1. Chapter 15
Succession Planning and Strategies for Harvesting and Ending the Venture
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Learning Objectives
To understand the planning that is necessary to allow for the effective succession of ownership or leadership in a business
To examine the options in providing for an exit strategy, such as the sale of the business to employees (ESOP) or to an external source

3. Learning Objectives
To illustrate differences in alternative types of bankruptcy under the Bankruptcy Act of 1978 (amended in 1984 and again in 2005)
To illustrate the rights of creditors and entrepreneurs in different cases of bankruptcy

4. Learning Objectives
To provide the entrepreneur with an understanding of the typical warning signs of bankruptcy
To illustrate how some entrepreneurs can turn bankruptcy into a successful business

5. Exit Strategy Exit strategies include: Initial public offering (IPO)
Private sale of stock
Succession by a family member or a nonfamily member
Merger with another company
Liquidation

6. Table 15.1 - Succession Planning Tips

7. Succession of Business
Transfer to family members
Role of owner - Full-time/part-time/retire
Family dynamics
Income for working family members and shareholders
Transition business environment
Treatment of loyal employees
Tax consequences

8. Succession of Business
Transfer to nonfamily members
Train a key employee and retain some equity
Retain control and hire a manager
Sell the business outright

9. Succession of Business
In an S corporation or an LLC:
Senior management of the company must be committed to any succession plan
Well-defined job descriptions and a clear designation of skills
Process needs to be an open one

10. Options for Selling the Business
Direct sale
Strategies to be considered:
Focus on a narrow, well-defined segment
Control costs and focus on higher margins and profits
Get all financial statements in order
Prepare a management documentation
Assess the condition of capital equipment
Get tax advice

11. Options for Selling the Business
Get nondisclosures from key employees
Try to maintain a good management team
Prepare and plan in advance
Type of payment the buyer will use
Business brokers
Business plan
Sale agreement or contract with the new owners

12. Options for Selling the Business
Employee stock option plan: A two-to three-year plan to sell the business to employees
Establishes a new legal entity - An employee stock ownership trust
Obligates the firm to repay the loan plus interest out of business cash flows
Results in significant stock values for employees

13. Options for Selling the Business
Advantages
Motivates employees to put in extra time
Provides a mechanism to pay back loyal employees
Allows transfer of business under a planned written agreement
Permits the company to reap the advantage of deducting contributions on ESOP

14. Options for Selling the Business
Disadvantages
Quite complex to establish
Raises issues such as:
Taxes, payout ratios, amount of equity to be transferred per year, and the amount actually invested by the employees

15. Options for Selling the Business
Management buyout
Direct sale of the venture for some predetermined price
To establish a price, the entrepreneur should:
Have an appraisal of all the assets
Determine the goodwill value established from past revenue

16. Options for Selling the Business
Sale of a venture
For cash
Financed through banks
Entrepreneur could also agree to carry the note
Sale of voting or nonvoting stock

17. Bankruptcy—An Overview
Common types of bankruptcies:
Chapter 7 or liquidation (70% in 2011)
Chapter 11 or reorganization (21% in 2011)
Chapter 13 or installment payments (9% in 2011)

18. Bankruptcy—An Overview
Bankruptcy lessons
Too much time and effort is spent on diversifying in markets where entrepreneurs lack knowledge
Bankruptcy protects entrepreneurs from creditors, not from competitors
Difficult to separate entrepreneurs from the business
Entrepreneurs should file for bankruptcy early
Bankruptcy should be shared with employees

19. Bankruptcy—An Overview
Bankruptcy Act of 1978 (with amendments added in 1984 and 2005) ensures:
Fair distribution of assets to creditors
Protection of debtors from unfair depletion of assets
Protection of debtors from unfair demands by creditors

20. Bankruptcy—An Overview
Bankruptcy Act of 1978 provides three alternative positions
Chapter 11 bankruptcy: Provides the opportunity to reorganize and make the venture more solvent
Chapter 13 bankruptcy: Voluntarily allows individuals with regular income the opportunity to make extended time payments
Chapter 7 bankruptcy: Requires the venture to liquidate, either voluntarily or involuntarily

21. Chapter 11—Reorganization
Courts try to give the venture “breathing room” to pay its debts
Plan for reorganization is prepared and approved by the US Bankruptcy Court
Decisions made reflect one or a combination of the following:
Extension - Postpone claims
Substitution - Exchange stock for debt

22. Chapter 11—Reorganization
Composition settlement - Debt is prorated to creditors as settlement
Surviving bankruptcy
Bankruptcy can be used as a bargaining chip to voluntarily restructure and reorganize the venture
File before failure of cash or revenue
Chapter 11 should be filed only if a chance of recovery exists
Be prepared for examination of transactions for fraud

23. Chapter 11—Reorganization
Surviving bankruptcy
Maintain good records
Understand how protection against creditors works
Transfer litigation to bankruptcy court
Prepare a realistic financial reorganization plan

24. Chapter 13—Extended Time Payment Plans
Individual creates a five-year repayment plan under court supervision
A court appointed trustee:
Receives money from debtor
Bears responsibility for making scheduled payments to all creditors
About two of every three Chapter 13 filers fail to meet their planned obligations
Result in a Chapter 7 filing

25. Chapter 7—Liquidation Extreme case of bankruptcy
Voluntary bankruptcy: Entrepreneur’s decision to file for bankruptcy
Courts will require a current income and expense statement
Involuntary bankruptcy: Petition of bankruptcy filed by creditors without consent of entrepreneur

26. Table 15.2 - Liquidation under Chapter 7 Involuntary Bankruptcy

27. Strategy During Reorganization
The entrepreneur can speed up the process by:
Taking the initiative in preparing a plan
Selling the plan to secured creditors
Communicating with groups of creditors
Not writing checks that cannot be covered

28. Strategy During Reorganization
Enhancing the bankruptcy process by:
Keeping creditors abreast of how the business is doing
Stressing the significance of creditors’ support during the process

29. Table 15.3 - Requirements for Keeping a Venture Afloat

30. Table 15.4 - Warning Signs of Bankruptcy

31. Starting Over Entrepreneurs start new ventures even after failing
Entrepreneurs have the need for:
Market research
More initial capitalization
Stronger business skills
Business failure does not have to be a stigma when seeking venture capital

32. The Reality of Failure
Important considerations for the entrepreneur in case of failure:
Consult with family
Seek outside assistance from professionals, friends, and business associates
Do not hang on to a venture that will continually drain resources

33. Business Turnarounds
Learn to recognize the warning signs of bankruptcy
Principles of a successful turnaround:
Aggressive hands-on management
Management must have a plan
Action