The Harvest Plan
Part 3 Developing the New
Venture Business Plan
PowerPoint Presentation by Charlie Cook
The University of West Alabama
Copyright © 2006 Thomson Business & Professional Publishing.
All rights reserved.
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.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
12–2
The Importance of the Exit
• Exiting (or Harvesting)
–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
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
12–3
Methods for Exiting a Business
Exhibit 12.1
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12–4
Exiting: Selling the Firm
• Buyers’ Reasons for Purchasing a Firm:
–Strategic acquisition
• Synergies to be gained in combination with other assets
–Financial acquisition
• Profitability of the firm as a stand-alone business
–Employee acquisition
• Preservation of employment for
current employees
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
12–5
Exiting: Selling the Firm (cont’d.)
• Strategic Acquisition
–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
• Financial Acquisition
–A purchase in which the value of the business is
based on the stand-alone cash generating potential of
the firm being acquired
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
12–6
Exiting: Selling the Firm (cont’d.)
• Leveraged Buyout (LBO)
–A purchase heavily financed with debt, when the
potential cash flow of the target company is expected
to be sufficient to meet debt repayments
• Bust-up LBO—purchasing with the intention of selling off
assets
• Build-up LBO—purchasing similar firms to make one larger
company
• Management buyout (MBO)—the firm’s top managers become
significant shareholders in the acquired firm through debt
financing
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12–7
Exiting: Selling the Firm (cont’d.)
• 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 the exit method of last resort
–Motivates the employeeowners to perform
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12–8
Leveraged ESOP Buyout
1. Employer firm
guarantees payment
of loan.
Employer
Firm
5. Employer firm
makes annual
contribution for
employee stock
purchases.
3. Cash from loan
is used to buy
owner’s stock.
Lender
2. ESOP trust
borrows money
from lender.
6. ESOP trust
makes payment
on loan.
ESOP
Trust
Selling
Owner
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4. Stock is sent to
ESOP trust for
benefit of employees.
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Exiting: Releasing the Firm’s Cash Flows
• Exiting 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
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12–10
Exiting: Going Public
• Initial Public Offering (IPO)
– The first sale of shares of a company’s stock to the
public in order to
• raise capital to repay outstanding debt
• strengthen the balance sheet to support growth
• create a source of capital that can be selectively accessed to
fund continuing growth
• create a liquid currency to fund future acquisitions
• create a liquid market for the company’s stock
• broaden the shareholder base
• create ongoing interest in the company and its continued
development
Source: Lisa D. Stein, vice-president, Salomon Smith Barney.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
12–11
Exiting: 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.
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 the public offering, an offering price is decided
upon.
8. The stock is offered to the public to see how it is received.
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12–12
Exiting: Using Private Equity
• Private Equity (Capital)
–Money provided by venture capitalists or private
investors
• Factors in the Transfer of Family-Owned Firms
–Liquidity for exiting family members
–Continued financing for company growth
–Maintenance of family control of the firm
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12–13
Private Equity Financing
Exhibit 12.2
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12–14
Firm Valuation and the Harvest
• The Harvest Value
–Opportunity cost of funds
• The rate of return that could be earned on another investment
of similar risk
• Harvest Value/Market Comparable Valuation
–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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12–15
Exiting: The Method of Payment
• Payment Alternatives
–Cash
• Immediate and stable in value
• Tax liability consequences
–Stock
• Immediate but uncontrollable in value
• Potential problems with disposal of stock
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12–16
Developing an Effective Exit Strategy
• Manage for the Harvest.
–Manage for the long-term.
–Avoid playing the harvest game.
• 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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12–17
Developing an Effective Exit Strategy
• Understand What You Want.
–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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12–18
What’s Next
• Whatever you decide to do, do it with passion
and let your life bless others in the process.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
12–19
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
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
12–20