Vermont entrepreneurs cash out
COVER STORY
The cashing out of Vermont
A generation of entrepreneurs sell their businesses
by Joyce Marcel
A generation of Vermont entrepreneurs is passing from the scene.
These are the ones who started successful business in the 1970s and 1980s. Some
were born and raised in Vermont. Some came charging up from the flatlands with
visions of social responsibility and a new way of doing business. Now in their 40s, 50s
and 60s, they're starting to cash out.
It's interesting that many of the companies nurtured in Vermont over the years have
been "lifestyle" companies manufacturers of things that bring pleasure, like super-rich
ice cream, good beer, fine coffee, hand-crafted cheeses, healthy bread, natural salad
dressings, luxury textiles, organic cosmetics and designer furniture and lighting fixtures.
The entire country today benefits from the Sixties generation's interest in quality and
sensuality, as well as from its devotion to social responsibility values that flourished
especially well in Vermont.
"Vermont, for some reason, just tended to be an incubator for so many people who I
don't think would ever have thought of themselves as entrepreneurs," said George
Chandler, 55, the CEO and co-founder of decorative lighting manufacturer Hubbardton
Forge. "Many of us were part of the back-to-the-earth movement, products of the
Sixties. We wanted to make a living here but we wanted to do it our own way. That
didn't leave a lot of choices so we built what were really life-style companies. It took
some of us a lot longer than others, certainly longer than those that start today with a
business degrees and a clear strategy. We are all getting older now and having to deal
with what we have built."
Now old problems about growing the business are being exchanged for new problems
around succession planning and long term sustainability.
"As young entrepreneurs," Chandler said, "we had a much higher tolerance for risk,
especially because there wasn't a lot to lose. That changes with time and growth. We
now have 240 employees and growing. That's a lot of jobs; it represents a large
economic chunk of the community, to say nothing of our own interest and investment in
the company. Sustainability and risk has become a different animal."
One of the big questions for entrepreneurs still at the helm is how to transition
responsibly, even gracefully. One of the big questions for Vermont is who will replace
them. There are many up-and-coming entrepreneurs in the state today, but will their
newer companies be able to step in and take the places of those who are leaving?
Strictly speaking, this is not a Vermont problem. The Baby Boomer generation, the one
born between 1946 and 1964, is approaching 60. It is natural that they are thinking
about retirement. But because Vermont is a small state, its entrepreneurs are well
known in their communities, and their companies have become an important part of the
state's heritage.
Ben Cohen and Jerry Greenfield were the crash-test dummies for the trend of cashing
out. By going public to get new capital, these creative and socially responsible
entrepreneurs ended up seeing their business go to a giant multinational company,
Unilever. While most of the jobs stayed in Vermont, Ben & Jerry's is now just another
ice cream.
But Ben & Jerry's isn't the only one. Vermont has already said good-bye to Jogbra, to
Green Mountain Gringo, to York Capacitor, to Tubbs Snowshoes, and it is now saying
good-bye to Annie's Naturals, which is moving to California. Remaining in the state, but
under different ownership structures, are such companies as IDX, Vermont Pure
Springs, Inc, King Arthur Flour, Autumn Harp, Hubbardton Forge, Sonnax and now
Vermont Bread Company.
There are many reasons why entrepreneurs choose to cash out. Some just want the
money. Some are looking for a change of challenges. Some are responding to greater
global corporate competition. Some see the need to take their companies to the next
growth level with new money and new management. Some have attracted the kind of
money offers that are too good to pass up. Some are tired now, or in poor health. Some
want to write, travel, or just have time to smell the flowers. Whatever the reason, their
leaving represents a significant shift in the Vermont business scene.
Lisa Lorimer, who recently sold Vermont Bread Company to a New York-based private
equity firm, compares the life cycle of a business to a corn harvest.
"You plant the corn and it grows, and then you harvest it," Lorimer said. "And you have
to make sure you plant the corn again. The real question is who is planting the corn?
It would be a mistake to focus on how you harvest the corn. That's part of what it means
to own a business the harvest. So how do you think about that transition, and how do
you do it in a way that protects the corn?"
Good jobs are hard to come by in small rural towns, and the possibility of successful
rural-based companies being sold and leaving the state has become a serious issue.
The state recently joined forces with the Vermont Sustainable Jobs Fund to produce a
new study, "Rural Vermont Inventory of Dependent Communities," to see how
vulnerable small rural towns with just one or two large employers really are. The
answer? Very vulnerable.
"One of the conclusions of the study was that there is a crisis looming of businesses
that are successful that will in five or 10 years be sold," said Don Jamison, executive
director of the Vermont Employee Ownership Center. "The question is, what are our
economic policy recommendations for those businesses and what are we doing for
those entrepreneurs? Those guys can say, 'What the hell do I care, I'm just looking for
my biggest buck.' That's the traditional capitalist. Does it matter if the business goes to
New Jersey? Versus the entrepreneur who is saying, 'This thing was built in the
community and I want it to stay."
The state takes this issue seriously, said Commissioner of Economic Development
Mike Quinn.
"It is going to be a continuing effort in the Douglas Administration to create a business
environment of entrepreneurs doing well," Quinn said. "There are large businesses and
small ones, and certainly selling is a personal decision. But at the same time, the
economics have to work. The most important thing you can do to keep a viable
economic climate is keep fixed costs down and taxes lower so companies can keep
their expenditures down. Then they can invest in Vermont workers and reinvest in
growing their business in Vermont. It will be a constant evolution."
The announcements of the sales of Vermont Bread and Annie's Naturals, coming close
together, raise the issue of what other companies will change hands in the near future.
While it is certain that other companies are in the negotiating stages right now,
business sales are closely held secrets until the deals are done, and no one will say
exactly which Vermont companies are in play. But a quick check of the listings on the
Web sites of Vermont Business Brokers (vermontbusinessbrokers.com) and Country
Business, Inc (countrybusiness.net) shows several country stores, restaurants and
pizzerias, a wood products manufacturer, a jewelry store, an auction house rated one of
the "13 hot businesses for 2005" by Entrepreneur Magazine, and a "high ticket"
business with real estate and 2004 sales of $4,221,844, for sale, among others.
Cashing out can take time and thought.
Lorimer spent more than two years thinking about how to do it in a socially responsible
way. For her, that meant finding new capital and management to help the company
grow in a rapidly consolidating field while keeping the company's livable-wage jobs in
southern Vermont, and continuing Vermont Bread's commitment to organic agriculture.
Now that she's been through the process, she wants to help other entrepreneurs do the
same.
"Think about livable jobs for Vermont," Lorimer said. "A company has to get to a certain
scale to afford that. The truth is that many business owners aren't making livable
wages. How do we get our smaller Vermont businesses to the scale they need to be to
pay these wages? I'm hoping to get this conversation started, to hear what other
business owners are thinking about, and to share what we thought about when we were
going through this."
Successful business owners have many retirement options. They can list their
businesses with a broker. They can sell to the highest bidder. They can recapitalize
through partnerships with private equity firms. They can turn their companies over to
their employees through a variety of employee-ownership plans. They can do a
leveraged buyout and turn the company over to their senior managers. They can simply
hand the keys to their kids with varying results.
Deciding on how to sell or recapitalize a business is "an awareness process that needs
to get expanded," said Ellen Kahler, the recently appointed executive director of the
Vermont Sustainable Jobs Fund. Kahler is the founder of the Peer to Peer
Collaborative, which provides teams of successful entrepreneurs who advise "small
business owners on the cusp of growth and organizational change." The Vermont
Business Roundtable has provided organizational sponsorship for the collaborative for
the past two years, and now the VSJF board of directors is considering how to integrate
it into that organization.
Kahler would like to open a dialog with entrepreneurs about how to sell their businesses
and still keep the jobs in Vermont.
"We have a critical mass of Vermont-based entrepreneurs that started companies 20 or
30 years ago who are naturally reaching the age where retirement is what they want to
do," Kahler said. "If we want to retain these companies and retain these jobs in
Vermont, then we'd like to see a greater conversation of how to do it. The only way we
can try to influence the decision-making is to be able to provide the range of options.
Where there's an opportunity is to provide information which may lead to different
decision-making. We're at the very beginning stages."
PRIVATE EQUITY
Private equity firms are playing a large part in the cashing out of Vermont. Hubbardton
Forge, Annie's Naturals and Vermont Bread have all recently used private equity funds
to restructure and recapitalize.
What is private equity? It is institutional capital, typically raised in a fund that the
partners generally a group of experienced investors invest in privately held
companies. Early-stage private equity is known as venture capital, while later-stage
investments are simply called private equity.
Currently, there is a boom in private money looking for investments.
"Private equity firms are a North American phenomenon," said Peter Worrell, managing
director of The Bigelow Company, LLC, of Portsmouth, NH, an investment banker and
business broker specializing in private companies. Bigelow brokered the recent
recapitalization deal between Hubbardton Forge and its new financial partner, Lineage
Capital of Boston. "Now there are literally over a thousand private equity firms seeing to
invest in private companies. Not to take them over or help them sell out, but to provide
recapitalization to help them grow and provide some capital for the owners."
Before the private equity trend began, owner-managers who wanted to sell large
companies had to go hat in hand to Wall Street.
"Today, the world has happily gone upside down," Worrell said. "Meaning that what
Wall Street has capital is now a commodity. What is valuable are these great,
privately-owned companies. Our practice is coast-to-coast, and we find that owners
don't know this. They don't have to wait or sell out. They can actively go to the market
and seek out capital under their own terms and conditions."
The downside of recapitalizing with a private equity company, especially if the
entrepreneur wants to remain connected to the business, is loss of control. Typically,
these funds buy controlling interests at least 51 percent, and very often more. While a
fund will not be responsible for the day-to-day operations of a company, it will control its
board and decide strategy.
The trick, Worrell said, is to not think of it as "losing control."
"Owner-managers have often created an enterprise which was their baby, and over a
long period of time, if they're successful, it has become very valuable," Worrell said.
"Then they own 100 percent control of an illiquid investment. Control is only their
perception of control. They're dealing with other stakeholders, suppliers, employees,
customers, spouses. They seem to have control. But if they want to assure longevity,
they need an owner succession plan. In the old days, before this bevy of investors, they
had few alternatives. Now they have a whole bevy of alternatives."
Typically, a private equity fund buys a company while planning to cash in on the
investment down the road, probably within three to seven years through a sale, merger,
recapitalization, or public offering. This is the time when a Vermont company is most in
danger of being taken out of state.
Hubbardton Forge recently faced this issue head-on.
Small as it, as compared to its competition, Hubbardton Forge is one of the largest
decorative lighting companies manufacturing in the United States. It expects to close
2005 with about $26 million in sales. Its competition, much of it in the $150- to $200
million range manufacture the vast majority of their product primarily in China. To keep
up with the competition, it was clear that Hubbardton would need new capital.
When Chandler and his partners, Reed Hampton and Don Merkle, joined up with
Lineage Capital, many wondered how they structured the deal to assure that the
company and its 240 jobs would stay in Vermont.
"The agreement we have essentially says that as long as we are growing and managing
the company properly it will stay here," Chandler said. "Though there are exceptions, if
we meet certain performance targets, we maintain control of the company. Our
objective was to find the right financial partner, one who shared our beliefs and values,
our focus on Vermont, the best interests of the company as it grows and the ability of
the investor to provide needed capital plus the management expertise we would need
along the way. That is the best you can possibly look for"
The three partners wanted to build a succession plan, take some equity out of the
company, and continue to grow the company, and accomplish these three things early
enough so that decisions were part of a process rather than a response to an
emergency.
"Through this recapitalization we now have the ability to work alongside our investors
and our management team," Chandler said. "Yet, some time we want to look at
retirement, and you know you're not going to live forever. Now if something were
happen to any of the partner's commitment or health, an emergency transition can be
avoided."
Finding the right private equity company to partner with would be the key.
"There are good guys and bad guys," Worrell said. "There are firms willing to be
supportive and plenty who probably aren't going to be as supportive. It's the match
between the owner-managed firm and the private equity group which is essential."
Employee Ownership
Employee ownership is high on the list when successful business owners think about
cashing out. It is about to get an even higher profile in Vermont, now that Senator
Patrick Leahy has secured a $500,000 federal grant to expand the work of the Vermont
Employee Ownership Center (www.veoc.org).
Employees can become owners in many ways. There are workers cooperatives, direct
stock ownership plans, and different kinds of Employee Stock Ownership Plans
(ESOPs). There are already about 40 partially or fully employee-owned companies in
Vermont, including Gardener's Supply Company in Burlington, Chroma Technology in
Rockingham, King Arthur Flour in Norwich, The Trust Company of Vermont, and Carris
Reels of Rutland.
"There are approximately 11,000 businesses around the country with ESOPs," VEOC's
Jamison said. "Per capita, Vermont, with 40, seems to have a disproportionally high
number of them. I think employee ownership's time is coming. We have an aging
generation of entrepreneurs, and also a real concern in the state for keeping our
businesses in our communities."
Employee ownership can ensure that a company and its jobs stay in Vermont. For
example, Will Raap, founder of Gardner's Supply, a direct mail gardening tool supplier,
started his ESOP in 1987.
"Then it was all about sharing ownership, having people have a stake in the place they
work for," said COO Cindy Turcot. "Now it's a succession tool. It's also about keeping
our business in Vermont. We want to keep ownership in Vermont, share wealth with our
employees, stabilize jobs. and for people have a stake in the company they work for,
rather than investing in other people's companies through a 401K."
Generally, ESOPs are established in companies with 20 or more employees. They are
structured as trust funds. Businesses put in new stock or cash to buy existing stock.
These funds can also borrow money, usually to buy stock from retiring owners. The
stock is then distributed into employees' accounts within the trust. As the employees
work in the company, they acquire shares in the company. When they leave, they
receive their stock, which the fund then buys back at fair market value.
The downside for an owner is that they may get less for their companies than if they
sold it directly, and they may have to wait longer for a full return on their investment.
"A strategic buyer would pay cash, and the seller would be more likely to be able to
walk away sooner," Jamison said. "Selling a controlling interest to a venture or roll-up
firm also could bring more immediate cash to the seller. If the company is carrying a
considerable debt load already, a leveraged ESOP might not be an option anyway, so
bringing in equity from outside might be the only realistic way for a seller to cash out in
the near term. If an owner of a company with a good bit of debt wants to sell to
employees, they have to be prepared for a lengthy exit, using some creative
mechanisms for getting cash out of the company a note, a deferred compensation
plan, a stock appreciation rights, set-up. But in some cases, this will be their best
option."
It can sometimes happen that the employees are not "able to fill the shoes of the exiting
owner, and the company declines -- and the owner is on the hook for the bank loan that
is buying his or her shares," Jamison said. "I imagine this could be really, really
nerve-racking. But if the seller has confidence in the management team, wants to
preserve jobs and keep the company operating in the town it's in, likes the idea of all
employees having an equity stake, likes the possibility of avoiding capital gains taxes,
doesn't "need" to have all the cash on the table right now, and is willing or even wants
to remain involved in the company for a time then a leveraged ESOP can fit the bill.
If an owner wants to go the ESOP route, it can be done in stages. After many years,
King Arthur Flour recently became 100-percent employee-owned. Gardener's Supply
today is at 30 percent.
"We're not sure if we're going to 100 percent, but the ideal is we'd become 100
percent," Turcot said. "But we'll do it slowly and see how it works."
To tout the ups and downs of employee ownership, Jamison is taking his show on the
road. Called "The Search for a Happy Ending," it is a half-day seminar on business
ownership succession that will be at the Capitol Plaza in Montpelier on March 21, the
Holiday Inn in Rutland on March 28, and the Quality Inn in Brattleboro on April 4.
"The goal of the event is to present models of ownership transitions that serve the
interests of sellers, employees and the broader community," Jamison said. "Stories
from Vermont companies will be featured, along with presentations on selling to
managers, selling to employees, and bringing in outside equity in ways that preserve
key features of a business."
Creativity Unleashed
Thinking positively, the cashing out of Vermont is not necessarily "a zero sum game,"
said Cairn Cross of FreshTracks Capital, LP of Middlebury, one of several Vermont
venture capital firms. FreshTracks is an $11 million fund focused on high-growth
companies in Vermont and "the adjacent geography." It was involved in the recent deal
to take Vermont Teddy Bear back to private ownership, which kept the company in the
state. It also, in what Cross called "a stealth transaction," helped ClearSource of Natick,
MA, buy the water bottling business of Vermont Pure Springs, and increasing the
number of jobs in Randolph.
Selling a business could "unleash a creative class of people who might help develop
more companies in Vermont," Cross said. Also, historically, established companies
foster talent that goes on to create new companies.
"The best example is the creative destruction around Garden Way Industries in
Charlotte, which built the Troy-Built Rototiller and a lot of garden tools," Cross said. "For
various reasons, in the mid-1980s, Garden Way ceased to exist. But the list of
businesses that exist today because of Garden Way includes Gardner's Supply
Company and the National Gardening Association, which powers the on-line content
behind Lowe's and Martha Stewart."
The state is seeing something similar now in the snowboarding industry, where a host
of creative types who once worked in Burton Snowboards have split off to create
companies manufacturing such things as sun screen, sleds and high-end designer long
underwear.
In addition, "if you have a creative person stuck at the mid- or high-level management
position, and they don't own the lion's share, they get unleashed when the business is
sold. And most of the time, they want to stay in Vermont," Cross said.
Rural Vulnerability
When a community loses a major employer, it is often difficult to find comparable jobs.
The study "Rural Vermont Inventory of Dependent Communities," done by the Vermont
Sustainable Jobs Fund and funded by the Department of Commerce, studied 61
communities with an eye to identifying rural areas that are dependent on one or two
large employers. It then provided nine recommendations to the state to foster more
community and economic development.
They are:
Alter the perception that manufacturing in Vermont is dead. Vermont, the study says,
is home to "hundreds of innovative niche manufacturers who employ less than 100
employees, are quite profitable and have opportunities to grow and expand."
Support the incremental expansion of locally owned businesses with loyalty to
Vermont.
Promote a dialog on exit strategy options for entrepreneurs and CEOs.
Do more to get young people into the trades, especially by supporting apprenticeship
programs.
Continue to focus attention on key industry sectors. Five sectors were mentioned: the
ski industry, the granite industry, the plastics industry, the machine tool industry, and
the wood products industry.
Promote Vermont as the place for innovative, niche oriented business development.
Invest in developing broadband infrastructure. This is critical for business retention,
expansion and recruitment.
Invest especially in communities where "local leadership and sparks" exist. The study
identified Bennington, Northfield, Lyndonville, Brandon, Bellows Falls, Vergennes and
Waitsfield as places with "buzz."
Promote a statewide conversation on the costs and benefits of "the increasing
phenomenon of second homes." Some of the benefits are property tax dollars with no
impacts on schools, and construction jobs. But the downside is that "if the vast majority
of homes are owned by out-of-state residents and housing prices have risen so high
that 'locals' can no longer afford to live in the town, there may not be enough children
left in the town to support a school, volunteers to run the fire department may be in
short supply, local town committees may not have enough volunteer leadership, a
community may 'feel' dead because so few people actually live there year round."
The state is taking these recommendations seriously, said Commissioner of Economic
Development Quinn.
"The first thing we've started to do, on an informal basis, is have our staff out visiting
with companies," Quinn said. "We're getting state programs out in front of Vermont
businesses. We're taking a look at businesses and where they are in their life cycles.
We're trying to identify as many entrepreneurs as we can."
The state has recently hired Angle Technologies, an international firm headquartered
outside of Washington, DC, to see what the state can do for its entrepreneurs.
"The age-old challenge is that entrepreneurs believe that there's not a capital round to
support their on-going initiatives," Quinn said. "On the other side, the investment
community likes to invest in local companies and see them grow. Knit these two
questions together and we'll do a better job of making sure entrepreneurs and investors
find each other."
Last month the state also released a request for proposals for a study on how to attract
and retain the 18-30 demographic.
Up and Coming
It isn't hard to find young entrepreneurs and young companies in Vermont.
There's Himaya Sports Sun Protection, for example. It was started by Dave Schmidt,
who worked with Burton Snowboards for 17 years before he partnered with a European
snowboard industry veteran to produce a new sunscreen designed for outdoor action
athletes.
According to Schmidt, the sunscreen, which has been on the market for a year, is made
and warehoused in Texas and sold around the US. But its main US office is in Vermont,
where, Schmidt said, "a lot is going on in the entrepreneurial world. There's graphic
design, Web development and t-shirt companies coming from the snowboard world. It's
pretty exciting to be a part of it."
Then there's Steve Luhr's company, Cool Front, Inc, doing business as Cherry Max
Sleds, which produces 100-percent adult "hammerhead" sleds. The Vermont company
incorporated in 2002 with just under $1 million in capital. Another snowboard-related
company, Eesa Corp, makes stylish long underwear, an idea that just "popped into" the
head of the company's founder, Stephen Cleary
"The concept is a product you can wear from lift to lounge," Cleary said. "You could
wear it out for dinner. It's like nothing you've ever seen before."
Cleary, a snowboarder who also once worked at Burton, founded his company on
November 11, 2004, with a seed round of $100,000 in capital, so it's still brand new.
He's currently trying to raise another $500,000 in angel capital, and has $100,000 of
that already committed. He spent last year developing the product, starting a marketing
campaign, and sourcing factories. He's launching the brand this month. He's another
entrepreneur with strong feelings about the state.
"We love Vermont," Clearly said. "We like the socio-political climate and the people. We
like to get up on the mountain and test our product."
Then there's New England Overshoes of Burlington, run by Scott Hardy, 37. An
overshoe and upscale all-weather boot manufacturer, Hardy, who has doubled his
company's growth this year, is the very model of a modern entrepreneur.
"My passion is the first crazy years when you start," Hardy said. "It's taking the
back-of-the-napkin sketch and bringing the product to market."
According to Hardy, some entrepreneurs may be cashing out too early.
"Where you make the money is expanding the market and the exposure," Hardy said.
"It's not until the second or third time the company is sold that it really starts to make
money for investors. A company that sells first for $60 million will then sell for $80
million and then $100 million. An entrepreneur starts a business for blood sweat and
tears to get it to the first stage, the first million dollars or two million dollars, and
sometimes cashes out too early. They're not really making the heavy dollars. It's the
person who buys it for $2 million and takes it to $15 million who makes the money."
Hardy's business model is to create new companies, grow them under the NEOS
umbrella, and then sell them off.
"The idea is to develop businesses that become their own individual entities," Hardy
said. "We have two distinct brands synergies but (the overshoe) NEOS and (the
style boot) ULU can go to entirely different homes. Right now our focus is to grow our
current brands as well as diversify in additional products or additional companies."
If and when he sells NEOS, Hardy isn't sure that he would want to start another one.
"Would I go out and buy another business? I might," he said. "As opposed to starting
another one. Maybe I'm hoping since I started younger, I can finish a little younger."
Attracting young people and keeping them here could be one of the most important
things the state does in the next few years. After all, as University of Vermont President
Daniel Fogel told a high school group last month, "We have a huge crisis in Vermont.
We are losing young people. We have the lowest birthrate and most rapidly aging
population in the nation. If you leave Vermont to go to college, it is very unlikely you will
come back in your working life."
Hardy understands that younger business people are the state's future. He thinks the
state is missing a few obvious moves if it wants to keep the entrepreneurship energy
flowing.
"The state of Vermont should say to any young college graduate, 'Move to the state and
pay no state income taxes for five years,'" Hardy said. "They'll move. Someone who
graduates college is not a high-salary person. They would be here setting up their roots.
After five years, they're pretty entrenched and will stay here. It's a marketing thing, a
way of saying, 'Hey, we want you here."
Joyce Marcel is a freelance writer from Dummerston.
