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Entrepreneurship 14 Exit Strategies for Entrepreneurs: When—and How—To Harvest the Rewards “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. 14-2 Exit Strategies • Sell or transfer ownership to insiders • Sell or transfer ownership to outsiders • Take the company public through an IPO 14-3 Sale or Transfer to Insiders • Succession • Leveraged buyout • Employee stock ownership plan 14-4 All In the Family • Share power • Form a limited partnership • Set up a trust 14-5 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. 14-6 Employee Stock Ownership • Ordinary ESOP • Leveraged plan • Transfer ownership plan 14-7 Selling to Outsiders • • • • • Sell at the right stage 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 14-8 Factors in Terms of the Sale • Valuation of the company • Negotiation process 14-9 What’s It Worth? • Balance sheet methods • Earnings methods • Market method 14-10 Balance Sheet Methods • Balance sheet method Net worth = Assets – Liabilities • Adjusted balance sheet method Estimates market value of assets 14-11 Earnings Methods • Excess earnings method • Capitalized earnings method • Discounted future earnings method 14-12 Advantages of IPOs • Cash • Aura of respectability • Market provides continuing valuation of worth • Ability to use stock options for employees • Ability to use stock to acquire other companies 14-13 Disadvantages of IPOs • A tremendously expensive process • Lock-up agreements • Subject to careful scrutiny 14-14 Bargaining Tactics • Beginning with an extreme initial offer • Using the “big lie” technique • Convincing the other side you have an “out” 14-15 Unethical Negotiation Tactics • False promises • Misrepresentation • Inappropriate information gathering 14-16 Reaching Integrative Agreements • • • • • Logrolling Nonspecific compensation Broadening the pie Cost-cutting Bridging 14-17 Changes Over Time • • • • Physical appearance and energy Cognition and memory Intelligence Creativity 14-18 Eras of Our Lives • • • • Age 30 transition Midlife transition Late-adult transition Consider your stage in life as you consider your exit strategy 14-19