Michael Kerr from Kerr Capital on why founders of Social Enterprises need an exit plan just like every other business owner.

[00:00:00] Hi, it's Michael Kerr here presenting Small Business Banter.

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[00:00:27] I'm Michael Kerr, founder of Kerr Capital, advises to business owners.

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[00:01:07] Welcome in to another edition of Small Business Bander Community Radio and Podcast. On today's edition I'm going to be talking about exor planning or sale of a social enterprise or a for purpose business.

[00:01:36] This was triggered, it's a solo discussion about six or seven years ago I wrote an article on LinkedIn about what I thought were some pretty unique challenges for the owners

[00:01:49] or the founders of social enterprises and for purpose businesses who had been either approached themselves by a potential buyer

[00:02:00] and triggered a whole lot of really interesting questions for them, ethical, personal, moral, financial.

[00:02:07] Or they just came to me and said look I've been doing this for a while and it's hard and I think I'd like to explore selling but I'm not sure if you can sell a social enterprise.

[00:02:19] So that's what today's discussion is about I'll put a link to the original article if you're interested.

[00:02:26] It is a very niche topic but for the reasons I'm going to talk about shortly there are a lot of social enterprise founders and in using the term social enterprise for the rest of the 25 odd minutes.

[00:02:40] So what I'm talking about is a formally registered or unregistered social enterprise or for purpose businesses.

[00:02:48] I'm probably separating them out from the large not for profits that have been around for a very long time but it's more of the social enterprises that have really come on stream in the last 10, 20 years.

[00:03:06] So yeah so the discussion about why I think it's a little bit different for a social enterprise founded to exit but I also think it's a normal and natural extension of running and starting and running something that you will potentially be faced with.

[00:03:27] And it's okay to think about selling that at some point for the good of the business or the social enterprise and for your own good as well.

[00:03:37] So just firstly David Brooks who was managing director of social traders in 2016 said something along the lines of social enterprise in Australia is on the rise.

[00:03:51] We are well on the way to seeing social enterprises part of the mainstream and that's the point.

[00:03:58] And since 2016, I don't know what the numbers are but suffice so I think they have grown strongly again.

[00:04:06] So he thought they and they will be recognized social enterprises that is for the contribution, for its contribution to a diverse economy providing innovative solutions to employment and access to services for disadvantaged Australians.

[00:04:23] The social enterprise sector continues to take on and beat everyday problems and and in as plenty of problems around and in effectively solving these problems and creating employment opportunities it is as a byproduct creating businesses of value for the founders.

[00:04:44] A couple of things come straight to mind for me as they do with a lot of just everyday small business owners.

[00:04:50] How many founders actually start out thinking they're potentially creating a business of value for themselves to sell later?

[00:04:59] They certainly think about making a profit along the way and they think about impact but how many actively or consciously kind of set it up and think about what it might be worth at the end.

[00:05:12] And then following off about how many actively set in place an exoplan whatever your definition of an exoplan is.

[00:05:23] So let's leave those questions open for the minute.

[00:05:26] One of the commonly used predictors of potential viability for a for profit business is the extent to which an entrepreneur has identified clearly identified a customer problem has the solution to the problem and has validated there are enough customers with the problem to underpin a viable business.

[00:05:48] The social enterprise sector is comprised I think almost entirely of of entrepreneurs doing just that.

[00:05:56] So there's been an enormous momentum in the last 10 to 20 years driven into social enterprise space and fueled by an increasing range of service providers to the sector but it's been driven by a lot of individuals and small groups who have taken the initiative

[00:06:14] and had a crack at attacking a problem they in a lot of cases have a direct connection within one of solve.

[00:06:22] So how many social enterprises are we talking about that in 2016 there was some research done by the Centre for Social Impact in Swinburne.

[00:06:33] They estimated look the short of it was they estimated 20,000 but said there was a little bit of small print.

[00:06:43] But fundamentally said it was it was really difficult to measure but the important thing is it's a big number and and a large percentage of them were very, very new businesses.

[00:06:56] So I think there's been a lot more started since then and you know with the I think the opportunities for entrepreneurs in this sector are bigger than ever.

[00:07:09] You you can as a minimum if you do it well create your own job let alone you know whether that turns into a business but the environment for startups, the overarching impact of things like sustainable development goals and a host of other things just you know making things more problems and challenges more visible and I think it drives a hunger for entrepreneurs to do something about it

[00:07:37] and not pursue that maybe the typical employment path.

[00:07:43] So with all of this though it's I think it's going to well no it's going to bring greater focus to normal every day challenges that if you're in small business you face.

[00:07:56] How do you how do you once you get started how do you keep how do you keep it rolling past the initial startup phase?

[00:08:03] How do you personally maintain the rage? How do you get access to you know additional resources to to make a big extent in the problem these are everyday problems for all businesses social enterprise or other.

[00:08:18] For survival and success and sustainability.

[00:08:22] You're going to need you know you're going to need to deal with on top of doing whatever it is you do accessing funding dealing with with your own founder burn out or you know you co found the burnout it takes its toll you're going to deal with competition if you're doing a good job others will we'll be looking at going well we like that space we're going to do something about it.

[00:08:45] It's you're going to need to you know actively think about setting and and continually re-seeing a business strategy unique you're going to need to decide if you're on a real growth trajectory how far how how big do you want to take this.

[00:09:02] So we look forward another 10 or 15 years the numbers of founders and a lot of them will be founder.

[00:09:14] Centric founder centred it is going to be a lot of founders of social enterprise game what am I going to do with this so.

[00:09:24] So then they're going to be asking what's my exit plan and we're you know really is it any different to that of any other business so that the fundamental questions and intrigue me in when I started to think about this and wrote that article.

[00:09:40] So look in terms of exit plan I don't think many small business owners period have an exit plan and there's a you can you can beat yourself up and say I need that you hear we hear a lot about it but not many do it and it's not it's not term it's not devastating not to have one the reality is what what turns out what drives thoughts about it so

[00:10:09] that it's often an external event or an unplanned event and it could be a health issue could be just a I'm done with this or it could be another organization or individual coming along saying I'm interested in buying and that and then you start to fast track your own exit planning thinking because you know some this external events.

[00:10:31] As kind of triggered you that you need to actually do something what why business owners don't have an exit plan the value of an ex plan there's a whole lot of reasons behind that we're not going to get into it but it would be a good discussion for another day.

[00:10:47] And you know will it be any different to that of a an exit plan if there was one would it be any different you know to that of a for profit owner and I think the answers yes because

[00:11:00] because social enterprises and any and any turn customers suppliers to that business in a lot of cases have a much deeper connection it which it's not just transaction or it's you know there's all these other things that if you're in social enterprise you know what I

[00:11:19] I talk about so I'll come to you know dealing so yes I think it will be different and for good reason but there's a way through that and I'll come back to that.

[00:11:31] So yeah there's been a really intriguing opportunity ahead for advisors and for owners and founders to capitalize on some good work so you know prompt the prompted by this

[00:11:49] external event and the potential for you know for maybe exiting the business and maybe doing okay out of it that is going to kind of supercharge a whole lot of emotions about value and equity and fairness and you know

[00:12:08] selling selling my baby my business but that's that's you know it's pretty it is pretty normal and but it just requires good garden through through the process and and a real check in on what you know why you're in that business in the first place.

[00:12:26] So let's just quickly talk about the different types of of exits that the owner of a social enterprise might consider I won't go into too much technicality but

[00:12:45] the reasons you might think about them are because and I want owners and founders of social enterprises to be really clear about this you can change direction you can do something new you have to have to be comfortable that you being in the business is best for the

[00:13:01] business caring for the business can mean you being less involved in a day to day running of the business maybe it's time for somebody else you have to think about an exit just purely because if something happens to you and the business falls over well you've let your customers down you know that's that's real for a lot of people

[00:13:22] and it's okay there might be value and you might you know you should understand what what that value might be and how to extract it so

[00:13:32] getting rewarded for building a business and doing good work is is okay as far as I can see so just if you've just joined me Michael current today's edition of small business

[00:13:42] band to community radio and podcasts I'm doing a solo session on social enterprises and selling them or exiting them and and some of the

[00:13:55] that the process and the emotional and personal triggers that that brings up so real quickly it's a bit of jargon but first first kind of exit for a social enterprise is the same as any other small business owner

[00:14:09] so no it's a traditional business sale you decide you've had enough put it on the business for sale website your point of business broker you prepare some information in deal with inquiries hopefully because it's it's attractive to a buyer.

[00:14:26] The second kind it's it's not a highly effective way to sell any business but it is the most common for you know smaller and and broad based you know businesses.

[00:14:40] Second one is call it mergers and acquisitions fancy corporate term but what it means is there are and most of the work I've done in the sector is when somebody else in an industry

[00:14:54] or a sector like social enterprise broadly they keep an eye on who's doing interesting things in their industry or their supply chain and you get a knock on the door saying look we really like what you're doing there we'd like to help you expand it or we'd like to take it over so fancy term mergers and acquisitions but it's essentially when something somebody comes along from your industry and talks about you know taking you over

[00:15:22] the reverse of that is you if you're thinking actively about exit to think about who should buy you and and then you make an approach to them so there's a whole bunch of reasons why

[00:15:35] and it's often a case of bigger buying smaller because smaller is nimble and it's you know the brand can be really vibrant and so but you know the more this social enterprise sector is going to flourish

[00:15:50] you know the greater that the more of these mergers and acquisitions it sounds sort of counterintuitive saying it in a social enterprise sense but they're good reasons you know bigger corporates you know

[00:16:03] they're all they're looking for better ways to impact well they're looking for better ways to protect their brand and enhance their brand let's be fair in a lot of cases so

[00:16:14] so you know by buying something smaller and more nimble and and and focus you know they can they can they can they can put their stamp on something that's tested

[00:16:24] so the third the third potential exit is put in the exit basket but it's really just saying as a founder or an owner that I like to business as it is I'm not going to grow it anymore

[00:16:38] it returns me a good in a case of social enterprise it returns me a good wage a sustainable wage a predictable wage yes I could grow but I'm not going to do that so

[00:16:51] it's kind of like exiting out of the idea that you're going to grow and and sell it you're just saying I'm going to keep it and contain it so

[00:17:02] the the fourth one is it's really terrible it's it's a closure or liquidation when when for whatever reason you've just you've gotten to a point where

[00:17:14] it's it's all too much and you're out of options and and you close it could be you know financial driven you can't keep paying the bills it could be just pure exhaustion it could be

[00:17:27] don't know what else to do so you know it's um it's always the least the least preferred way out and if I can employ you to do anything is to avoid that one

[00:17:41] for obvious reasons so so given that there are at least four different types of exit

[00:17:51] but what what are the the kind of the unique challenges you get factors you're going to think about very specifically that are different to

[00:18:06] what a for a for profit business owner might have to tackle and I'm talking about these three three challenges from the point of view of me being

[00:18:17] I'm pretty active advising or have been advising owners of social enterprises and I've been a you know director on a social enterprise it will

[00:18:25] so I've kind of seen it up firsthand so what what you need to get clear the bottom line is not the bottom line and what I mean by that is

[00:18:37] for profit businesses everything is about what is the net profit after you know after tax or before tax however you measure it but it's

[00:18:47] what's left after all the bills have been paid what's different with social enterprises is there's a there's a mix of financial traditional

[00:18:57] financial but but also non financial objectives and and how you how you factor in the non financial objectives is is takes take some real planning and some some real thinking so

[00:19:17] it's it's clear to me that that social enterprises are going to change hands they will be bought and sold and the market's going to evolve so that

[00:19:31] there is a greater understanding of the value of the non financial things the impact you're having the employment opportunities you're creating

[00:19:43] like it gets it gets really technical and it gets really tricky you know I don't have time to go into it

[00:19:51] today but nevertheless if you're the founder of a social enterprise and you're thinking about selling

[00:20:01] and you're thinking the bottom line doesn't look that attractive or a bias as it doesn't look that attractive it's on you to point to

[00:20:11] and help them understand measure put a value on the non financial things easily said but much trickier to do but it's as more of these come to market

[00:20:25] normal to talk about all these non financial things I'll leave it at that what's different is I think for social enterprises it the business the reason for doing

[00:20:39] businesses often personal is triggered by a personal desire to do something to impact the world and

[00:20:47] it's not just about putting out a widget or selling a you know a service commoditized so that deep connection to the business you

[00:20:59] got to turn that into something that is that a buyer can understand and can put their own value on it's it'd be too easy to dismiss and say the business is all about

[00:21:15] the owner so which which often happens in small business traditional small business sales buy won't buy because they figure as soon as the owner walks out of the door the whole thing is going to fall apart

[00:21:29] so in a social enterprise you've created often created a business out of a personal vision and you've got to you've got to harness that and you've got to

[00:21:41] you've got to build the business around that you know that's that that personal around the the cause that you set out to fix or the problem you

[00:21:55] you set out to solve so like with dealing a dealing with non financial items it's it is going to be different and as the market matures it will become more

[00:22:09] commonplace to talk about more of these intangibles and more of these personal things when it comes to the sale so we're going to get into

[00:22:19] in the world of social enterprises I think we're going to dig a lot deeper on what is good will and what is intangible value and and how the actual bottom line is a long way from an indicator of the true value of the business so

[00:22:39] as I say it gets it gets it's not esoteric it's tricky it's hard to talk about but the idea of today's discussion is to raise four founders of social enterprises raise these issues and get

[00:22:55] you thinking about these issues get you thinking it's okay to think about selling it's going to be different I need to think about this I need to get some some good

[00:23:05] advice so what I want to do now is just leave founders listening with 10 questions or so to to really if you're not going to go and do it exit plan formal exit plan

[00:23:21] that's okay they are they are incredibly you know helpful but I know what it's like running a business we don't always have times of these things but take away and think about these 10 questions on an ongoing basis

[00:23:36] and you know you might end up forming in your own mind a much clearer idea of what you want to do and potentially setting in place a bit of a process so when that question number one

[00:23:49] and I'll put these on as a on the notes when the podcast of this radio episode goes up online so how well are you in the business position to continue the impact of the problem

[00:24:08] the impact on the problem you said about fixing can can the purpose or cause be more effectively served by a new owner that's being really honest

[00:24:20] there is often a time when a new CEO or a new general manager might bring some more rounded skills and to a business so that it's there for the longer term again it's up to the owner to decide these things

[00:24:35] you got to think about how much fuel you personally have in the tank and you give yourself some freedom to say maybe it's time for me to change change problems go do something new or something different

[00:24:51] you need to think about if there was a sale are there any other conditions that I would want to impose on the sale then I've had lots of owners say to me it's important that the staff are retained or they have conditions are special to them

[00:25:09] so it's okay and you should think about those and what quirky or whatever think about them and when come time for a sale don't be afraid to put them on the table I kind of said basically the traditional business breaking models pretty tough way to sell a business

[00:25:29] so have a good think about who your natural buyer is a bigger organization or a competitor think about who you wouldn't sell to

[00:25:41] and this is the last three if is there any potential for misunderstanding between the public perception of any actual outcomes being delivered by your social enterprise

[00:25:53] so just be clear if you're going to say we're don't that we don't notice you know percentage of profits from the business that you that's all tight

[00:26:05] the goodwill you get can be quickly undone if that's not clearly defined and understood as always think about who the stakeholders are that would be impacted by the sale and think about how to communicate with that staff or partner organizations

[00:26:21] and lastly think about your personal message to other stakeholders so that you walk away with your personal reputation and integrity firmly intact thanks for your time

[00:26:35] so that is all for today's episode of Small Business Banner I continued to be inspired bringing you small business experts and other small business owners and hearing their stories

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