1. PowerPoint Presentation by Charlie Cook The University of West Alabama Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Part 3 Developing the New Venture Business Plan The Harvest Plan

2. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 12–2 Looking Ahead After studying this chapter, you should be able to: 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.

3. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 12–3 Options for Harvesting There are four basic ways to harvest an investment in a privately owned company: –(1) selling the firm –(2) releasing the firm’s cash flows to its owners –(3) offering stock to the public through an IPO –(4) issuing a private placement of the stock In a sale to a strategic buyer, the value placed on a business depends on the synergies that the buyer believes can be created. Financial buyers look primarily to a firm’s stand-alone, cash-generating potential as the source of its value.

4. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 12–4 Leveraged Buyouts (LBOs) In leveraged buyouts (LBOs), high levels of debt financing are used to acquire firms. With bust-up LBOs, the assets are then sold to repay the debt. With build-up LBOs, a number of related businesses are acquired, which may eventually be taken public via an initial public offering (IPO). A management buyout (MBO) is an LBO in which management is part of the group buying the company.

5. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 12–5 Options for Harvesting (cont’d.) In an employee stock ownership plan (ESOP), employees’ retirement contributions are used to purchase shares in the company. The orderly withdrawal of an owner’s investment in the form of the firm’s cash flows is one method of harvesting a firm. An initial public offering (IPO) is used primarily as a way to raise additional equity capital to finance company growth, and only secondarily as a way to harvest the owner’s investment.

6. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 12–6 Options for Harvesting (cont’d.) Private equity is a form of outside financing that can allow the original owners to cash out. Trying to finance liquidity and growth while retaining control is perhaps the most difficult task facing family firms.

7. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 12–7 Valuing a Firm Value is created when a firm’s return on invested capital is greater than the investors’ opportunity cost of funds. A firm will have greater value in the hands of new owners if the new owners can create more value than the current owners can. Often, buyers and sellers base the harvest value of a firm on a multiple of its earnings. Cash is generally preferred over stock and other forms of payment by those selling a firm.

8. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 12–8 Developing an Effective Harvest Plan Investors are always concerned about exit strategy. Entrepreneurs who plan to stay with a business after a sale can became disillusioned quickly and end up leaving prematurely. Entrepreneurs frequently do not appreciate the difficulty of selling or exiting a company. Having bought other companies does not prepare entrepreneurs for the sale of their own firm. Entrepreneurs have a real need for good advice, both from experienced professionals and from those who have personally been through a harvest. Going public is not the end, but only a transition in the life of a firm.

9. Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 12–9 Key Terms harvesting (exiting) leveraged buyout (LBO) bust-up LBO build-up LBO management buyout (MBO) employee stock ownership plan (ESOP) initial public offering (IPO) private equity opportunity cost of funds