2020

Hop Compost Final

Report

PREPARED BY: JACK WAGNER, SON NGUYEN,

NICK RHOA, AND CALEB CRANTON
RHOA, NICK
PREPARED FOR HOP COMPOST
EXECUTIVES
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TABLE OF CONTENTS

EXECUTIVE SUMMARY 2

INTRODUCTION 3
BACKGROUND 3
EXPLANATION OF CERTIFICATION 3
PROBLEM & HYPOTHESIS 3
ANALYSIS 4
CONSIDERATIONS 4
CONSTRAINTS 4
COST – BENEFIT ANALYSIS 5
BENEFIT CORPORATION COSTS 6
BUSINESS FAILURE RATES AND CAUSES 6
PROJECTED INCOME STATEMENT 7
REASONS TO PURSUE B CORP 8
REBUTTAL 9
CONCLUSION 9

LIST OF TABLES & FIGURES

TABLE 1 5
FIGURE 1 7
FIGURE 2 8

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EXECUTIVE SUMMARY
Background & Problem
Hop must decide whether to pursue a Benefit Corporation certification. A B Corp certification
essentially verifies that a firm has environmental and sustainable practices and goals in the
forefront of all they do. This decision cannot be made without determining the value of the
certification. To determine value, many questions must be answered. The questions are as
follows:

 What value does a B Corp certification provide?

 What are the associated costs?
 Will the certification help expand Hop’s brand and business?
 Will a B Corp certification make it easier to secure funding and investment?
Additionally, Hop faces a challenge in securing financing. The second question Hop faces is:

 How should Hop pitch the company to investors?

Analysis
This report provides an analysis of the problems listed above. We will make claims and provide
evidence as we answer each question.
Benefit of B Corp
The benefit from the certification is marketing and relationship related. The argument is that B
Corp’s are more marketable and open more customer/supplier relationships. Our analysis
indicates these benefits are not guaranteed by becoming a B Corp.
Cost of B Corp
The annual cost of a B Corp certification for a company of Hop’s size is $1,200 (B Corporation).
However, many other implicit costs are involved. These implicit costs are difficult to quantify.
We estimate the total annual cost of a B Corp certification at $25,000 to account for all costs
with some buffer.
Projected Income Statement
In short, out projections indicate Hop Compost will not be profitable until 2020 (See Fig. 2).
Recommendation
In conclusion, we recommend not pursuing the B Corp certification currently. Our estimates
indicate net income will stabilize in 2021, and the matter should be reevaluated then. Until that
time, Hop should continue reinvesting money to expand its product and market. Hop should
pitch itself to investors as a high growth firm whose core values revolve around sustainability
environment consciousness.

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INTRODUCTION

Picture this, you are in your freshman year of college. You want to join a fraternity, sorority or
any other club that might interest you and that has similar values and future goals. You learn as
much as you can about the group and determine that it is a network you want to be a part of; you
are sure it will be beneficial in the future. Then you finally get invited to join and you are
informed on the steep costs you will have to pay on top of your other annual expenses. You have
a couple streams of income from various jobs, but you wonder if it is better to wait a year until
you are in a better situation financially. What should you do?

Background

Now we know Hop was just recently founded in Calgary, Canada and that you all want to
expand to Vancouver and other big cities in North America. We also know that Hop wants to
pitch its business models and values to investors. Lastly, we know that Hop has three main
streams of revenue: organic waste pickup, Fertilizer distribution, and sale of carbon credits. 

The dilemma that we are faced with then, is whether we think Hop should get the B Corp
certification and join this club of other businesses or not.

Explanation of the certification 

So, what does a certified B Corporation look like – they are businesses that meet the highest
standards of verified social and environmental performance, public transparency, and legal
accountability to balance profit and purpose. B Corps are accelerating a global culture shift to
redefine success in business and build a more inclusive and sustainable economy (B Corp).

Society’s most challenging problems cannot be solved by government and nonprofits alone. The
B Corp community works toward reduced inequality, lower levels of poverty, a healthier
environment, stronger communities, and the creation of more high-quality jobs with dignity and
purpose. By harnessing the power of business, B Corps use profits and growth to a greater end:
which is a positive impact for their employees, communities, and the environment.

So basically, the B Corp certification is a new legal tool to create a solid foundation for long
term mission alignment and value creation. It protects missions through capital raises and
leadership changes, creates more flexibility when evaluating potential sale and liquidity options,
and prepares businesses to lead a mission-driven life post-IPO

Problem & Hypothesis

We believe that a B Corp certification would be a great marketing tool, it would create valuable
supplier relationships and save money in the long term. However, the certification has a steep
annual cost and high benchmarks to maintain. Our team believes that now is just not quite the

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right time in the company’s development to acquire the certification. After analyzing the
company’s finances, we think the money could be put to better use at this point in time; maybe
used for company expansion and magnifying its environmental impact that you all desire.

ANALYSIS

Considerations

The tricky situation that Hop has to deal with is whether the company should obtain the B Corp
certificate or not. Opinions vary. On one hand, it is very tempting to believe that, because
obtaining B Corp is a time consuming and costly process, our company should not choose this
option. On the other hand, B Corp is a powerful marketing tool that can help our company
connect with like-minded businesses. It can provide us with many social media platforms, thus
expanding our network in not only Canada but also big cities in the US (B Corporation 3). As a
result, for a young start-up company like Hop, we should make careful considerations in order to
both grow our company and pitch it to investors.

The first step towards making the right choice is to use an appropriate framework to value the
options. The two main frameworks that we are going to use are financial returns and
environmental impact. Specifically, for financial returns, we are going to focus on costs versus
benefits analysis to see if the benefits of obtaining B corp can outweigh the cost or not. The
assumed internal rate of return, which is also known as the IRR, is another metric that we will
use. 

We understand that there are many other models besides the costs-benefit analysis and the IRR.
For example, we can look at profitability ratio or capital structure, but they are difficult to
perform (Black 50). Given our simple balance sheet and income statement, we believe that the
cost-benefit analysis and the IRR are the two most appropriate models to value our company
against investing in B Corp. These two are relatively simple to calculate, yet they offer us a lot of
useful information that lays the foundation for more in-depth analysis that will appear later on
this report. 

We also want to evaluate the cost of obtaining B Corp from an environmental and social
standpoint, because Hop is the company that focuses not only on growing its business, but also
on investing in social and environmental projects. Our company is strongly mission-driven,
meaning that we really consider the B Corp certificate as part of our profitable investment
portfolio. If we can support the triple bottom line argument (social, environmental and financial),
we can balance profit equally with the impact our company has on the environment and society
as a whole (B Corporation 7). Hence, environmental and social impact is the chief criterion that
truly assesses the validity of getting the B Corp certificate.

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Constraints

One of the difficulties our CEO’s have to face when making a decision is the lack of models to
value externalities. There is currently no readily available valuation technique that can
incorporate all stakeholders’ concerns through environmentally friendly externalities, which
makes it hard for us to pitch Hop to the investors. Another constraint is the fact that not all
investors care about the environment. Many of them are still following the traditional paradigm
for making an investment decision, believing that focusing on the environment would hurt their
profits (Ayres 295). We understand that in the corporate world, the main goal is to maximize the
value of shareholders’ outstanding; however, sustainability can still produce good returns in the
long run.  

Cost-Benefit Analysis

Our preliminary research can be summarized in the following table:

Table 1:  Cost vs. benefit of obtaining B Corp

Monetary cost &

IRR Time Marketing Network

Obtaining B Corp

Internally
magnifying
environmental
impact

Obtaining B Corp is definitely costly, as our company needs to pay a significant 25 thousand per
year. That would lower the IRR to negative. For a startup company, a negative IRR would hurt
their cashflow a lot. As a result, it is fair to say that this portion of capital should be better
allocated in internally magnifying our company’s value and mission. The internal marketing
option cuts both ways: lowering the cost and still maintaining our environmental impact.  

Time is the second factor that we are going to look at. We all know that obtaining a B Corp
certificate is a time-consuming process, not taking into account the paperwork and surveys which
are also costly, and stressful procedures. Therefore, we believe that Hop can better use that time
and effort to expand the facilities in North America,

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However, regarding the potential marketing network, B Corp proves to be far more superior.
Having a B Corp means that the company can connect with similar companies and appear to be
attractive for future investors in the long run. If certified, Hop would be connected to B Lab’s
network of over 2,500 companies (B Corporation 5). This is a huge benefit to Hop. Without B
Corp, our company would have to spend its own resources to reach companies that are already in
the B Lab’s network. Indeed, B Corp will be vital to our company’s growth in North America. 

In a nutshell, we have seen that the cost-benefit analysis is a useful and easy tool to see the big
picture. It may appear that internal marketing is a better option (table 1). However, to pitch our
companies to the investors, we need more concrete, quantitative arguments rather than the
quantitative one. The analyses below, we believe, should do the work.

Benefit Corporation Costs

Becoming a Benefit Corporation has significant costs. These costs are broken down into two
main categories. The first category is an annual certification cost. The second category
encompasses all the implicit costs.  According to the B Corporation website, for a firm the size
of Hop Compost, the annual cost would be between $1100 - $1200 (B Corporation). The implicit
costs can be further broken down into things like regulation compliance, record keeping, internal
auditing and controls. These expenses are much more difficult to directly quantify; therefore, we
must estimate a total cost. For example, Hop may need to hire a new person at $10 per hour to
comply with B corp regulations and record keeping. This would cost Hop about $20,000 per
year. 

We estimate the annual certification cost plus all implicit costs at about $25,000 per year. This
annual cost of Benefit Corporation status is extremely important for a young business. A
negative cash flow of $25,000 for a company with annual revenues of $580,000 is substantial.
This leads into the importance of cash flows and how they affect young businesses.

Business Failure Rates and Causes

According to a 2018 report from the Small Business Association, business failure rates are as
follows: 20% of businesses fail in the first year, 50% fail before year five, and 67% of businesses
fail by year 10 (Small Business Association). An estimated cash outflow of $25,000 in the
critical years for a business is not the prudent choice of a financial manager. More often than not,
businesses fail due to cash flow concerns, according to a business insider article from 2017
(Desjardins). Business Insider summarized typical reasons for business failure with a nice
infographic (See Fig. 1):

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Fig. 1. Top Reasons Small Businesses Fail from: Desjardins, Jeff. “Here’s Why Small
Businesses Fail.” Business Insider, 2 Aug 2020.

Projected Income Statement

We created a pro forma income statement for Hop Compost. It uses our projection of revenues
and expenses to expand on our cash flow point. To estimate financial data for future years, we
made a handful of assumptions (See Fig. 2).

Our first assumption is for Service Revenue growth. According to the Hop Case, Morgan Stanley
published research that found ESG firms outperform the market by 45 basis points. We estimated
the average growth of the stock market at 8%. We then added 45 basis points to arrive at a
growth rate for Hop Revenue from Service of 8.45%.

The second assumption we made was regarding carbon credit sales. According to an Alberta
Farmer Express article, carbon prices will increase in 2017 and again by 150% in 2018
(Canadian Canola Growers Association). With this in mind, we estimated future Revenue from
Sale of Carbon Credits to be $140,000 in 2017 and $210,000 for 2018 and beyond. 

The third and fourth assumptions made regard depreciation. Originally, Hop projected
depreciation using a 50 year life for machinery and a 10 year life for vehicles. This is highly
unusual. According to the IRS depreciable life tables, both machinery and vehicles have a
depreciable life of 5 years (Internal Revenue Service). Therefore, we change the lifespan and
adjust depreciation accordingly. The result is machine depreciation of $100,000 per year and
vehicle depreciation of $19,600 per year. 

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Assuming all other accounts maintain the same percentage relative to Sales and Cost of Goods
Sold, we arrive at the bottom line. We estimate that net income will be negative until 2020,
without including the cost of obtaining a Benefit Corporation certification. We estimate Hop
Compost will be highly profitable by 2021.

Fig. 2. Hop Compost Projected Income Statement

Arguments for B Corp Certification

There were three reasons Mr. Davies believed that the B Corp certification would be beneficial.

First, he believed that the certification would establish accountability among their
environmentally conscious clients. The certification would establish accountability since B Labs,
the proprietor of the certification, puts companies through a rigorous test to ensure the company
adheres to the stringent criteria to meet B Corp certification standards. 

Second, Davies recognized that along with the certification comes an advantageous network of
other B Corp certified companies. The important aspect of the network was Hop Compost’s
aspiration to expand to the Toronto area after establishing the company in Vancouver. The
reason this is important is because B Lab’s headquarters is located in Toronto, and Toronto has
the largest concentration of B Corp certified companies in Canada. Utilizing the network could

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potentially help fuel growth for the company, especially in Toronto where it has many other
companies at its disposal. 

Lastly, Davies maintained that the certification would help market the company’s services and
products to knowledgeable consumers. The certification would help market the company as an
organization which utilizes sustainable practices that benefit the environment and reinforce
humanitarian views. 

Rebuttal

While all these points are valid and potentially beneficial to Hop Compost. It is still not the right
time to invest the capital and time in a B Corp certification. 

While the certification would establish accountability from a third party the costs associated with
the certification would hinder the growth of Hop Compost and deter investors since it reduces
the profitability of the firm. The firm could establish accountability by being transparent with its
customers about the company’s operations. This would signify not only accountability to
shareholders but also to stakeholders of the company.

The network of other B Corp certified companies would be useful to Hop Compost when
expanding operations to new cities. It would give it a network of other companies with similar
values, but if the certification hinders growth and scares investors that require a set return then
the network is moot. It would be preferable for Hop Compost to build the organization by
focusing on growth and attracting investors which in turn would lead to a strong network since
Hop Compost will be viewed as a strong and reputable company. 

Lastly, the certification in itself will not help with the act of marketing but rather give Hop
Compost more information to market. The certification does not entail a marketing campaign, it
simply would allow the company to market itself as a certified B Corp. This would mean Hop
Compost would still have a marketing expense on top of the certification expense. Also, Mr.
Davies has acknowledged that most Canadians do not know the significance or even the meaning
of a B Corp certification. It would be more beneficial to market the company based on its values
and mission statement rather than an arbitrary certification that holds no significance in most
people’s minds. 

CONCLUSION

Overall, we do not believe that the certification is an option Hop Compost should rule out
completely. But we do believe that given Hop’s young life it would not be a beneficial decision
to obtain the B Corp certification during these formative years when companies have the highest
probability of failing.

We maintain that the best course of action would be to focus on company growth to ensure
investors trust to put their money into the company. It is already known that Hop has struggled in

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the past to attract investors since the positive externalities generated by Hop are nearly
impossible to quantify into the valuation of the company. 

A major area of importance regarding the certification was being able to market the company as
a sustainable organization devoted to solving social and economic problems. Hop does not need
a certification to market the firm’s values and mission, a marketing strategy focusing on Hop’s
goals and transparency would resonate with their core customers. 

Following these recommendations would allow Hop Compost to market the firm to investors as a
company with a high growth opportunity that also recognizes the evolving culture today which
values sustainability and environmentally conscious activities. 

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 Works Cited

Ayres, Robert U., and Allen V. Kneese. "Production, consumption, and externalities." The
American Economic Review 59.3 (1969): 282-297.

B Corporation. Certification Requirements. 2020. Web. 12 Aug 2020.

B Corporation. About B corps. 2020. Web. 12 Aug 2020.

Black, Ervin. "Usefulness of financial statement components in valuation: an examination of

start-up and growth firms." Venture Capital: An International Journal of Entrepreneurial
Finance 5.1 (2003): 47-69.

Canadian Canola Growers Association. "Here's A Primer on Carbon Taxes and Cap and Trade in
Canada." 20 Dec 2016. Alberta Farmer Express. Web. 12 Aug 2020.

Desjardins, Jeff. "Here's Why Small Businesses Fail." 2 Aug 2017. Business Insider. Web. 12
Aug 2020.

Internal Revenue Service. "Publication 946 - How To Depreciate Property." 2019. Department of
Treasury Internal Revenue Service. PDF. 12 Aug 2020.

Small Business Association. Frequently Asked Questions. 2018. PDF. Aug 2020.

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