1. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. PowerPoint Presentation by Charlie Cook, The University of West Alabama Planning for the Harvest PART 3 Developing the New Venture Business Plan

2. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–2 1.Explain the importance of having a harvest, or exit, plan. 2.Describe the options available for harvesting. 3.Explain the issues in valuing a firm that is being harvested and deciding on the method of payment. 4.Provide advice on developing an effective harvest plan. Looking Ahead After studying this chapter, you should be able to:

3. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–3 The Importance of the Harvest Harvesting (or Exiting)Harvesting (or Exiting)  The 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

4. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–4 Exhibit 13.1 Methods for Harvesting a Business

5. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–5 Selling the Firm: Buyers’ Reasons for Purchasing a Firm Sales to Strategic BuyersSales to Strategic Buyers  A purchase in which the value of the 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. Sales to Financial BuyersSales to Financial Buyers  A purchase in which the value of the business is based on the stand-alone cash generating potential of the firm being acquired.

6. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–6 Financial Acquisitions Types of Leveraged Buyouts (LBOs) Bust-Up LBO Management Buyout (MBO) Build-Up LBO

7. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–7 Selling the Firm: Buyers’ Reasons for Purchasing a Firm (cont’d) Sales to EmployeesSales to Employees  Employee Stock Ownership Plan (ESOP)  A method by which a firm is sold either in part or in total to its employees. –Employees retirement contributions are used to purchase shares in the firm. –Frequently is exit method of last resort. –Motivates employee-owners to perform.

8. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–8 Leveraged ESOP Buyout Process Employer Firm Selling Owner ESOP Trust Lender 1. Employer firm guarantees payment of loan. 2. ESOP trust borrows money from lender. 6. ESOP trust makes payment on loan. 4. Stock is sent to ESOP trust for benefit of employees. 3. Cash from loan is used to buy owner’s stock. 5. Employer firm makes annual contribution for employee stock purchases.

9. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–9 Selling A Business in Difficult Times Selling A Business Clean up the books Consider your sector and market Keep revenue strong

10. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–10 Releasing the Firm’s Cash Flows Harvesting by Withdrawing Firm’s CashHarvesting by Withdrawing Firm’s Cash  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

11. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–11 Harvesting: Going Public Initial Public Offering (IPO)Initial Public Offering (IPO)  Benefits of the sale of shares of stock to the public:  Signals to investors that a firm is a quality business and will likely perform well in the future.  Provides access to more investors when the firm needs to raise capital to grow the business.  Helps create ongoing interest in the company and its continued development.  Makes firm’s stock more attractive as incentive pay to key personnel.

12. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–12 Going Public: The IPO Process 1.The firm’s owners decide to go public. 2.If not already completed, an audit of the last three years financial statements is conducted. 3.An investment banker is selected to guide the IPO process. 4.An S-1 registration is drafted and filed with SEC. 5.Management responds to suggested comments by the SEC, and issues a Red Herring/Prospectus. 6.Firm goes “on the road” explaining its attributes to investors. 7.On the day before public offering, an offering price is decided upon. 8.Offering the stock to the public and seeing how it is received.

13. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–13 Exhibit 13.2 IPOs Raising Less Than $25 Million Source: Dealogic, Capital Markets Advisory Partners, reported in David Weild and Edward Kim, “Why Are IPOs in the ICU?” White Paper, Grant Thornton, LLP, 2008, p. 8.

14. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–14 Harvesting: Private Placement Private Equity (Capital)Private Equity (Capital)  Money provided by venture capitalists or private investors. Factors in the Transfer of Family-Owned FirmsFactors in the Transfer of Family-Owned Firms  Liquidity for exiting family members  Continued financing for company growth  Maintenance of family control of the firm

15. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–15 Exhibit 13.3 Private Placement—An Illustration

16. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–16 Firm Valuation and the Harvest The Harvest ValueThe Harvest Value  Opportunity cost of funds  The rate of return that could be earned on another investment of similar risk Harvest Value/Market Comparable ValuationsHarvest Value/Market Comparable Valuations  Establishing the value of a privately held company based on the value of a similar or comparable publicly traded company.  Multiple of earnings method is frequently used.

17. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–17 Harvesting: The Method of Payment Payment AlternativesPayment Alternatives  Cash  Immediate and stable in value  Tax liability consequences  Stock  Purchaser: protection from liabilities  Seller: immediate but uncontrollable in value  Seller: potential problems with disposal of stock  Merger with Purchasing Firm  Purchased firm is absorbed into purchasing firm

18. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–18 Developing a Harvest Plan Anticipate the HarvestAnticipate the Harvest  Manage for the long-term.  Avoid playing the harvest game. Expect Conflict—Emotional and CulturalExpect Conflict—Emotional and Cultural  Strains of selling own business  Personal ties to the business after sale Get Good AdviceGet Good Advice  Advisors with harvest transaction experience  Other entrepreneurs who have sold their firms

19. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–19 Developing a Harvest Plan (cont’d) Understand What Motivates Your ExitUnderstand What Motivates Your Exit  Motives for exiting:  Money  Independence  Health of the company  Your management team  An heir apparent taking over  Personal identity and the business itself  Avoid “seller’s remorse”

20. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–20 What’s Next? Whatever you decide to do, do it with passion and let your life benefit others in the process.Whatever you decide to do, do it with passion and let your life benefit others in the process.

21. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13–21 Key Terms harvesting (exiting) harvesting (exiting) leveraged buyout (LBO) leveraged buyout (LBO) bust-up LBO bust-up LBO build-up LBO build-up LBO management buyout (MBO) management buyout (MBO) employee stock ownership plan (ESOP) employee stock ownership plan (ESOP) leveraged ESOP leveraged ESOP seller financing seller financing double taxation double taxation initial public offering (IPO) initial public offering (IPO) opportunity cost of funds opportunity cost of funds