1. Copyright © 2008 by Nelson, a division of Thomson Canada Limited ENTREPRENEURSHIP A PROCESS PERSPECTIVE Robert A. Baron Scott A. Shane A. Rebecca Reuber Slides Prepared by: Sandra Malach, University of Calgary

2. Copyright © 2008 by Nelson, a division of Thomson Canada Limited. 13 WHEN – AND HOW – TO HARVEST THE REWARDS FROM YOUR BUSINESS 1

3. Copyright © 2008 by Nelson, a division of Thomson Canada Limited LEARNING OBJECTIVES 1.Describe basic methods of valuing a business, including balance sheet methods, earnings-based methods, and market method. 2.Describe issues entrepreneurs should consider when transferring ownership of their companies to family members or employees. 3.List the advantages and costs of an initial public offering. 4.Describe the basic nature of negotiation and explain the nature of several key bargaining tactics.

4. Copyright © 2008 by Nelson, a division of Thomson Canada Limited LEARNING OBJECTIVES 5.Explain why integrative agreements between negotiators are generally best, and explain the relationship of such agreements to the overall approach to negotiation (a win-lose versus a win- win approach). 6.Define “life transitions” and explain why entrepreneurs should consider their own age and phase of life before choosing an exit strategy.

5. Copyright © 2008 by Nelson, a division of Thomson Canada Limited “All things change…There is nothing in the whole world which is permanent. Everything flows onward…the ages themselves glide by in constant movement.” --Ovid, 10 B.C.

6. Copyright © 2008 by Nelson, a division of Thomson Canada Limited EXIT STRATEGIES Entrepreneurs’ attitudes, values & goals determine the harvest strategy: Sell or transfer ownership to insiders Sell or transfer ownership to outsiders Take the company public through an IPO

7. Copyright © 2008 by Nelson, a division of Thomson Canada Limited FACTORS IN TERMS OF THE SALE Valuation of the company Value of intangible assets & goodwill Entrepreneurs often over estimate the value Negotiation process

8. Copyright © 2008 by Nelson, a division of Thomson Canada Limited WHAT’S IT WORTH? Balance sheet methods Earnings methods Market method

9. Copyright © 2008 by Nelson, a division of Thomson Canada Limited BALANCE SHEET METHOD Net worth = Assets – Liabilities Adjusted Balance Sheet Technique Reflects actual market value of assets

10. Copyright © 2008 by Nelson, a division of Thomson Canada Limited EARNINGS METHOD Excess Earnings Method Estimates the extent to which a company will generate earnings in excess of the industry average = goodwill Capitalized Earnings Method Net earnings are capitalized Discounted Future Earnings Future earnings are discounted for time.

11. Copyright © 2008 by Nelson, a division of Thomson Canada Limited MARKET METHOD Compare the price/earnings ratio of the business to that of other publicly traded companies in the same industry. Problems: Identifying several, similar public companies Concept of comparing public and private companies.

12. Copyright © 2008 by Nelson, a division of Thomson Canada Limited FAMILY SUCCESSION Reasons for family succession: Family has helped build the business Family owns large blocks of shares Trust & confidence of entrepreneur Key goal was to build something of value for children

13. Copyright © 2008 by Nelson, a division of Thomson Canada Limited SUCCESSION ISSUES The #1 issue of family firms Adopt a clear Succession Plan How, when & to whom ownership will be transferred Characteristics of successors: Desire to have an active role Suited for the task Have a post-succession vision

14. Copyright © 2008 by Nelson, a division of Thomson Canada Limited SALE OR TRANSFER TO EMPLOYEES Cash Leveraged buyout Employee stock ownership plan

15. Copyright © 2008 by Nelson, a division of Thomson Canada Limited LEVERAGED BUYOUTS Managers borrow money to pay the owner an agreed-upon price. The new owners pledge their stock as collateral, or… Lenders accept an equity position in the company to cover part or all of the funds.

16. Copyright © 2008 by Nelson, a division of Thomson Canada Limited EMPLOYEE STOCK OWNERSHIP Ordinary ESOP Leveraged plan Transfer ownership plan

17. Copyright © 2008 by Nelson, a division of Thomson Canada Limited SALE TO OUTSIDERS Possible buyers: Competitors Non-competitors Acquisition by a larger company Manufacturing and distribution systems Economies of scale & scope

18. Copyright © 2008 by Nelson, a division of Thomson Canada Limited PREPARING FOR SALE Sell at the right stage of development Sell when the business cycle is strong Compensate for loss of talent Identify and protect intellectual property Adopt transparent and conservative accounting policies Resolve open questions that make it difficult to estimate value

19. Copyright © 2008 by Nelson, a division of Thomson Canada Limited INITIAL PUBLIC OFFERINGS Generates huge amounts of $$$$$. $$ for expansion Gain respectability increasing competitive advantage Market provides continuous valuation Easier to use stock options as an employee incentive

20. Copyright © 2008 by Nelson, a division of Thomson Canada Limited Disadvantages of IPOs A tremendously expensive process Time and $$$ Lock-up agreements Initial under-pricing of shares Subject to careful continuous scrutiny by regulators

21. Copyright © 2008 by Nelson, a division of Thomson Canada Limited FOUR PHASES OF IPO ACTIVITY 1.Prepare for L-Day (listing day). Accountants 2.Preparation of IPO Documentation Lawyers, underwriters & accountants 3.Road show Top Management 4.Constant flow of information to analysts & investors

22. Copyright © 2008 by Nelson, a division of Thomson Canada Limited NEGOTIATION Opposing sides exchange offers, counteroffers, and concessions. If successful, an agreement acceptable to both sides is attained If negotiations fail, the process ends and each side seeks other parties with whom to make a deal

23. Copyright © 2008 by Nelson, a division of Thomson Canada Limited BARGAINING TACTICS 1.Beginning with an extreme initial offer 2.Using the “big lie” technique 3.Convincing the other side you have an “out”

24. Copyright © 2008 by Nelson, a division of Thomson Canada Limited UNETHICAL NEGOTIATION TACTICS The MOST objectionable tactics: False promises Misrepresentation Inappropriate information gathering Using them may work in the short run but may prove costly over a long period of time

25. Copyright © 2008 by Nelson, a division of Thomson Canada Limited OTHER TACTICS Make relatively unimportant concessions Induce a positive effect Location & atmosphere

26. Copyright © 2008 by Nelson, a division of Thomson Canada Limited APPROACH TO NEGOTIATION Two basic approaches: 1.Win-Lose Gains by one are the losses of the other Assumes incompatible interests 2.Win-Win Negotiations can maximize the outcome of both sides

27. Copyright © 2008 by Nelson, a division of Thomson Canada Limited REACHING INTEGRATIVE AGREEMENTS Logrolling Nonspecific compensation Broadening the pie Cost-cutting Bridging

28. Copyright © 2008 by Nelson, a division of Thomson Canada Limited RESULTS OF NEGOTIATION Obtain a favourable agreement Avoid inducing feelings of anger, resentment, or outrage by the other party

29. Copyright © 2008 by Nelson, a division of Thomson Canada Limited HARVEST STRATEGIES Exiting the business for any reason ‘I am a free man, I feel as light as a feather’ No single harvest strategy is best for all entrepreneurs

30. Copyright © 2008 by Nelson, a division of Thomson Canada Limited THE AGING PROCESS Physical appearance and energy Cognition and memory Intelligence Creativity

31. Copyright © 2008 by Nelson, a division of Thomson Canada Limited ERAS OF OUR LIVES Age 30 transition Midlife transition (40-45) Late-adult transition (50-55) Consider your stage in life as you consider your exit strategy