1. The Harvest Plan
Part 3 Developing the New Venture Business Plan

2. Looking Ahead After studying this chapter, you should be able to:
Explain the importance of having a harvest, or exit, plan.
Describe the options available for harvesting.
Explain the issues in valuing a firm that is being harvested and deciding on the method of payment.
Provide advice on developing an effective harvest plan.
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3. The Importance of the Exit
Exiting (or Harvesting)
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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4. Methods for Exiting a Business
Exhibit 12.1
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5. 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
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6. Exiting: Selling the Firm (cont’d.)
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
Financial Acquisition
A purchase in which the value of the business is based on the stand-alone cash generating potential of the firm being acquired
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7. Exiting: Selling the Firm (cont’d.)
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
Management buyout (MBO)—the firm’s top managers become significant shareholders in the acquired firm through debt financing
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8. Exiting: Selling the Firm (cont’d.)
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
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9. Leveraged ESOP Buyout Employer Lender Firm ESOP Trust Selling Owner
1. Employer firm
guarantees payment
of loan.
Employer
Firm
Lender
5. Employer firm
makes annual
contribution for
employee stock
purchases.
2. ESOP trust
borrows money
from lender.
6. ESOP trust
makes payment
on loan.
ESOP
Trust
3. Cash from loan
is used to buy
owner’s stock.
4. Stock is sent to
ESOP trust for
benefit of employees.
Selling
Owner
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10. Exiting: 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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11. Exiting: 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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12. Exiting: Going Public—The IPO Process
The firm’s owners decide to go public.
If not already completed, an audit of the last three years’ financial statements is conducted.
An investment banker is selected to guide the IPO process.
An S-1 registration is drafted.
Management responds to suggested comments by the SEC, and issues a Red Herring/Prospectus.
Firm goes “on the road” explaining its attributes to investors.
On the day before the public offering, an offering price is decided upon.
The stock is offered to the public to see how it is received.
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13. Exiting: 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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14. Private Equity Financing
Exhibit 12.2
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15. 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
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16. Exiting: 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
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17. Developing an Effective Exit Strategy
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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18. Developing an Effective Exit Strategy
Understand What You Want.
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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19. What’s Next
Whatever you decide to do, do it with passion and let your life bless others in the process.
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20. Key Terms harvesting (exiting) leveraged buyout (LBO) bust-up LBO
build-up LBO
management buyout (MBO)
employee stock ownership plan (ESOP)
initial public offering (IPO)
private equity
opportunity cost of funds
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.