Oct. 5, 2005--Vermont Teddy Bear Company CEO Elisabeth Robert feels the weight of the world lifted from her shoulders.
"I'm in the right mindspace now to think about the future of our company, and only the future of the company," Robert said Tuesday, less than a week after her company reverted to private ownership.
The weight Robert says Vermont Teddy Bear "got out from under" was the Sarbanes-Oxley Act, the 2002 anti-fraud bill enacted by Congress in the wake of Enron, WorldCom, and other large-scale corporate scandals.
Among other strict accounting rules, Sarbox, as it's come to be known, requires public-company CEOs to sign off on financial statements, reinforces the oversight role of company directors, and puts a firewall between accountants and executives. Under Section 404, it also requires companies to file an independent assessment of internal controls.
"Corporate America brought this on themselves," said Robert, "but it's a huge, daily distraction for a small company trying to grow."
While the costs of complying with the act have some fast-growing private companies re-evaluating the benefits of going public at all, Vermont Teddy Bear, which earned $66 million in revenue for the fiscal year ending June 30 and was an Inc. 500 company in both 1992 and 1993, is among the first to be forced the other way. Its decision was prompted by a combination of added costs, overstretched resources and sheer frustration, Robert said.
Late last week, the company, which sells teddy bears, pajamas, flowers, and food through online catalogues, closed a $50 million merger deal with a Boston-based private equity firm, Mustang Group LLC, taking Vermont Teddy Bear off the Nasdaq exchange.
The deal, under which the company's two dozen shareholders agreed to sell their holdings for $6.50 a share, gives Mustang a 65% stake in the once publicly traded business. Robert called the delisting process, begun in May, "very complicated and very, very difficult," but also "a relief."
In her estimate, Sarbox would have cost the company well over 1% of annual revenues, or about $600,000 a year, for the foreseeable future. This year alone, Vermont spent about $300,000 on compliance measures, like extra resources and auditing for internal controls. That's lower than most. A Nasdaq study earlier this year found public companies earning less than $100 million in revenue were spending about 1.3% on average to comply. The cost, especially for a small company, is restictively high, Robert said, "with no sign of a leveling off in the years ahead."
A survey by Financial Executives International, a group of about 15,000 CEOs and other executives, reported that bigger public companies were spending $4.4 million to comply. That's 39% higher than they expected to pay in July 2004, and more than double the projected costs in January 2004. High as those costs are for big companies, unlike smaller public companies, they represented far less than half a percent of total revenue, the Nasdaq survey found.
"There's no sense of proportion," said Robert. "I've never had a problem with accountability. But can you really treat IBM and Vermont Teddy the same? It doesn't make any sense."
Yet beyond the added costs, Robert said she's glad to be rid of the daily "nitty gritty" and petty frustations of Sarbox compliance. Topping her list is Section 404, which restricts company executives from consulting with in-house accountants. That, said Robert, is like "throwing up a barricade between us and our experts" for complicated financial transations required of any size company.
"You have a team of experts on hand, but can't use them. It's extremely frustrating," she said. "We are an entrepreneurial business, which means we are trying to make the most of our recources that are already stretched to the bone."
Robert said the chief benefit of reverting to private ownership was more time to pursue growth possiblilities, rather than constantly fretting about anti-fraud legislation. She said the company, which filed a Sarbox-enforced audit just weeks before the merger, is now accountability to a new set of investors. "We have time and capital to pursue opportunities to grew as a business, and that's what we plan to do," she said.