To Sell or Not to Sell?
John Elkington talks with social entrepreneurs and others about what happens when the time comes to sell the business.
John Elkington talks with social entrepreneurs -- Andrew Whitley (Village Bakery), Rory Stear (Freeplay Energy), Craig Sams (Whole Earth and Green & Blacks), and Neil Makin (Cadbury Schweppes) -- about selling out without "selling out."
John Elkington: One of the toughest moments any entrepreneur faces is when the time comes to consider whether to "sell out." For example, I was at the Ben & Jerry's board meeting in the US when they decided they would have to sell out to a larger player. It was an excruciating period for the founders, Ben Cohen and Jerry Greenfield. But if the social enterprise sector is to work well as an incubator of future businesses, the mechanisms of investments, mergers and acquisitions will have to be considered.
While thinking this issue through, I spoke with Pamela Hartigan, who runs the Schwab Foundation for Social Entrepreneurship . She says that it is "rare" among the social entrepreneurs she works with to sell, indeed she knows of at least one who considered it and then "decided not to pursue it." But they're a very particular type of social entrepreneur. And it's interesting how often successful social entrepreneurs didn't think about selling on when they started out. One of the first social entrepreneurs -- although that wasn't the term then -- I came across has since been a long-standing friend, Andrew Whitley. Originally a BBC Russian Service producer, he created The Village Bakery in 1976. They were very unusual at the time in that they based the entire business on organic methods, renewable energy, and artisanal methods. But the real challenges began when they were discovered by a major supermarket chain in 1991. As Ben & Jerry's found many years later, the process of scaling up was a grueling process, but -- Andrew, was an eventual sale always part of the business plan?
Andrew Whitley: I usually describe the Village Bakery as a paradoxical example of brand success through serial business failures! I didn't have a business plan, indeed I didn't know what one was for the first ten years of my "business" career. I had no particular end game in mind. The decision to sell was in effect taken for me when my then wife indicated that she wanted to leave the partnership, both business and personal. So the choice was between giving up the whole thing and selling enough of it to generate some cash, while allowing me to remain in the business.
JE: Tough times.
AW: Yes. The first stage, 1994 to 1995, involved a long search for investors who showed any inkling of understanding what the
business was about. I eventually found three people who did, the folk behind the successful Phileas Fogg brand, and they acquired 66% of the shares. But then they were bought out -- pretty much over my head -- by a local bakery, Bells, in 1998, with my share dropping to 24.9%. The second stage, 2001 to 2002, involved a difficult negotiation in which it seemed that the majority shareholder wanted to engineer my exit for nothing. I took legal advice and consulted people like Rachel Rowlands of Rachel’s Dairy, Lizzie Vann of Organix Brands and Craig Sams of Whole Earth and Green & Black’s.
JE: But you eventually settled and the business has maintained many of the original characteristics. What advice would you give to someone starting up today as a social entrepreneur?
AW: Find a way of achieving adequate capitalization before you start, so you can cushion against temporary dips in profitability caused by a determination to stick to your principles.
JE: It’s interesting, this tension between staying small and the need to scale. While we were researching this issue of Radar, I visited Innocent Drinks and interviewed one of the founders, Jon Wright. They are trying to get into supermarket giants like Tesco, but are up against bigger companies like Ocean Spray, Tropicana and PJ’s, owned by PepsiCo. They say they don’t want to sell out, but it’s hard to scale up without getting money from somewhere.
One social entrepreneur who has recently gone through an IPO (Initial Public Offering) process is Rory Stear of Freeplay Energy. He started out in the field of wind-up radios in the mid-1990s and now says he wants Freeplay to be "the best in the world at harnessing human energy." But -- Rory -- what were the financial options when it came to think about scaling up?
Rory Stear: Unlike many other social entrepreneurs, we always intended to seek external investment -- and, eventually, to take the business public. In the early days, we had sold slices of the business to investors like Anita and Gordon Roddick and GE Pension Trust. But any investor wants to know what their "exit" is going to be. And any entrepreneur has a number of options in this area. They can go for a trade sale, selling out to another company. They can try a management buyout. Or they can go public using an IPO, the first sale of stock to the public.
Our problem was that our first-round investors were tired and over the years we had developed an impossibly complicated capital structure, with some investors effectively having the power of veto on what we did.
The IPO helped straighten that out. And it’s an unfortunate fact of business life that often the people who make the real money out of a business are the second-round investors.
JE: Have you seen the financial markets responding to your efforts?
RS: When we started trying to raise capital in 1996, none of the big investment banks had a renewable energy analyst. Now not a single one doesn’t.
JE: And if you were offering advice to a would-be social entrepreneur?
RS: I agree with Andrew. Try to make sure you have enough capital from the outset, or you end up being driven by the deals.
JE: Craig Sams has sold at least two social enterprises, Whole Earth, now part of Kallo Foods, and organic chocolate makers Green & Black’s, now part of Cadbury Schweppes. Craig, was selling always part of the game?
Craig Sams: Yes, but previous attempts hadn’t been successful. We offered Whole Earth to Heinz in 1996, thinking it the perfect opportunity for them. But they went with their own brand. The decision to sell Green & Black’s became inevitable when William Kendall and Nick Beart made an offer of cash and shares retention. Encouraged by my father and my wife (Jo Fairley, co-founder of Green & Black’s) I agreed, and we were into the venture capital stage. Everyone had invested in a business plan that showed an exit in five years or so.
JE: And the benefits of being part of Cadbury Schweppes?
CS: We dreamed that we would sell to a big chocolate company, but Cadbury Schweppes exceeded our wildest dreams. We have long leveraged the production and processing powers of others, but now with Cadbury Schweppes we have the global reach of a multinational and can make strategic decisions without being constrained by short-term cost issues.
JE: And what about from the other side of the table? Let’s ask Neil Makin, External Affairs Director at Cadbury Schweppes, what was the thinking on the Green & Black’s purchase?
Neil Makin: Well, we were impressed at how Green & Black’s had managed to maintain growth. I met Craig Sams some time ago, in his role at the Soil Association. It was clear then that we shared some mutual interests. Cadbury Schweppes had also bought a 5% stake in Green & Black’s some time ago, so you could say we had been following them from within.
JE: So, what do Green & Black’s bring to Cadbury Schweppes?
NM: Green & Black’s is reinforcing our commitment to all parts of the ethical supply chain. Green & Black’s are a beacon at one end of that. It’s a flag pole for us all to walk around.
We’re particularly interested in harnessing the ideas and passion that the Green & Black’s team bring to our business. Coupled with our distribution and marketing we will be able to help them to grow and to reach new markets.
JE: Can the Green & Black’s brand values continue even when owned by a large multinational?
NM: Absolutely -- we wouldn’t want to buy these companies if we were going to destroy their brand. With our Bournville Quaker forefathers, we have something of a social and ethical heritage already.
We were a little surprised by the reaction of some of the media, who argued that Cadbury Schweppes was trying to buy ethical credibility. Whenever I hear such arguments I think of what Green & Black’s CEO William Kendall once said: "Heaven help us if ethical trade is only left to small organizations!"
JE: It’s great to hear of an acquisition that seems to be working well. But, Craig, with hindsight, what advice would you offer early-stage social entrepreneurs?
CS: The same advice as Andrew and Rory. Capital is wonderful stuff. I was always constrained by being undercapitalized and used each successful product as a cash cow to fund the next. Whole Earth peanut butter, for example, was what kept Green & Black’s going in the early days.
JE: And how carefully did you vet bidders for your businesses? Would you have sold Green & Black’s to Nestlé, for example?
CS: I’d have had plastic surgery and gone to live in Uzbekistan if it had been Nestlé!
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This article has been reprinted courtesy of SustainAbility RADAR. It was first published in the August/September issue of that publication.
John Elkington: One of the toughest moments any entrepreneur faces is when the time comes to consider whether to "sell out." For example, I was at the Ben & Jerry's board meeting in the US when they decided they would have to sell out to a larger player. It was an excruciating period for the founders, Ben Cohen and Jerry Greenfield. But if the social enterprise sector is to work well as an incubator of future businesses, the mechanisms of investments, mergers and acquisitions will have to be considered.
While thinking this issue through, I spoke with Pamela Hartigan, who runs the Schwab Foundation for Social Entrepreneurship . She says that it is "rare" among the social entrepreneurs she works with to sell, indeed she knows of at least one who considered it and then "decided not to pursue it." But they're a very particular type of social entrepreneur. And it's interesting how often successful social entrepreneurs didn't think about selling on when they started out. One of the first social entrepreneurs -- although that wasn't the term then -- I came across has since been a long-standing friend, Andrew Whitley. Originally a BBC Russian Service producer, he created The Village Bakery in 1976. They were very unusual at the time in that they based the entire business on organic methods, renewable energy, and artisanal methods. But the real challenges began when they were discovered by a major supermarket chain in 1991. As Ben & Jerry's found many years later, the process of scaling up was a grueling process, but -- Andrew, was an eventual sale always part of the business plan?
Andrew Whitley: I usually describe the Village Bakery as a paradoxical example of brand success through serial business failures! I didn't have a business plan, indeed I didn't know what one was for the first ten years of my "business" career. I had no particular end game in mind. The decision to sell was in effect taken for me when my then wife indicated that she wanted to leave the partnership, both business and personal. So the choice was between giving up the whole thing and selling enough of it to generate some cash, while allowing me to remain in the business.
JE: Tough times.
AW: Yes. The first stage, 1994 to 1995, involved a long search for investors who showed any inkling of understanding what the
business was about. I eventually found three people who did, the folk behind the successful Phileas Fogg brand, and they acquired 66% of the shares. But then they were bought out -- pretty much over my head -- by a local bakery, Bells, in 1998, with my share dropping to 24.9%. The second stage, 2001 to 2002, involved a difficult negotiation in which it seemed that the majority shareholder wanted to engineer my exit for nothing. I took legal advice and consulted people like Rachel Rowlands of Rachel’s Dairy, Lizzie Vann of Organix Brands and Craig Sams of Whole Earth and Green & Black’s.
JE: But you eventually settled and the business has maintained many of the original characteristics. What advice would you give to someone starting up today as a social entrepreneur?
AW: Find a way of achieving adequate capitalization before you start, so you can cushion against temporary dips in profitability caused by a determination to stick to your principles.
JE: It’s interesting, this tension between staying small and the need to scale. While we were researching this issue of Radar, I visited Innocent Drinks and interviewed one of the founders, Jon Wright. They are trying to get into supermarket giants like Tesco, but are up against bigger companies like Ocean Spray, Tropicana and PJ’s, owned by PepsiCo. They say they don’t want to sell out, but it’s hard to scale up without getting money from somewhere.
One social entrepreneur who has recently gone through an IPO (Initial Public Offering) process is Rory Stear of Freeplay Energy. He started out in the field of wind-up radios in the mid-1990s and now says he wants Freeplay to be "the best in the world at harnessing human energy." But -- Rory -- what were the financial options when it came to think about scaling up?
Rory Stear: Unlike many other social entrepreneurs, we always intended to seek external investment -- and, eventually, to take the business public. In the early days, we had sold slices of the business to investors like Anita and Gordon Roddick and GE Pension Trust. But any investor wants to know what their "exit" is going to be. And any entrepreneur has a number of options in this area. They can go for a trade sale, selling out to another company. They can try a management buyout. Or they can go public using an IPO, the first sale of stock to the public.
Our problem was that our first-round investors were tired and over the years we had developed an impossibly complicated capital structure, with some investors effectively having the power of veto on what we did.
The IPO helped straighten that out. And it’s an unfortunate fact of business life that often the people who make the real money out of a business are the second-round investors.
JE: Have you seen the financial markets responding to your efforts?
RS: When we started trying to raise capital in 1996, none of the big investment banks had a renewable energy analyst. Now not a single one doesn’t.
JE: And if you were offering advice to a would-be social entrepreneur?
RS: I agree with Andrew. Try to make sure you have enough capital from the outset, or you end up being driven by the deals.
JE: Craig Sams has sold at least two social enterprises, Whole Earth, now part of Kallo Foods, and organic chocolate makers Green & Black’s, now part of Cadbury Schweppes. Craig, was selling always part of the game?
Craig Sams: Yes, but previous attempts hadn’t been successful. We offered Whole Earth to Heinz in 1996, thinking it the perfect opportunity for them. But they went with their own brand. The decision to sell Green & Black’s became inevitable when William Kendall and Nick Beart made an offer of cash and shares retention. Encouraged by my father and my wife (Jo Fairley, co-founder of Green & Black’s) I agreed, and we were into the venture capital stage. Everyone had invested in a business plan that showed an exit in five years or so.
JE: And the benefits of being part of Cadbury Schweppes?
CS: We dreamed that we would sell to a big chocolate company, but Cadbury Schweppes exceeded our wildest dreams. We have long leveraged the production and processing powers of others, but now with Cadbury Schweppes we have the global reach of a multinational and can make strategic decisions without being constrained by short-term cost issues.
JE: And what about from the other side of the table? Let’s ask Neil Makin, External Affairs Director at Cadbury Schweppes, what was the thinking on the Green & Black’s purchase?
Neil Makin: Well, we were impressed at how Green & Black’s had managed to maintain growth. I met Craig Sams some time ago, in his role at the Soil Association. It was clear then that we shared some mutual interests. Cadbury Schweppes had also bought a 5% stake in Green & Black’s some time ago, so you could say we had been following them from within.
JE: So, what do Green & Black’s bring to Cadbury Schweppes?
NM: Green & Black’s is reinforcing our commitment to all parts of the ethical supply chain. Green & Black’s are a beacon at one end of that. It’s a flag pole for us all to walk around.
We’re particularly interested in harnessing the ideas and passion that the Green & Black’s team bring to our business. Coupled with our distribution and marketing we will be able to help them to grow and to reach new markets.
JE: Can the Green & Black’s brand values continue even when owned by a large multinational?
NM: Absolutely -- we wouldn’t want to buy these companies if we were going to destroy their brand. With our Bournville Quaker forefathers, we have something of a social and ethical heritage already.
We were a little surprised by the reaction of some of the media, who argued that Cadbury Schweppes was trying to buy ethical credibility. Whenever I hear such arguments I think of what Green & Black’s CEO William Kendall once said: "Heaven help us if ethical trade is only left to small organizations!"
JE: It’s great to hear of an acquisition that seems to be working well. But, Craig, with hindsight, what advice would you offer early-stage social entrepreneurs?
CS: The same advice as Andrew and Rory. Capital is wonderful stuff. I was always constrained by being undercapitalized and used each successful product as a cash cow to fund the next. Whole Earth peanut butter, for example, was what kept Green & Black’s going in the early days.
JE: And how carefully did you vet bidders for your businesses? Would you have sold Green & Black’s to Nestlé, for example?
CS: I’d have had plastic surgery and gone to live in Uzbekistan if it had been Nestlé!
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This article has been reprinted courtesy of SustainAbility RADAR. It was first published in the August/September issue of that publication.