1. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. PowerPoint Presentation by Thomas M c Kaig, Ryerson University Managing Growing Firms and Exit Strategies 14

2. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-2 Looking Ahead After studying this chapter, you should be able to: 1. Discuss the evolving features of small firm management. 2. Identify the various kinds of plans and approaches to planning. 3. Describe the nature and kinds of small business organization. 4. Discuss the ways in which control is exercised. 5. Describe the problem of time pressure and suggest solutions. 6. Explain the various types of outside management assistance. 7. Explain the importance of having an exit strategy. 8. Describe harvesting options and effective harvesting strategies. 9. Discuss issues in preparing for life after the harvest.

3. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-3 Distinctive Features of Small Firm Management Professional Manager  A manager who uses systematic, analytical methods of management.  Organizations, even small ones, do not function on their own – they need to be managed. A small business will not run well without proper direction and coordination of its activities.  The management process enables production workers, salespeople, and others to collaborate effectively in servicing customers.

4. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-4 Prevalent Management Weaknesses in Small Firms Although large firms can be subjected to all of the following management pitfalls, these seem more prevalent within small firms. Many think of small firms as being unprofitable and struggling from day to day for survival frequently due to poor management

5. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-5 Constraints on Management in Small Firms Constraints include:  Small bank accounts  Limited staff such as office assistants  Lack of funds for promotional sales brochures, research, etc.

6. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-6 Firm Growth and Management

7. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-7 Stage 3 Intermediate Supervision Stage 4 Formal Organization Stage 2 Player-Coach Stage 1 One-Person Operation Organizational Stages of Small Business Growth Figure 14-1

8. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-8 Managing Versus Doing STAGE 1STAGE 2STAGE 3STAGE 4 One-Person Operation Player-Coach Intermediate Supervision Formal Organization Time spent managing Time spent doing Figure 14-2

9. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-9 Characteristics of Founders and Professional Managers Professional Manager  A manager who uses systematic, analytical methods of management. Founders as Managers  Are not always good organizational members.  Have difficulty fitting into conventional roles.  Have a different orientation from that of professional managers.

10. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-10 Founders versus Professional Managers Innovative Intuitive Action-oriented Long term focus Bold Administrative Analytical Planning-oriented Short term focus Cautious Founders Professional Managers Table 14-1

11. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-11 The Nature of Managerial Work ControllingControlling PlanningPlanningLeadingLeading OrganizingOrganizing Managerial Work

12. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-12 Planning Activities The Benefits of Formal Planning  Improved productivity  Better focus on goal attainment  Increased credibility with stakeholders Planning Time  “Tyranny of the urgent”  Planning requires discipline  Planning should not be postponed

13. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-13 Planning Activities: Types of Plans

14. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-14 Goal Setting Goal Setting is a key aspect of planning process Goals can be established using the S.M.A.R.T. criterion: 1.S pecific: clearly state expectations 2.M easurable: select goals that have concrete indicators 3.A cceptable: the goals must be acceptable to those responsible for their attainment 4.R ealistic: the goals should be a stretch to achieve, but attainable 5.T ime-framed: a deadline should be indicated

15. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-15 Employee Participation and Effective Communication Employee Participation  Employees are an excellent planning resource Stimulating Two-Way Communication  Conduct periodic performance review sessions to get employee feedback  Use bulletin boards to keep employees informed about developments affecting the  Make suggestion boxes available to solicit employees’ ideas  Hold staff meetings to discuss current issues and problems

16. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-16 Establishing a Chain of Command - Creating Organizational Structure Structure of the Firm  Structure evolves as the firm evolves  Growth creates the need for structural change Chain of Command  The official, vertical channel of communication in an organization  Unity of Command A situation in which each employee’s instructions come directly from only one immediate supervisor. Entrepreneurs’ personal relationships with employees creates problems in complying with the chain and the unity of command in their firms.

17. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-17 Line and Staff Organizations Line organization  A simple organization in which each person reports to one supervisor. Line and staff organization  An organizational structure that includes staff specialists who assist management.  Line activities Activities contributing directly to the primary objectives of the firm.  Staff activities Activities that support line activities

18. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-18 Line Organization President Sales Manager Production Manager Financial/Office Manager SalespeoplePlant EmployeesOffice Employees Figure 14-3

19. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-19 Line-and-Staff Organization President Human Resources Manager Sales Manager Production Manager Financial/Office Manager SalespeoplePlant EmployeesOffice Employees Assistant to the President Figure 14-4

20. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-20 Delegating Authority  Granting to a subordinate the right to act or make decisions  Benefits of delegation Frees up superior to perform more important tasks Develops subordinate’s skills Improves two-way communications

21. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-21 Deciding how many to supervise: Determining the Optimum Span of Control Greater Number of Subordinates Simple work Very experienced workers Superior with much ability Fewer Subordinates Complex work Inexperienced workers Superior with limited ability More Subordinates Moderately difficult work Moderately experienced workers Superior with moderate ability

22. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-22 Measuring Performance Establishing Standards in the Stages of the Control Process Establishing standards Planning and Goal Setting Taking Corrective Action

23. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-23 Stages of the Control Process Figure 14-5

24. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-24 Time Management The Problem of Time Pressure  Many owner-managers work 60-80 hours per week.  Effect of overwork is inefficient work performance. Time Savers for Busy Managers  Effective use of time (time management) Analyze how time is normally spent Eliminate practices that waste time Carefully plan available time Use a daily planner to prioritize activities Don’t avoid unpleasant or difficult tasks Limit conference and meeting times

25. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-25 Hours per Week Worked by New Business Owners Figure 14-6 Data developed and provided by the NFIB Foundation and sponsored by American Express Travel-Related Services Company

26. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-26 Outside Management Assistance Counselling Assistance to Small Enterprise (CASE) Canadian Youth Business Foundation (CYBF) Industry Canada Industrial Research Assistance Program (IRAP) Management Consultants Entrepreneurial Networks Other Business and Professional Services Business Incubators

27. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-27 Services Provided by Business Incubators to New Firms Figure 14-7

28. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-28 The Importance of the Harvest 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

29. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-29 Financial Acquisition: LBO or MBO Using Private Equity Selling the Firm Going Public Exit Options Releasing Cash Flows Employee Acquisition Strategic Acquisition Methods of Harvesting Liquidation

30. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-30 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 …continued

31. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-31 Exiting: Selling the Firm 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. + = $$$$ $$$$ $$$$ + …continued

32. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-32 Exiting: Selling the Firm 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. 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 …continued

33. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-33 Exiting: Selling the Firm Management Buyout (MBO)  A leveraged buyout that includes the firm’s top management to significant shareholders in the acquired firm.

34. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-34 Employee Ownership Plan Employee Ownership  A method by which a firm is sold either in part or in total to its employees.  Frequently is the exit method of last resort.  Motivates the employee- owners to perform.

35. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-35 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

36. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-36 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.

37. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-37 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

38. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-38 Illustration of Private Equity Placement Figure 14-8

39. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-39 Liquidation Founder manager would not typically choose to liquidate as the harvest value will be less. Some businesses such as one person consulting firms cannot operate without the owner and therefore have limited value to potential buyers. Other firms may not be attractive due to the deterioration of their customer base, leveraged financial positions, or aging and unproductive equipment.

40. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-40 Firm Valuation and the Exit The Actual 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.

41. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-41 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”

42. Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. 14-42 Life After the Harvest Two key questions must be asked by the exiting entrepreneur. 1.Will I experience serious regrets over the decision to harvest my investment in a company? 2.What will become my passion after I have become more than contended with the “easy life” where I have the option to play golf every day if I choose or to travel to my heart’s content?