Tuesday, January 15, 2013

LBO: Liquidity, Legacy, Exit 2.X

It's a thorny issue. An entrepreneurial team builds a company with a great products, an iconic brand and strong vision, values and mission. In the process of doing so, they create value. Lots of it. They finally see a pot of money at the end of the rainbow. It is a just reward for years of hard work, long hours, and ever present fear of failure. Liquidity beckons. 

Typically, there are two solutions for this fortunate business: to sell all the company (acquisition) or part of it (IPO, etc.). And that's the rub. In both of those cases, you will likely lose what it is that got you there. Because along with all that hard work, long hours and fear of failure came the joy of building something different, the relationships forged in tough times together, the fun of celebrating the wins along the way. Some entrepreneurs are happy with these two choices, cash out, and then look for their next adventure. But others find this choice perplexing. Is there another way? Is there a way for the entrepreneurs to receive a fair price for the value they have created, yet not give up the soul of the company?  Legacy beckons. 

Which of these divergent paths to take? 

This is a big issue for two reasons. First, if the only exit paths are financially driven, then the implications for mission driven companies are discouraging. There are some well known sales of mission driven companies: Ben & Jerry's sale to Unilever, Tom's of Maine to Colgate-Palmolive, Burt's Bees to Chlorox and Seventh Generation to, well, that's a whole 'nother story. But it is hard to find models of successful exits, if your yardstick has any dimensions beyond shareholder return. Some noble intentions, but little long term success and happiness on both sides of the table. The role models for exit version 2.x are limited to piecing together the "best of" components of deals that have come before. 

Second, looking over the horizon, there are many more transactions to come. As Marjorie Kelly notes, "the moment of Founder Departure is about to occur on a massive scale," with the pending retirement of baby boomer entrepreneurs. She reports that while 50,000 companies changed hands in 2001, that number had shot to 750,000 by 2009, and was expected to continue to grow as boomers age.* 

Figuring out alternative paths to exit matters. 

There are several intriguing alternatives out there. Paths less travelled, but paths with a destination of long lasting legacy. There are ESOPs, where employees own all or part of the company in a trust for their retirement. These are used by some pretty big companies, like Publix with over 150,000 employees. A few years ago, the founder of Bob's Red Mill used this structure to give his company to his employees for his 81st birthday. In her book, Kelly describes other possibilities for "mission-controlled" companies, too- such as foundation controlled corporations (Novo Nordisk) or supplier controlled cooperatives (Organic Valley).

Becoming a B Corp (or benefit corporation), is another piece of the puzzle. All companies can seek to be certified by meeting social/environmental performance goals and transparency standards. Some notable B Corps are Patagonia, Method, Etsy, and recently, the aforementioned Ben & Jerry's. Now, the legal status of a benefit corporation is available to companies in 12 states, and more, including Colorado, are on the way.  

Two companies that have combined these- 100% employed owned and B Corp certified- are King Arthur Flour and Dansko.** The reason for this rare combination was well stated by Dansko co-founder and CEO Mandy Cabot: 

“Dansko is our baby; our employees are our family. Becoming an employee-owned B Corp protects our legacy, ensuring that we can not only remain independent, but also maintain our focus on being a great place to work, a valued member of our community, and a good steward of the environment.”***
At New Belgium Brewing, the company faced the liquidity/legacy quandary. By building a strong brand in a growing business, the company had created great financial value. While already an employee owned company, the ownership was split with the ESOP owning a minority of the company, and the founders and executives owning the majority, and over time this was creating some pressures with respect to newer employees joining the ESOP. As a board, we struggled with the issue of unlocking the value that had been created, without sacrificing the values that had driven it or the future of our co-workers. 

At the end of last year, we took the plunge, and joined the small ranks of companies that are fully employee owned B Corps. We announced the change of ownership at yesterday's all staff meeting in Fort Collins. You can get more details here. Basically, the company borrowed enough money to pay the shareholders a fair price for their shares, and the ESOP ended up owning 100% of the outstanding shares. An LBO of sorts- but rather than a Leveraged Buy Out on Wall Street, it is a Legacy Buy-Onward on Linden Street. 

We kicked off the meeting with a talk by Jack Stack, whose book The Great Game of Business, had helped shape New Belgium's high involvement culture and open book management. Kim Jordan, co-founder and CEO, then took the stage. Employees were handed an envelope and a beer (hey, it is New Belgium, and it was past beer-thirty). Kim said she had struggled with issues of ownership for some time and had decided to sell control of the company. Co-workers were invited to open the envelope to find the identity of the buyer. Inside was a congratulatory message from all the selling shareholders, and a mirror. The mirror showed every co-worker that THEY were the buyer. It got a bit wild after that! When things settled down, there were some great comments by a few other members of the management team, and our ESOP trustee. Kim then assured the crowd of her continued high involvement in the company, and closed with the following: 
"We have been on a long journey to look at a number of options for ownership, with a focus on who would best perpetuate what has been started, and innovate as we grow. We looked at alliances, going public and being acquired. In the end, we felt that the best people in the world to take the business forward were the ones who had taken it to this point: our co-workers. It is with great confidence that we start this next chapter in the New Belgium story, one that we all get a hand in writing."
At New Belgium, we have made a deliberate decision to keep ownership in the hands of people we know and trust as a way to achieve liquidity and pursue legacy. We don't know how it will all turn out, and whether this is a path that will work for other companies. We hope so, and we will work to share our experiences with those that are interested in looking down alternative paths. Perhaps others will join us, or follow us, and these paths will become smoother, more obvious and better traveled.

We celebrated last night, and resume the journey today. It is on the path less travelled, and we hope that will make "all the difference." **** 
NOTE: for my less regular readers, I have been on the New Belgium board since 2006.
* Kelly, "Owning Our Future" (2012) p 174.
** Another intriguing model is the worker cooperative B Corp from our Colorado neighbor Namaste Solar
*** Gilbert & El Tahch, " 'B' A Better ESOP" (2012)
**** Robert Frost, "The Road Not Taken" (1920)


barefootmeg said...

Thanks, Paul. This explanation helps a lot. I think it's really interesting what NBB has done. I look forward to seeing how this changes/grows/builds the company going forward.

I'm still confused about how it all worked. There was a bank loan to purchase the shares owned by the founders/execs? Then those shares were given (donation? sale? who is going to have to pay the bank back?) to the ESOP? Then do employees own shares of the ESOP in varying proportions? I assume the founders/execs are now also part of the ESOP?

I hope you don't mind that I'm asking about all the details, but that's the part that intrigues me is how it actually all works out.

Bopreneur said...

The ESOP is a trust, managed by a third party, but set up by the company for the benefit of its employees.
In order to purchase the shares, the company did need to borrow some of the money from banks.
Once these shares were purchased, the only shares left outstanding were the existing shares owned by the ESOP. So the ESOP now owns 100% of the company's outstanding shares.
The purchased shares will be allocated over a long period of time, into employee ESOP accounts, including new employees who join the company. For instance, those hired at the new brewery in Asheville.
ESOP accounts are determined the same way for all employees (including execs), based on their salary and tenure with the company. Said another way, ESOPs are not equal ownership structures, where everyone owns the same number of shares.
The nature of the transfer of the shares to employee accounts is as a benefit, like days off or profit sharing or health insurance. Ownership is part of being a co-owner; it is a privilege and a responsibility. Co-workers don't have to "pay" for the shares, or repay the loans, directly. But all need to show up every day and build the company, make wonderful beer and delight our customers, so that the Company can make money and repay the loans. If those things happen, over time the ESOP share price (determined by the trustee) will go up. If they don't happen, the value of the shares in the ESOP will go down.
There is no market for the shares. Employees can only sell back to the ESOP when they leave the company or retire.
For most existing companies, what NB did may be hard to replicate. We were fortunate to have been very conservative in financing the company, and keeping the equity to a small number of people who deeply believe in the mission of the company. If we had had outside equity investors, it might have been more difficult to pull off.
The lesson for startup design is that this path is possible, but will take discipline and intention over many years to realize. It will be a path less travelled, yet I think it is one well worth considering.