1. Small Business Management, 18e
Longenecker/Petty/Palich/Hoy
Small Business Management, 18e
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2. Planning for Harvest Chapter 13
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3. Learning Goals:
Explain the importance of having a harvest, or exit, plan.
Describe the options available for harvesting.
Explain the issues in valuing a firm that is being harvested and deciding on the method of payment.
Provide advice on developing an effective harvest plan.
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4. The Importance of the Harvest
Harvesting (or Exiting)
The process used by entrepreneurs and investors to reap the value of a business when they leave it.
The process involves:
Capturing value (cash value)
Reducing risk
Creating future options
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5. 13.1 Methods for Harvesting a Business
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6. Selling the Firm: Buyers’ Reasons for Purchasing a Firm
Sales 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 Buyers
A purchase in which the value of the business is based on the stand-alone cash generating potential of the firm being acquired.
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7. Financial Acquisitions
Bust-Up LBO
Build-Up LBO
Types of Leveraged Buyouts (LBOs)
Management Buyout (MBO)
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8. Choosing a LBO Firm for Acquisition
Characteristics of a Potential LBO Firm
Steady earnings over time
Attractive growth rate for firm
Effective management team
Assets useful as collateral
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9. Selling the Firm: Buyers’ Reasons for Purchasing a Firm (cont’d)
Sales 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.
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10. Harvesting by Going Public
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.
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11. Harvesting by Going Public
Setting the Stage for an IPO
Maintain an accounting process that cleanly separates the business from the entrepreneur’s personal life
Select a strong board of directors that can and will offer valuable business advice
Manage the firm so as to produce a successful track record of performance
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12. Harvesting by Going Public
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13. Going Public: The IPO Process
The firm’s owners decide to go public.
If not already completed, an audit of the last three years financial statements is conducted.
An investment banker is selected to guide the IPO process.
An S-1 registration is drafted and filed with SEC.
Management responds to suggested comments by the SEC, and issues a Red Herring/Prospectus.
Firm goes “on the road” explaining its attributes to investors.
On the day before public offering, an offering price is decided upon.
Offering the stock to the public and seeing how it is received.
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14. Private Equity Recapitalization
Private equity investors provide additional financing to a business that allows an entrepreneur to cash out a portion of his or her investment, while possibly continuing to operate the business.
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15. Private Equity Recapitalization (cont.)
Factors in the Transfer of Family-Owned Firms
Liquidity for exiting family members
Continued financing for company growth
Retaining control of the firm by the younger family member
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16. 13.3 Private Placement—An Illustration
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17. Firm Valuation and Payment Methods
The Harvest Value
Opportunity cost of funds is the rate of return that could be earned on another investment of similar risk
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18. Firm Valuation and Payment Methods (cont.)
Harvest 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.
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19. Harvesting: The Method of Payment
Payment 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
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20. Developing an Effective Harvest Plan
Anticipate the Harvest
Manage for the long-term
Avoid playing the harvest game
Prepare by separating your “self” from the firm
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21. Developing an Effective Harvest Plan (cont.)
Expect Conflict—Emotional and Cultural
Strains of selling own business
Personal ties to the business after sale
Get Good Advice
Advisors with harvest transaction experience
Other entrepreneurs who have sold their firms
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22. Developing a Harvest Plan (cont’d)
Understand 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”
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23. What’s Next?
Whatever you decide to do, do it with passion and let your life benefit others in the process.
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24. build-up LBO business broker bust-up LBO double taxation employee stock ownership plan (ESOP) harvesting (exiting) initial public offering (IPO) leveraged buyout (LBO) management buyout (MBO) opportunity cost of funds private equity recapitalization seller financing
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.