Social Enterprise Exit Strategies

1. Social Enterprise Exit Strategies www.virtueventures.com

2. Many for-profit exits don’t apply to social enterprises Who: • 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

3. Social enterprise exits Who: • Funders and parent organizations exit How: • Access new funders • Earned income • Debt financing • Merge • Spin-off • Transfer • Franchise • Close • ESOP • Sell

4. Reasons for Exits • Donor requirement • Opportunity • Divestment • Self-sufficient • Need new funding • Strategy

5. Preconditions for Exits • Good leadership and management • Including 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

6. Operations Vision Governance Management Impact Structure Exits relate to capacity...

7. …. and funding needs Investor Perspectives, Tuan, Emerson, Roberts Foundation 2000

8. … and timing "My work is done. Why wait?" — George Eastman, founder of Kodak, in his suicide note

9. A social enterprise may experience several exits Funding Needs Seed Capital  Start up  Primary  Secondary  Mezzanine  Mainstream Development Stage Pilot  Start up  Growth  Expansion  Maturity  Sustainability Exits are not single events, but rather a series of steps

10. Before you start • Valuation • Due Diligence • Partnership Assessment • Risk Assessment • Legal Structure • Ownership • Human Resources

11. How exits work • Two case studies: • Spin-off • Merger

12. 7. Exit Parent SE Project Spin-off process 1. Incubation 2. Capacity Building 3. Infrastructure & Systems 4. Track Record & Success 6. Separation 4. Diversify Funding 5. Sources Technical Assistance

13. 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 Pros and cons of spin-off

14. Spin-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

15. 1. Introduce idea 2. Leadership buy-in 3. Negotiation 4. Legal issues 9. Merger complete Merger 5. Process planning 7. Team building 6. Due diligence 8. Incorporation Merger process

16. 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 Pros and cons of mergers

17. Merger 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

18. Mainstreaming exits will take 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.

19. “Know when to hold ‘em, know when to fold ‘em, know when to walk away and when to run” - Kenny Rogers Final thoughts on social enterprise exits

20. 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 Merger guidelines