Planning for Successful Divestiture: The Business Plan Richard A. Michelfelder, Ph.D. Assistant Professor of Finance January 27, 2005

What is a business plan? Many businesses do not have a business plan Some Fortune 500 firms, closely-held, publicly-traded, large, small Euphemisms for business plans Financial plan Marketing plan Sales Plan Strategic Plan Operating Plan Exit Strategy 4/7/2019

quoted from “The Bottom Line on Startup Failures” "We studied firms that had developed a business plan at the outset, and found that 85% were still in business after three years. I think that fact speaks for itself," says Jonathan Goldhill, a small-business consultant and former director of an economic development center in California's San Fernando Valley. quoted from “The Bottom Line on Startup Failures” Karen E. Klein, Business Week, March 4, 2002 4/7/2019

Key to a Successful Divestiture Have and use business plan! 4/7/2019

The Question Is: “What Is A Business Plan?” Let start by stating what it’s not: Vision Mission Strategies Marketing Plan Sales Plan Operational Plan Financial Projections / Plan Exit Plan Report developed by investment bankers, consultants, the “planning department,” or the lawyers Offer Memorandum 4/7/2019

Case 1: The Straight and Narrow “Business Plan” Publicly-Traded Electric Utility Vision: “provide cheap, reliable electric power and a attractive return to shareholders” Mission: “generate, transmit, and deliver electricity Long-term plan horizon: 25 years Operational plan horizon: 15 years Operational objective: 99.999% reliable power Results: “Same old, same old” (read: flat stock price) 4/7/2019

Case 1:“I know, lets diversify, earnings and stock price will grow faster” Diversification of electric companies: Banking, hotels, telecommunications, etc. Typical Board / Management Meeting Agenda: Electric / Gas financials 2 hours Electric / Gas operating statistics 1 hour Electric / Gas investment plan 1.5 hours Our banks, hotels, and phone company ventures 20 minutes Results: Chapter 11 bankruptcies / falling stock prices 4/7/2019

Case 1: “Lets stick to our core business and compete for others’ customers” Question: Do we have marketing skills to work with customers? Sure. We have 2 million “ratepayers” right now. The result: In California, tripling of prices, 2 of 3 utilities in Chapter 11 In New Jersey and Pennsylvania, nothing! 4/7/2019

Case 1: “Lets grow by merging: after all, bigger is better with competition” 110 publicly-traded electric utilities in late 80’s down to 63 and dropping The result: Stock price growth of acquired utility firm nil at 1 to 4% Typical stock price growth of target firm: 20-40% Investors did not see the value creation from the “big will win in competitive markets” so why the mergers. 4/7/2019

Case 1: What’s the problem here? No Business Plan! 4/7/2019

Case 2: The High Tech Start-Up with the Offer Memorandum NY investment banker wrote the plan to raise equity $ Six months to write 18 months and 30 or so investor presentations: The results: No takers Angel investor getting anxious Start-up management very anxious Cash “burn rate” rising 4/7/2019

Case 2: “We need to plan, so we know where we are going” Developed by management for management in two sleepless days after finally repudiating the banker’s offer memo The Results: Revenues from $1 million to over $20 million in one year and two years after start-up, cash flow and profits attractive to investors Multiple syndicated financial equity investment closures 4/7/2019

Case 2: “What was our problem?” Their Business Plan, Not Ours! 4/7/2019

Case 3: Steady as she goes Successful 20 year old boutique consulting firm “Problem”: Revenues, profits, cash flow strong every year, but flat Review of business plan shows they had none but called it one Developed a plan with everyone engaged; revenues, profits, cash flow more than doubled in one year Real problem? You know the answer by now. 4/7/2019

So then, what is a business plan? Includes ALL of these: Vision: What does success look like? Mission: What are we doing now? Strategies: Paths for getting there Marketing Plan: Compelling offer sold to whom? Sales Plan: Implementing the marketing plan Operational Plan: Resource needs and deployment Financial Projections / Plan: Value of success, cash and capital needs Exit Plan: Extracting some or all of the financial value EXECUTE – lets call it business planning and doing!!!! 4/7/2019

That’s the cookbook, now just add the ingredients? The plan must be yours – those who execute the business Live by your plan, its not primarily a tool to raise money or to sell your business, it answers the following questions for everyone in the business: What you are doing? What does success look like? What business are you in? Why are you doing it? Why will you succeed? What is the shareholder value created if you succeed? Goals – Are you getting there or not? 4/7/2019

Lets return to the PriceWaterhouseCoopers Presentation 4/7/2019

PWC’s 10 Critical Steps: Links to Business Plan PWC Step No. PWC 10 Steps Business Plan Component 1 Align Org. Objectives Vision / Mission 2 Develop a Divestiture Plan Exit Strategy 3 Assemble Team of Trusted Advisors & Deal Specialists Operational Plan / Exit Strategy 4 Get “Financial House” in Order Financial Projections / Plan 5 Develop Credible Financial Projections – A Compelling Story Financial Projections / Plan & entire business plan 6 Understanding Subjective Value – Seeing Your Business through the Eyes of the Buyer 7 Initiate Buyer Identification / Assessment Process 8 Evaluate Potential Structuring Alternatives 9 Re-Visit Specific Transition Objectives and Priorities Deal Process – not part of business plan 10 Determine Specific Sales Timeline and Execute 4/7/2019

A little research to back this up? Shane and Delmar (2004, Journal of Business Venturing): Study of 223 new ventures initiated in 1998 “…we show that new ventures are less likely to be terminated if the entrepreneurs complete business plans before initiating marketing and promotion and before talking to customers” 4/7/2019

Personal Note As an academic researcher, consultant, and entrepreneur, my message is that a primary key to business and divestiture success is having and executing a business plan with a trusted team of outside advisors US Dept. of Commerce survey recently showed that out of 10 start-ups in a specific year, only 2 will exist in 5 years I have started or took the helm of 7 businesses, some in large corporations, partnerships, solely-owned LLC’s, consulting, high-tech, energy, real estate, commercial construction; they are all thriving today – I believe, to a large degree, due to business planning and doing, and having outside advisors who kept us in check! 4/7/2019