Download Small Business Management 14e.

Part 3
Developing the New Venture Business Plan
CHAPTER 12
The Harvest Plan
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Longenecker • Moore • Petty • Palich
© 2008 Cengage Learning.
All rights reserved.
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.
12–2
The Importance of the Exit
• 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.
12–3
12-1
Methods for Harvesting a Business
© 2008 Cengage Learning. All rights reserved.
12–4
Selling the Firm: Buyers’ Reasons for
Purchasing a Firm
• 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.
12–5
Financial Acquisitions
Bust-Up
LBO
Build-Up
LBO
Types of
Leveraged
Buyouts (LBOs)
Management
LBO
© 2008 Cengage Learning. All rights reserved.
12–6
Selling the Firm: Buyers’ Reasons for
Purchasing a Firm (cont’d)
• 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.
12–7
Leveraged ESOP Buyout Process
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.
© 2008 Cengage Learning. All rights reserved.
Lender
2. ESOP trust
borrows money
from lender.
6. ESOP trust
makes payment
on loan.
ESOP
Trust
Selling
Owner
4. Stock is sent to
ESOP trust for
benefit of employees.
12–8
Releasing the Firm’s Cash Flows
• 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
 Tax
of development potential and opportunities
disadvantages of cash withdrawal
 Requires
patience to siphon off cash slowly
© 2008 Cengage Learning. All rights reserved.
12–9
Harvesting: Going Public
• 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.
© 2008 Cengage Learning. All rights reserved.
12–10
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. Offering the stock to the public and seeing how it is received.
© 2008 Cengage Learning. All rights reserved.
12–11
Harvesting: 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
© 2008 Cengage Learning. All rights reserved.
12–12
12-2
Private Equity Financing
© 2008 Cengage Learning. All rights reserved.
12–13
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.
© 2008 Cengage Learning. All rights reserved.
12–14
Harvesting: 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
© 2008 Cengage Learning. All rights reserved.
12–15
Developing an Effective Harvest Plan
• 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
© 2008 Cengage Learning. All rights reserved.
12–16
Developing an Effective Harvest Plan
• 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”
© 2008 Cengage Learning. All rights reserved.
12–17
What’s Next
• Whatever you decide to do, do it with passion
and let your life bless others in the process.
© 2008 Cengage Learning. All rights reserved.
12–18
Key TERMS
•
•
•
•
•
•
•
•
•
•
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.
12–19