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

2. 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
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3. 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
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4. Key to a Successful Divestiture
Have and use business plan!
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5. 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
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6. 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: % reliable power
Results: “Same old, same old” (read: flat stock price)
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7. 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 hours
Our banks, hotels,
and phone company ventures minutes
Results: Chapter 11 bankruptcies / falling stock prices
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8. 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!
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9. 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.
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10. Case 1: What’s the problem here?
No Business Plan!
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11. 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
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12. 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
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13. Case 2: “What was our problem?”
Their Business Plan, Not Ours!
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14. 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.
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15. 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!!!!
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16. 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?
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17. Lets return to the PriceWaterhouseCoopers
Presentation
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18. 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
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19. 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”
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20. 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!
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