1. HARVESTING THE BUSINESS VENTURE INVESTMENT
ENTREPRENEURIAL FINANCE
Chapter 14
HARVESTING THE BUSINESS VENTURE INVESTMENT

2. Chapter 14 : Learning Objectives
Plan an exit strategy
Understand the meaning of systematic liquidation
Describe outright sales of the venture to various potential buyers
Discuss the terms “leveraged buyouts” and “management buyouts”
Describe the process of going public
Identify what investment banking involves

3. Planning an Exit Strategy
Evidence suggest that over one-half of entrepreneurs either develop formal exit strategies or at least have thought about harvest strategies at the outset of the venture
Having a harvest plan in place makes it easier to take advantage of windows of opportunity to exit

4. Harvesting Harvesting: Methods of harvesting
process of exiting the privately held business venture to unlock the owners’ investment value
Methods of harvesting
Systematic distribution of assets directly to the owners
Outright sale of the venture to others
Two-step public equity registration/sale

5. Methods of Exiting a Privately Held Venture 新创私有制企业退出方式
Systematic Liquidation:
venture liquidated by distributing the venture’s cash flows to the owners
However, other than when the venture is operating in a declining industry, it is difficult to think of cases where the advantages of liquidation outweigh the disadvantages

6. Systematic Liquidation 清算
Advantages:清算的优势
Entrepreneur maintains control throughout the harvest period
Harvesting of the venture can be spread out over several years
Time, effort, and costs of finding a buyer for the venture can be avoided

7. Systematic Liquidation
Disadvantages:清算的不足之处
Liquidation proceeds are treated as ordinary income (rather than capital gains)
Difficulty for the entrepreneur to maintain focus on a dying venture
The value of the venture may decline more rapidly when competitors respond to the venture’s lack of investment

8. Methods of Exiting a Privately Held Venture新创私有制企业退出方式
Outright Sale – venture sold to others including:直接出售 - 出售给其他企业包括：
family members
managers
employees
outside (external) buyers

9. Outright Sale to Management 销售给管理层
Leveraged Buyout (LBO):杠杆收购
purchase price of a firm is financed largely with debt financial capital 收购公司的资金主要来源于债务资本
Management Buyout (MBO):管理层收购
special type of LBO where the firm’s top management continues to run the firm and has substantial equity position in the reorganized firm由公司高层管理者进行的收购和继续管理公司并持有公司大部分股权。

10. Outright Sale to Employees 销售给公司雇员
Process can use a leveraged Employee Stock Ownership Plan (ESOP)
The ESOP uses proceeds from the sale of debt to purchase venture equity
Employees gain an ownership stake in the private venture
ESOP strategy was made possible by an act of Congress

11. Sale to Outside Buyers 销售给外部买家
Control Premium:获得控制权
amount typically applied to the base valuation to reflect the value of controlling the venture rather than just being a minority shareholder
Illiquidity Discount:非流动性折扣
amount typically applied to the base valuation to compensate for the difficulties in reselling private equity

12. Going Public: 公开上市 Initial Public Offering (IPO)首次公开募股
a venture’s first offering of SEC-registered securities to the public
Primary Offering:
sale of new securities
Secondary Offering:
sale of used securities

13. Going Public: 公开上市 Role of Investment Banking 投资银行的作用
an intermediary assisting in the creation, sale, and distribution of financial assets协助 销售和分配金融资产 的中介金融机构
Due to their extensive network of possible buyers for the securities (through affiliated brokerage and client services), investment bankers are considered to be the experts in predicting the value of newly issued securities

14. Going Public: Role of Investment Banking
Underwriting Spread:承销收益
difference between what the investment bank gets from selling securities to public investors and what they pay to the issuing firm
Red Herring Disclaimer:
obligatory disclaimer disavowing any intent to act as an offer to sell, or solicit an offer to buy, securities
Due Diligence:
process of ascertaining, to the extent possible, an issuing firm’s financial condition and investment intent

15. Going Public: Role of Investment Banking
Firm Commitment:
type of agreement with investment bank involving the investment bank’s underwritten purchase and resale of securities
Best Efforts:
type of agreement with investment bank employing only marketing and distribution efforts
IPO Underpricing:
syndicate’s offering price when it is less than the market price immediately following the offering

16. NYSE Listing Requirements 上市要求
At least 2,000 holders of at least 100 shares
At least 1,100,000 share outstanding, held by public
At least $60 million in market value
At least $2.5 million before tax profits in last 2 years & $2 million in each of previous 2 years

17. Aftermarket Security Trading
Market Order:
order to be executed as soon as possible at the prevailing market price
Limit Order:
order that can be executed only at a specified price or better
Stop Order:
order that converts to a market order once a certain price is achieved

18. Contemplating & Preparing for the IPO Process
For the officers of a publicly traded corporation, there is minimal personal privacy. They are public figures and their lives are subject to scrutiny in a way that most entrepreneurs have never imagined or desired.
Entrepreneurs in a public company will quickly find out what they can and cannot say about the company

19. Preparing for The IPO首次公开募股
Typical Steps to Follow
Organization meeting and due diligence
Drafting and attendant activities
Initial 30-day SEC review
Pre-marketing
Marketing
Pricing and closing