits

“Know when to hold ‘em,know when to fold ‘em,know when to walk away

and when to run”

- Kenny Rogers


Merger guidelinesMerger guidelines

Financial Agreement of intent Due diligence Financial/asset

agreement Human Resources

One CEO or ED HR plan - staff roles,

gaps and redundancy, HR policies and pay

Reporting relationships Organizations

Similar mission, target population, priorities

Governance Shareholders agreement Board roles and bylaws

Operations Brand enterprise Merger process plan Culture evolves Legal

constraints/impact External

Lawyer Negotiator Auditor

national gathering of social entrepreneurs december 2002 social enterprise exit strategies

Documents

n valuation n

n investors

mission n

virtue ventures

exits work n

social enterprises

new funding n strategy

n good leadership