Andrea Freedman, the former CFO of Method Products, thinks there are lessons to be learned from Method’s sale to a Belgian company nine months ago, and she relayed some of those lessons to attendees at the CFO Playbook conference in San Francisco on Tuesday. Among them: the deal doesn’t end once the merger closes.
The journey to a takeover started with what Freedman called her “year from hell,” which occurred in 2008. The financial crisis happened, yes, but the high-flying “green” household cleaning products company she was finance chief of — Method Products — also had other problems: its margins were falling; it had its first product recall, which cost the company some money; two of the biggest soap companies launched products to compete in its space of nontoxic, biodegradable cleaning products; and, finally, Method had its first real failure, a personal care product that Freedman described as being dead on arrival when it hit store shelves.
“It was a tough, tough year,” Freedman said. So Method, which had just reached $100 million in sales in its eighth year of existence, started analyzing its products and operations from the perspective of profitability. Executive management retooled the company and cut SKUs to 100 from 300. By 2010 the actions added 10 points of gross margin to the business, Freedman said, and Method had “gotten [its] mojo back.”
But in 2011 and early 2012, the company started getting inbound inquiries from prospective buyers in two camps: large multinational soap companies that liked the products but not necessarily the company or its culture, and Ecover, the largest natural home care company in Europe, which had values similar to Method’s.
While Method didn’t need to sell, the executives at Method had a fiduciary duty to consider the offers. In addition, there had also been a “post-recession mood shift” among the company’s investors, Freedman said. “People had been letting their investment [in Method] ride for awhile, and they were a little nervous,” she said. “They wanted to be sure there would be a path to liquidity at some point.”
Technically, the company was ready to sell, Freedman said, because it had a solid management team and prospects for growth, but emotionally “maybe we weren’t quite ready, there was some ambivalence,” Freedman said. “It’s hard to go into a sale if everyone is not fired up about it.”
Method designed a four-pronged approach to weigh its options. The first prong was to cultivate the potential relationship with Ecover, because it felt it was a unique opportunity. The second was shopping the company to other potential strategic acquirers. “We [limited] our list to companies that had a reputation for acquiring companies and not destroying them,” Freedman said. Third, Method explored internal liquidity with private equity investors, in case it was not quite ready to sell. And the fourth prong was to not sell at all.
“We didn’t need to sell, we didn’t need the cash and we wanted to weigh that [final] choice against the others,” she said.
Method’s boutique investment bank did what Freedman described as a “masterful” job at a company board meeting in April 2012, handling the emotions and helping narrow down the choices to either partnering with Ecover or just waiting.
But, in the end, that last option didn’t seem a real option, because of “the desire to avoid the perception of failure.” No matter how confidential a company thinks the process or how many nondisclosure agreements are signed, Freedman said, word gets out. “We didn’t want to have a situation where we had gone out and talked to all these people and absolutely nothing came of it,” she said.
So Method ended up with a term sheet from Ecover in May 2012, and the deal closed last August. Nine months into the combination, “so far, so good,” Freedman told the conference audience.
Freedman provided five lessons from her experience helping to sell Method. (She left the company six weeks ago to pursue other opportunities.)
There is no such thing as confidentiality. You put a huge amount of effort into marketing materials, into your management presentation, into your financial plans, but you need to have a few good sessions addressing all the possible skeletons that could come out of the closet and “practice how to respond to that,” said Freedman. “Because they all come out,” she said.
Choices a business makes can affect its ability to sell itself later on. “Some of the things we did to compete against much bigger players and make our business special were the very things that actually made it challenging to sell the company,” Freedman said. For example, Method had chosen not to be in Wal-Mart. But for most of the potential acquirers 30% of their business was through Wal-Mart, and “they were absolutely sure” that Method’s not being in Wal-Mart was a risk, not a strength, Freedman said.
Deals take a huge amount of stamina and “a variety of characters to succeed,” Freedman said. The CFO has to be the risk manager, Freedman said, and during what will be a longer process than expected, has to make sure the company is hitting its numbers or if it is not have a clear explanation why. In addition, there is a also a “softer skills” role for the CFO, Freedman said. The CFO has to scan the horizon for all the possible weak links, and “weak links are people,” Freedman explained. How are they going to react to the situation? “As you see fears, or concerns, or the change of heart some people go through emerge, you jump in and address them,” she said. “I did a lot of counseling.”
The deal doesn’t end at the close. Once the close happens, the seller is facing integration and reporting issues, and “suddenly you have a new owner and have to make your systems adjust to their systems,” said Freedman. “The six months to nine months after the close are a long, bumpy road.”
The merger hits the reset button. The deal close was like a switch being flipped for Freedman. “I felt like I had sent my baby off to college and didn’t need to quite parent it so much anymore,” she said. In the six months after the close, Freedman had to cope with that reality but at the same time there was a lot of work to be done, she said. The CFO is also the shepherd for the entire business, she said, making sure employees “are tracking along with the strategy and understanding what’s in it for them. It’s a real opportunity to strengthen the culture, not weaken it.”