Longenecker • Moore • Petty • Palich
© 2008 Cengage Learning.
All rights reserved.
Part 3 Developing the New Venture Business Plan
CHAPTER 12
PowerPoint Presentation by Charlie Cook
The University of West Alabama

Looking AHEAD
After you have read 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.
© 2008 Cengage Learning. All rights reserved.
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• Harvesting (or Exiting)
 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
© 2008 Cengage Learning. All rights reserved.
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12-1 Methods for Harvesting a Business
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• 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.
© 2008 Cengage Learning. All rights reserved.
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Bust-Up
LBO
Types of
Leveraged
Buyouts (LBOs)
Management
LBO
Build-Up
LBO
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• 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 the exit method of last resort.
– Motivates the employee-owners to perform.
© 2008 Cengage Learning. All rights reserved.
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5. Employer firm makes annual contribution for employee stock purchases.
Employer
Firm
1. Employer firm guarantees payment of loan.
Lender
2. ESOP trust borrows money from lender.
ESOP
Trust
6. ESOP trust makes payment on loan.
3. Cash from loan is used to buy owner’s stock.
Selling
Owner
4. Stock is sent to
ESOP trust for benefit of employees.
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• Harvesting 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
© 2008 Cengage Learning. All rights reserved.
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• Initial Public Offering (IPO)
 Benefits of the sale of shares of stock to the public:
1.
Signals to investors that a firm is a quality business and will likely perform well in the future.
2.
Provides access to more investors when the firm needs to raise capital to grow the business.
3.
Helps create ongoing interest in the company and its continued development.
4.
Makes firm’s stock more attractive as incentive pay to key personnel.
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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. Offering the stock to the public and seeing how it is received.
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• 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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12-2 Private Equity Financing
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• 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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• 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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• 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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• Understand What Motivates You
 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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• Whatever you decide to do, do it with passion and let your life bless others in the process.
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Key
• harvesting (exiting)
• leveraged buyout (LBO)
• bust-up LBO
• build-up LBO
• management buyout (MBO)
• employee stock ownership plan (ESOP)
• leveraged ESOP
• initial public offering (IPO)
• private equity
• opportunity cost of funds
© 2008 Cengage Learning. All rights reserved.
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