HARVESTING THE BUSINESS VENTURE INVESTMENT ENTREPRENEURIAL FINANCE Leach & Melicher Chapter 15 HARVESTING THE BUSINESS VENTURE INVESTMENT © 2003 South-Western College Publishing
CHAPTER 15 : LEARNING OBJECTIVES Describe the process of going public Identify what investment banking involves Explain “due diligence” and “security registration” of new securities
CHAPTER 15 : LEARNING OBJECTIVES Describe reorganization under Chapter 11 of the U.S. Bankruptcy laws Describe liquidation under Chapter 7 of the U.S. Bankruptcy laws
HARVESTING Harvesting – process of exiting the privately held business venture to unlock the owners’ investment value Methods of harvesting 1. Through a systematic distribution of assets directly to the owners 2. Through an outright sale of going concern to others 3. Through a two-step public equity registration and sale
METHODS OF EXITING A PRIVATELY HELD VENTURE Systematic Liquidation – venture liquidated by distributing the venture’s cask flows to the owners Outright Sale – venture sold to others including family members, managers, employees, or external buyers
METHODS OF EXITING A PRIVATELY HELD VENTURE Leveraged Buyout (LBO) – purchase price of a firm is financed largely with debt financial capital Management Buyout (MBO) special type of LBO where the firm’s top management continues to run the firm and has substantial equity position in the reorganized firm
GOING PUBLIC Initial Public Offering (IPO) – shares registered with the Securities Exchange Commission (SEC) and state regulators and sold to the public Primary Offering – sale of new securities Secondary Offering – sale of used securities Investment Banking – assist in the creation, sale, and distribution of financial assets
GOING PUBLIC Underwriting Spread – difference between what the investment bank gets from selling securities to public investors and what they pay to the issuing firm Red Herring Disclaimer – obligatory disclaimer disavowing any intent to act as an offer to sell, or solicit an offer to buy securities Due Diligence – process of ascertaining, to the extent possible, an issuing firm’s financial condition and investment intent
GOING PUBLIC Firm Commitment – type of agreement with investment bank involving the investment bank’s underwritten purchase and resale of securities Best Efforts – type of agreement with investment bank employing only marketing and distribution efforts IPO Underpricing – syndicate’s offering price when it is less than the market price immediately following the offering
NYSE LISTING REQUIREMENTS At least 2000 holders of > 100 shares At least 1,100,000 share outstanding, held by public At least $60 million in market value At least $2.5 million before tax profits in last 2 years & $2 million in each of previous 2 years
AFTERMARKET SECURITY TRADING Market Order – order to be executed as soon as possible at the prevailing market price Limit Order – order that can be executed only at a specified price or better Stop Order – order that converts to a market order once a certain price is achieved