1. CHAPTER 12 The Harvest Plan
Part 3
Developing the New Venture Business Plan
CHAPTER 12 The Harvest Plan
© 2008 Cengage Learning. All rights reserved.

2. Looking AHEAD
After you have read 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.
© 2008 Cengage Learning. All rights reserved.

3. 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.

4. Methods for Harvesting a Business
12-1
Methods for Harvesting a Business
© 2008 Cengage Learning. All rights reserved.

5. 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.

6. Financial Acquisitions
Bust-Up LBO
Build-Up LBO
Types of Leveraged Buyouts (LBOs)
Management LBO
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7. 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.

8. Leveraged ESOP Buyout Process
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
© 2008 Cengage Learning. All rights reserved.

9. 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 of development potential and opportunities
Tax disadvantages of cash withdrawal
Requires patience to siphon off cash slowly
© 2008 Cengage Learning. All rights reserved.

10. Harvesting: 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.
© 2008 Cengage Learning. All rights reserved.

11. 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.
Offering the stock to the public and seeing how it is received.
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12. 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.

13. Private Equity Financing
12-2
Private Equity Financing
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14. 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.

15. 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.

16. 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.

17. 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”
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18. 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.

19. 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.