15
Managing
Growing Firms and
Exit Strategies
PowerPoint Presentation by
Ian Anderson, Algonquin College
Chapter 15
Copyright © 2010 by Nelson Education Ltd.
Looking Ahead
After studying this chapter, you should be able to:
1. Describe managing for growth.
2. Explain the various types of outside management assistance.
3. Explain the importance of having an exit strategy.
4. Describe succession planning.
5. Discuss serial entrepreneurs.
6. Describe harvesting options and effective harvesting
strategies.
7. Discuss issues in preparing for life after the harvest.
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Copyright © 2010 by Nelson Education Ltd.
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Managing for Growth
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Many SMEs fail to achieve commercial
success
Queen's School of Business study:
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lack organizational and leadership skills
fail to plan for and manage growth
fail to implement plans
Copyright © 2010 by Nelson Education Ltd.
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Achieving Sustainability
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Annual planning process
Anticipate growth challenges
Change course and direction if required
Groom leadership
Step back to get a broader perspective
Professional advice between stages
Best practices
Promote, communicate, and manage change
Promote discussion
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Outside Management Assistance
Business
Incubators
Counselling
Assistance to
Small Enterprise
(CASE)
Other Business
and Professional
Services
Outside
Management
Assistance
Entrepreneurial
Networks
Management
Consultants
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Canadian Youth
Business
Foundation (CYBF)
Industry Canada
Industrial Research
Assistance Program
(IRAP)
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Low-Cost Space
Services Provided
by Business
Incubators
to New Firms
Credibility
Management Counsel
Links to Accounting, Legal,
Other Professional Services
Business Incubator
Access to Financial Resources
Entrepreneurial Education
Photocopying, Receptionist,
Photocopying,
Receptionist,
Word-Processing
Servicesand
Computer Services
Practical Business Expertise
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Copyright © 2010 by Nelson Education Ltd.
Exhibit 15-1
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The Importance of the Harvest
• 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
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Succession Planning
• Pass to next generation or
• Hire managers to reduce personal involvement
• A written succession plan will address:
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Identify future managers and leaders
How to assess potential candidates
Monitoring process
Training and declaration of a successor
Timeline
Operational and tax issues
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Serial Entrepreneurs
• Innovative and creative people who are
more interested in starting new businesses
than running them
• Characteristics:
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Determination
Commitment
Perseverance
Vision
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Methods of Harvesting
Exit Options
Selling the
Firm
Releasing
Cash Flows
Going
Public
Using
Private Equity
Liquidation
Strategic
Acquisition
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Financial
Acquisition:
LBO or MBO
Employee
Acquisition
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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
…continued
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Exiting: Selling the Firm
• 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.
…continued
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Exiting: Selling the Firm
• Financial Acquisition
– A purchase in which the value of the business is based on the standalone cash generating potential of the firm being acquired.
• 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
…continued
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Exiting: Selling the Firm
• Management Buyout (MBO)
– A leveraged buyout that includes the firm’s top
management to significant shareholders in the
acquired firm.
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Employee Ownership Plan
• Employee Ownership
–A method by which a firm is sold either in part or
in total to its employees.
–Frequently is the exit method of last resort.
–Motivates the employeeowners to perform.
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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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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.
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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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Illustration of Private Equity
Placement
Exhibit 15-2
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Liquidation
• Founder manager would not typically choose to
liquidate as the harvest value will be less.
• Some businesses such as one person consulting
firms cannot operate without the owner and
therefore have limited value to potential buyers.
• Other firms may not be attractive due to the
deterioration of their customer base, leveraged
financial positions, or aging and unproductive
equipment.
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Firm Valuation and the Exit
• The Actual 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.
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Developing an Effective Exit Strategy
• Understand What You Want
–Motives for exiting
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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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Life After the Harvest
Two key questions must be asked by
the exiting entrepreneur.
1.Will I experience serious regrets
over the decision to harvest my
investment in a company?
2.What will become my passion
after I have become more than
contended with the “easy life”
where I have the option to play
golf every day if I choose or to
travel to my heart’s content?
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