If policymakerYCC are serious about unlocking social enterprise development, the introduction of a new Social Buy-Out Fund must be given urgent consideration, argues Richard Litchfield.
Social enterprises and the broader not-for-profit sector have a well-documented problem with succession, which leaves founders and those that back them unable to exit organisations when they plateau.
The problem can be clearly seen in the figures. In our newly-released Good Merger Index 2014/5 we found only 61 mergers and takeovers were completed in the past year out of well in excess of 160,000 registered charities and social enterprises.
The current status quo – one inadvertently perpetuated by sector regulators and funders – leaves gradual organic growth as the only option for expansion and leads to far too many not-for-profit organisations being maintained for their own sake.
I have witnessed the problem as an advisor, as a trustee to a number of social enterprises and very personally with my own organisation.
Over 10 years ago now I left a City job and started out in social enterprise, first by helping The Big Issue team with the development of Big Issue Invest, and then by establishing Eastside Consulting as an advisory firm for social organisations. It was an exciting time – we took an office on Brick Lane, and I was working with a team of incredibly motivated young people in our 20s and 30s.
We did a load of interesting projects, tested some early investment readiness programmes (Equal-Invest and Spark), got involved in corporate venturing and co-developed a bidding platform at 3SC to help the third sector win large contracts. In short we did some great stuff planned on a fag packet – but none of it made much money for us.
After about five years, we reached an inflection point. We lost a large contract and were stagnating. This is a common problem for social enterprises and for advisory businesses like ours, which become constrained by the capacities of a few shareholding partners. We were worn out and in a need of fresh ideas and capital.
I can safely say there is no worse feeling as an entrepreneur. We were stuck, low on cash and very uncertain whether there was a way forward. Having invested so much time and money personally, the stakes are high. This is not like an ordinary job. You are tied to the social cause and every instinct is compelling you to keep going, even though your head is telling you that you’re bumping along nowhere fast.
In our case we kept going by innovating our model to advise large not-for-profits and simultaneously we sought a merger partner. I’m very grateful that in 2013 we were able to complete a deal with Primetimers, a business leaders network, to establish Eastside Primetimers. The deal allowed us to increase our reserves, pay off London Rebuilding Society (an early backer), strengthen our management team and board and access a talent pool of consultants. More than anything, it was the shot in the arm that gave everyone in the company a fresh lease of life to take the business forward – me included.
I’ve met so many brilliant people in social enterprise over the last decade. Inspiring, resourceful, sometimes difficult and always passionate – but I fear we are sitting on a social enterprise time-bomb unless we wake up and realise that many of these established entrepreneurs are now having to face up to very real issues of succession.
We need to kick-start a new phase of growth by helping people who have made it to base camp to design their own succession routes. So here’s an idea – a Social Buy-Out Fund. This Fund should be an initial £10m pot providing a blend of support and investment to help established social enterprises to find strategic buyers. Support grants would be used to provide succession advice and technical support to find strategic buyers, while investment would fuel the next stage of the enterprises’ growth.
We know from researching the Good Merger Index that strategic buyers do exist as there are quite a few large not-for-profits with strong balance sheets – Shaw Trust, GLL, Catch 22, Richmond Fellowship and housing associations like Accord – that are prepared to diversify by taking stakes in social enterprises.
They want to find enterprises, with a track-record of delivering quality services, and where the hard miles have been travelled. In return, they have a lot to offer – infrastructure, capital, and real progression routes for the founders and managers.
An acquisition fund could provide a blend of grant and finance; advising entrepreneurs on succession options and putting deals together; while also providing cash to pay golden-handshakes to departing senior managers (often vital to settle leadership questions thrown up by mergers); refinancing investors and de-risking the deal for the buyers.
There are a few examples of deals like this happening. In 2014, Richmond Fellowship took a 76% stake in mental health provider My Time, whose CEO Michael Lilley said it would allow his organisation to “benefit from the financial strength provided by the much larger Richmond Fellowship”.
More recently Blue Sky, a social enterprise for ex-offenders and backed by social investors, merged into the Rehabilitation for Addicted Prisoners Trust so that “the employment model so carefully pioneered by Blue Sky will have a sustainable long-term future”.
After hitting the seven year itch we at Eastside Primetimers found a way forward, just like Mick May of Blue Sky and Michael Lilley of My Time, but the same opportunity could be extended to many more.
A Social Buy-Out Fund on these lines would enable established enterprises to find new growth and demonstrate that social enterprise exits are possible. If policymakers are serious about unlocking social enterprise development, this idea is one that needs to be given urgent consideration.
This article by Eastside Primetimers chief executive Richard Litchfield originally appeared as a guest blog for Pioneers’ Post on November 30th 2015, following the launch of our Good Merger Index 2014/5.