PowerPoint Presentations for Small Business Management: Launching and Growing New Ventures, Fifth Canadian Edition Adapted by Cheryl Dowell Algonquin College

Chapter 15 Managing Growing Firms and Exit Strategies

LOOKING AHEAD After studying this chapter, you should be able to: 1. Describe managing for growth. 2. Explain the various types of outside management assistance. 3. Explain the importance of having an exit strategy. 4. Describe succession planning. 5. Discuss serial entrepreneurs. 6. Describe harvesting options and effective harvesting strategies. 7. Discuss issues in preparing for life after the harvest. Copyright © 2013 by Nelson Education Limited 15-3

MANAGING FOR GROWTH Strategy for growthCreating external networks and market connectivityUpgrading management skills and capabilitiesChallenging the leader’s assumptionsManaging succession and exitsGrowth and organizational changeProfessionalizing the business infrastructure Copyright © 2013 by Nelson Education Limited 15-4 LO 1

WHEN IS A BUSINESS READY TO GROW? Copyright © 2013 by Nelson Education Limited 15-5 Refusing to let go of the reinsWhere’s the money?The paper trailGrowing painsCompetition? What competition? LO 1

OUTSIDE MANAGEMENT ASSISTANCE NATIONAL RESEARCH COUNCIL Canadian Technology Network Business Development Bank of Canada -BDC Universities and Colleges Management Consultants Networks of Entrepreneurs Others: – bankers, chartered accountants, lawyers, insurance agents, suppliers, trade associations, and chambers of commerce provide management assistance. Copyright © 2013 by Nelson Education Limited 15-6 LO 2

THE IMPORTANCE OF THE HARVEST Copyright © 2013 by Nelson Education Limited 15-7 Exit process used by entrepreneurs and investors to reap the value of a business when they get out of it The process involves: – Capturing value (cash value) – Reducing risk – Creating future options LO 3

SUCCESSION PLANNING Copyright © 2013 by Nelson Education Limited 15-8 Pass to next generation or Hire managers to reduce personal involvement A written succession plan will address: – Identify future managers and leaders – How to assess potential candidates – Monitoring process – Training and declaration of a successor – Timeline – Operational and tax issues LO 4

SERIAL ENTREPRENEURS Copyright © 2013 by Nelson Education Limited 15-9 Innovative and creative people Are more interested in starting new businesses Characteristics: – Determination – Commitment – Perseverance – Vision LO 5

METHODS OF HARVESTING Selling the firm Releasing the firm’s free cash flows to its owners Offering shares to the public through an initial public offering (IPO) Issuing a private placement of the shares Liquidation Copyright © 2013 by Nelson Education Limited LO 6

SELLING THE FIRM Purchase in which value of business is based on both the firm’s stand-alone characteristics and synergies that the buyer thinks can be created by the strategic fit of the firm and a potential buyer Strategic Acquisition Purchase in which value of business is based on the stand-alone cash generating potential of the firm being acquired Financial Acquisition Copyright © 2013 by Nelson Education Limited LO 6

SELLING THE FIRM purchase heavily financed with debt, when potential cash flow of target company is expected to be sufficient to meet debt repayments Leveraged Buyout (LBO) purchasing with intention of selling off assets Bust-up LBO purchasing similar firms to make one larger company Build-up LBO Copyright © 2013 by Nelson Education Limited LO 6

SELLING THE FIRM Leveraged buyout that includes the firm’s top management to significant shareholders in the acquired firm Management Buyout (MBO) Method by which a firm is sold either in part or in total to its employees. Frequently is the exit method of last resort. Motivates the employee-owners to perform. Employee Ownership Copyright © 2013 by Nelson Education Limited LO 6

PREPARING THE FIRM FOR SALE Operations managementBusiness planning and managementHuman resources managementMarket developmentInnovation Copyright © 2013 by Nelson Education Limited LO 6

OBSTACLES OF SALE Copyright © 2013 by Nelson Education Limited For the Current OwnerFor the New Owner Financing for the new ownerFinancing the purchase Finding a buyer or suitable heir within the company or family Valuing the business Too much dependence on current owner’s involvement Getting the owner to “let go” Valuing the businessGetting the owner to “let go” Conflicting vision with family Conflicting vision of employeesDependence on previous owner Conflicting vision of key employees LO 6

RELEASING THE FIRM’S FREE CASH FLOWS Copyright © 2013 by Nelson Education Limited Free cash flow – the amount of cash that can be distributed to investors after all operating needs have been met = Operating profits + Depreciation − Taxes − Investments (after taxes) LO 6

RELEASING THE FIRM’S FREE CASH FLOWS Advantages – Retain control of firm while harvesting investment – No need to seek a buyer or incur expenses associated with sale of business Disadvantages – Loss of development potential and opportunities – Tax disadvantages of cash withdrawal – Requires patience to siphon off cash slowly Copyright © 2013 by Nelson Education Limited LO 6

GOING PUBLIC (IPO) Copyright © 2013 by Nelson Education Limited Reasons: – raise capital to repay outstanding debt – strengthen the balance sheet to support growth – create a source of capital that can be selectively accessed to fund continuing growth – create a liquid currency to fund future acquisitions – create a liquid market for the company’s stock – broaden the shareholder base – create ongoing interest in the company and its continued development LO 6

PRIVATE EQUITY PLACEMENT Copyright © 2013 by Nelson Education Limited Private Equity (Capital) – Money provided by venture capitalists or private investors. Factors in the Transfer of Family-Owned Firms – Liquidity for exiting family members – Continued financing for company growth – Maintenance of family control of the firm LO 6

Copyright © 2013 by Nelson Education Limited PRIVATE EQUITY PLACEMENT LO 6

LIFE AFTER THE HARVEST Copyright © 2013 by Nelson Education Limited Two key questions: – Will I experience serious regrets over the decision to harvest my investment in a company? – What will become my passion after I have become more than contended with the “easy life” where I have the option to play golf every day if I choose or to travel to my heart’s content? LO 7