Conversation: A Founder of the Soap Maker Method Discusses Its Sale

They started by mixing soap formulas in beer pitchers labeled “Do Not Drink” and wound up creating Method, an irreverent, design-driven, environmentally minded company that outsourced manufacturing. The company grew to $34 million in revenue and 39 employees in 2005, and more than $100 million and 100 employees in 2012. Those numbers remain modest compared to those of Big Soap, but a walk down the cleaning aisle in almost any supermarket reveals not just Method’s reach (Ginger Yuzu dish soap, Pink Grapefruit hand wash) but its impact on competitors (Clorox Green Works).

“We showed up at the party with a very different proposition,” Mr. Ryan said. “We’re superproud that we’ve had an influence.”

That influence will continue, Mr. Ryan and Mr. Lowry suggest, even though Method was acquired for an undisclosed price in September by the Belgian company Ecover, creating what they claim is now the largest green cleaning company in the world, with revenue “north of $200 million.”

In a conversation that has been edited and condensed, we recently asked Mr. Ryan why he and Mr. Lowry chose to sell, how they identified the right suitor, and what will happen to the Method brand.

Q. Was selling the company always a primary goal?

A. When we started the company, we knew we had two choices. One was to grow organically, which a lot of businesses do, and you control the business and grow slowly and steadily. We fundamentally believed that we would not have success in this competitive space unless we went after it fast and aggressively. So we had to take outside capital. And when we took that outside capital — at some point, you have to give it back with a return.

Q. You make soap, you sell it, you make more soap, you sell more of it. Why couldn’t you grow without being acquired?

A. Two primary reasons. One is just economies of scale. In the early years, we lost money on every product we sold. We were competing against companies that not only have a 100-year head start but have just built incredible efficiencies. They own their own plants. When you walk in a grocery store and that bottle of dish soap sells for $1.99, we could not make it for $1.99 in the beginning. We needed capital to accelerate growth, to get our volume to a place where the business would be profitable. Two is that the cost of doing business in the mass channel is really expensive. When you sell in a grocery store, you have to pay an upfront fee called slotting charges. And that takes a fair amount of capital. So growing organically is possible, but it’s really, really tough.

Q. You’ve built a brand that seems to resonate with consumers. Are you concerned about their reaction to the sale?

A. It was something that was heavy in our minds for a lot of years. The typical script for a socially driven company like ours is you get acquired by a major strategic. So look at Honest Tea, acquired by Coke. Kashi by Kellogg. Burt’s Bees by Clorox. Even Mrs. Meyer’s, in our space, by SC Johnson. I always justified it by saying, “Well, if that happens, it’ll give us the chance to work from a bigger, global stage, and we’ll try to change those companies from the inside out.” And once we did this deal, I was just so thankful we never had to go down that path. We recognized we had a partner at the table with identical mission statements, identical values and a real long-term commitment. It was just an opportunity too good to pass up.

Q. Did you say no to other offers because you didn’t see that cultural fit?

A. We can’t name names, but we did have, over the years, conversations with those usual suspects. And the movie looked pretty similar — full integration, we go from being a company to being an operating unit within a larger organization. The culture, the team, “the Method Method” that we spent the last 10 years building could have been nonexistent within 12 months.

Q. Will the Method brand continue to exist?

A. Very much so. We now have our own manufacturing. We’re turning on TV advertising for the first time in our history. We’re expanding more aggressively in Europe and Asia than we would have done otherwise. We’re creating a company with a long-term focus on the future. When you’re private equity-backed, it’s a much more short-term focus in how you invest and build the organization. The big thing that’s changing now, we’re a house of brands, which is Method and Ecover. And we have to set up a business where they coexist in a way that they don’t cannibalize each other and reach a broader audience collectively.

Q. Obviously, you’re in the honeymoon phase. How do you protect against something going wrong?

A. At the end of the day, it’s like a marriage — there is a leap of faith. And the way that you can protect yourself the most is just really trusting your instincts of who you’re jumping in bed with. It’s just like a job interview or any other relationship. If you’re getting to a point where you’re having to lean on a lot of legalities or other ways to try to protect yourself, it’s probably not the right relationship. It just comes back again to, are these people you trust, who share the same vision?

Q. While this was developing, how open were you with your employees?

A. You just can’t talk openly. It can do damage to the deal, but also, it’s a roller coaster, and you don’t want everyone riding the roller coaster with you. It’s incredibly distracting. There was a very small group that was in the know, and those were only the ones that were needed for due diligence. People knew we were looking and we were upfront about that, but they didn’t know to what extent, because we didn’t know to what extent. So when we did the announcement, there was initial shock, but over all it went well. And then for the next week, it was really challenging because what happened — what we were completely blindsided by — was how many people in their careers had been through a bad M. A. transaction. There were a lot of bad movies that started being replayed. What I told everybody was, “Look, I’ve never been through a bad merger in my life, and I’m not about to start now.”

Q. Things have been tough in Europe. Any concerns about partnering with a European company and expanding there?

A. I like the idea of investing when something is at its lowest. [Laughs.] No, we have not had too many concerns about it. This business is firing on all cylinders. I was definitely, in the back of my head, concerned that things would get derailed by the European crisis, but who we’re dealing with is very long-term focused and they’re also very globally minded. Europe is a big part of their business, but they’re also expanding aggressively in Asia — we are as well — and North America.

Q. And everyone needs soap.

A. And everybody needs soap. It’s a dirty world out there.

Article source: http://www.nytimes.com/2013/01/17/business/smallbusiness/a-founder-of-the-soap-maker-method-discusses-its-sale.html?partner=rss&emc=rss