HARVESTING THE BUSINESS VENTURE INVESTMENT ENTREPRENEURIAL FINANCE Chapter 14 HARVESTING THE BUSINESS VENTURE INVESTMENT

Chapter 14 : Learning Objectives Plan an exit strategy Understand the meaning of systematic liquidation Describe outright sales of the venture to various potential buyers Discuss the terms “leveraged buyouts” and “management buyouts” Describe the process of going public Identify what investment banking involves

Planning an Exit Strategy Evidence suggest that over one-half of entrepreneurs either develop formal exit strategies or at least have thought about harvest strategies at the outset of the venture Having a harvest plan in place makes it easier to take advantage of windows of opportunity to exit

Harvesting Harvesting: Methods of harvesting process of exiting the privately held business venture to unlock the owners’ investment value Methods of harvesting Systematic distribution of assets directly to the owners Outright sale of the venture to others Two-step public equity registration/sale

Methods of Exiting a Privately Held Venture 新创私有制企业退出方式 Systematic Liquidation: venture liquidated by distributing the venture’s cash flows to the owners However, other than when the venture is operating in a declining industry, it is difficult to think of cases where the advantages of liquidation outweigh the disadvantages

Systematic Liquidation 清算 Advantages:清算的优势 Entrepreneur maintains control throughout the harvest period Harvesting of the venture can be spread out over several years Time, effort, and costs of finding a buyer for the venture can be avoided

Systematic Liquidation Disadvantages:清算的不足之处 Liquidation proceeds are treated as ordinary income (rather than capital gains) Difficulty for the entrepreneur to maintain focus on a dying venture The value of the venture may decline more rapidly when competitors respond to the venture’s lack of investment

Methods of Exiting a Privately Held Venture新创私有制企业退出方式 Outright Sale – venture sold to others including:直接出售 - 出售给其他企业包括： family members managers employees outside (external) buyers

Outright Sale to Management 销售给管理层 Leveraged Buyout (LBO):杠杆收购 purchase price of a firm is financed largely with debt financial capital 收购公司的资金主要来源于债务资本 Management Buyout (MBO):管理层收购 special type of LBO where the firm’s top management continues to run the firm and has substantial equity position in the reorganized firm由公司高层管理者进行的收购和继续管理公司并持有公司大部分股权。

Outright Sale to Employees 销售给公司雇员 Process can use a leveraged Employee Stock Ownership Plan (ESOP) The ESOP uses proceeds from the sale of debt to purchase venture equity Employees gain an ownership stake in the private venture ESOP strategy was made possible by an act of Congress

Sale to Outside Buyers 销售给外部买家 Control Premium:获得控制权 amount typically applied to the base valuation to reflect the value of controlling the venture rather than just being a minority shareholder Illiquidity Discount:非流动性折扣 amount typically applied to the base valuation to compensate for the difficulties in reselling private equity

Going Public: 公开上市 Initial Public Offering (IPO)首次公开募股 a venture’s first offering of SEC-registered securities to the public Primary Offering: sale of new securities Secondary Offering: sale of used securities

Going Public: 公开上市 Role of Investment Banking 投资银行的作用 an intermediary assisting in the creation, sale, and distribution of financial assets协助 销售和分配金融资产 的中介金融机构 Due to their extensive network of possible buyers for the securities (through affiliated brokerage and client services), investment bankers are considered to be the experts in predicting the value of newly issued securities

Going Public: Role of Investment Banking Underwriting Spread:承销收益 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: Role of Investment Banking 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 上市要求 At least 2,000 holders of at least 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

Contemplating & Preparing for the IPO Process For the officers of a publicly traded corporation, there is minimal personal privacy. They are public figures and their lives are subject to scrutiny in a way that most entrepreneurs have never imagined or desired. Entrepreneurs in a public company will quickly find out what they can and cannot say about the company

Preparing for The IPO首次公开募股 Typical Steps to Follow Organization meeting and due diligence Drafting and attendant activities Initial 30-day SEC review Pre-marketing Marketing Pricing and closing