For Impact Companies, 'Exit' Is Not a Four-Letter Word

By Adam Wiskind

As a mergers and acquisitions advisor with an interest in serving the social impact community, I arrived at SOCAP16 seeking strategies to preserve the missions of social impact companies that go through a merger or acquisition.

I was surprised to discover that many impact investors and entrepreneurs haven’t given much thought to exit strategies. Or they believe exiting is antithetical to mission, and that exits involve private equity vampires swooping down on hapless impact companies, stripping them of their missions and selling them off to the highest bidder.

But one informative, hands-on session -- called Structuring for Impact without Relying on Exits -- stood out. It provided practical advice on creative investment terms, such as demand dividends and variable payment option loans which “patient” capital can use to structure investments that match certain types of impact companies’ limited ability to pay.  Clearly these approaches are important when businesses create real world impact but less-than-market returns.  However, the expectation that social impact must receive exceptional investment terms to be viable comes with the risk that more mainstream capital will not want to or be able to participate.

Furthermore, access to patient capital does in no way negate the need to plan for the eventualities of the future. There are many impact companies for whom planning an exit is not just a good idea, it is essential to deliver on impact goals and to protect the companies against the very loss of mission for which they fear.

An exit strategy is a contingency plan that is executed by an investor or business owner to liquidate interest in a company once certain predetermined criteria have been met or exceeded. It may be executed for the purpose of divesting from a non-performing investment or closing a business that is not generating sufficient returns. In this case, the purpose of the exit is to limit losses.

An exit may also be executed when an investment or business venture has met its profit (or impact) objective and for various reasons financial or otherwise the investors or entrepreneur no longer chooses to participate in the venture. It is wise to plan for both of these scenarios. Indeed, the very lack of disciplined exit planning that defines success and failure for social impact enterprises results in a great deal of wasted capital, Ned Breslin argues in the Harvard Business Review.

Michael Whelchel of Big Path Capital and Jeff Woodward of Taylor English Duma LLP, longtime participants in the social impact community, pointed to a growing portfolio of companies to that have exited successfully while managing to amplify their impact. Ben and Jerry’s, Honest Tea, Stonyfield Farm, and Plum Organics were all acquired, maintained their missions, and went on to have a significant influence on the mission of the acquiring company.

Their strategies provide a roadmap for others to follow:

Plan ahead

Successful exits don’t happen. They are planned, sometimes years in advance of execution. Take the time to set goals and strategies for exit; it will pay off in the end.

Most entrepreneurs only sell one company in their lives.  Hire an experienced professional to help with the process so that during the sales process the entrepreneur and management team can focus on running the business.

Know your buyer

Most merger and acquisition failures are due to lack of cultural integration between buyer and seller.  Spend time to identify mission-aligned investors and actively pursue them.  Once potential investors have been identified work hard to understand their values and motivations.

Embed mission in the DNA of the company

Make mission core to the company’s brand and inseparable from the company’s product or service. Patagonia’s mission to “use business to inspire and implement solutions to the environmental crisis” is evident in all of their marketing and the products that they make.  Patagonia’s value as a company is its relentless pursuit of its mission, without it they are simply another outdoor clothing company.

Structure matters

Judy Wicks of the White Dog Cafe chain developed a unique structure to preserve mission during the sale of her company. Wicks retains ownership of the brand name and licenses it back to the new owner with a "social contract" that protects key aspects of the company's social mission. Failure to adhere to the contract would lead to a termination of the license.

Incorporating as a benefit corporation signals to potential investors the importance of preserving mission. This gives legal protection to directors and officers to consider the interests of all stakeholders, not just shareholders, when making decisions.

Another way to find investors who share the company’s mission is to turn employees into owners through worker cooperatives or employee stock ownership plans (ESOPs). Employees are often best positioned to appreciate a company’s mission and to carry it forward.

The bottom line

While none of these exit planning strategies can assure that mission will be preserved through a merger or acquisition, it's fair to say that they will  produce better results than not planning for exit at all.

Image credit: Flickr/Kevin McGill

Adam Wiskind, based in the San Francisco Bay Area, is an M&A advisor to lower middle market companies with revenues between $1-$50 million.  Please contact him at awiskind@exitstrategiesgroup.com or linkedin.