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

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.

13–2© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Importance of the Harvest

• Harvesting (or Exiting) The process used by entrepreneurs and investors to

reap the value of a business when they leave it.

The process involves: Capturing value (cash value)

Reducing risk

Creating future options



Methods for Harvesting a Business13.1

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.


© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Financial Acquisitions

13–6

Types of Leveraged Buyouts (LBOs)

Bust-Up LBO

Management Buyout (MBO)

Build-Up LBO


Choosing a LBO Firm for Acquisition

13–7

Steady earnings over time

Assets useful as collateral

Attractive growth rate for

firm

Characteristics of a Potential LBO Firm

Effective manageme

nt team

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 exit method of last resort.

– Motivates employee-owners to perform.



Leveraged ESOP Buyout Process

13–9

EmployerFirm

SellingOwner

ESOPTrust

Lender

1. Employer firm guarantees payment of loan.

2. ESOP trust borrows money from lender.

6. ESOP trust makes payment on loan.

4. Stock is sent to ESOP trust for benefit of employees.

3. Cash from loan is used to buy owner’s stock.

5. Employer firm makes annual contribution for employee stock purchases.


Selling A Business in Difficult Times

13–10

Selling A Business

Clean up the books

Consider your sector and

market

Keep revenue strong

Distributing 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 of development potential and opportunities

Tax disadvantages of cash withdrawal

Requires patience to siphon off cash slowly


Harvesting by Going Public

• Initial Public Offering (IPO) Benefits of the sale of shares of stock to the public:

Signals to investors that a firm is a quality business and will likely perform well in the future.

Provides access to more investors when the firm needs to raise capital to grow the business.

Helps create ongoing interest in the company and its continued development.

Makes firm’s stock more attractive as incentive pay to key personnel.


Harvesting by Going Public

• Setting the Stage for an IPO

1. Maintain an accounting process that cleanly separates the business from the entrepreneur’s personal life

2. Select a strong board of directors that can and will offer valuable business advice

3. Manage the firm so as to produce a successful track record of performance



IPOs 2009–201213.2

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 and filed with SEC.

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 public offering, an offering price is decided upon.

8. Offering the stock to the public and seeing how it is received.


Private Equity Recapitalization

• Private Equity Recapitalization Private equity investors provide additional financing to

a business that allows an entrepreneur to cash out a portion of his or her investment, while possibly continuing to operate the business

• Factors in the Transfer of Family-Owned Firms Liquidity for exiting family members Continued financing for company growth Retaining control of the firm by

the younger family member



Private Placement—An Illustration13.3


Firm Valuation and Payment Methods

• The Harvest Value Opportunity cost of funds is the rate of return that

could be earned on another investment of similar risk

• Harvest Value/Market Comparable Valuations 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.

13–18

Harvesting: The Method of Payment

• Payment Alternatives Cash

Immediate and stable in value Tax liability consequences

Stock Purchaser: protection from liabilities Seller: immediate but uncontrollable in value Seller: potential problems with disposal of stock

Merger with Purchasing Firm Purchased firm is absorbed into purchasing firm



Developing an Effective Harvest Plan

• Anticipate the Harvest Manage for the long-term Avoid playing the harvest game Prepare by separating your “self” from the firm

• 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

13–20

Developing a Harvest Plan (cont’d)

• Understand What Motivates Your Exit 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”


What’s Next?

• Whatever you decide to do, do it with passion and let your life benefit others in the process.


Key Terms

harvesting (exiting)

business broker

leveraged buyout (LBO)

bust-up LBO

build-up LBO

management buyout (MBO)

employee stock ownership plan (ESOP)

seller financing

double taxation

initial public offering (IPO)

private equity recapitalization

opportunity cost of funds


Documents

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