Business acquisitions and exit strategy
- 1. AdepitanFasoro Universityof Houston,VictoriaTexas EDEN 6354 Final Exam. GrowingSuccessful BusinessVenture Guadalupe TechnologiesInc: 1. An Acquisitionisabusinessexpansionprocesswhereone firmsbuysanotherfirmwiththe intentof more effectivelyusingacore competence bymakingthe acquiredfirmasubsidiary withinitsportfolioof business. A subsetof anacquisitionisknownastakeoverora buyout.A takeoverisanunsolicitedacquisitionof one firmbyanother.Inacquisitiontwo companiesare combine togethertoforma newcompanyaltogether(Synergy).Itisthe mostcommon exit strategythat entrepreneursuse tocash-outof theirbusinesses. The two basictypesof acquisitionsare relatedandunrelated.A relatedacquisitionsindicates that there isa fitbetweenthe firms.Fitscouldinclude similarmanagementrequirements,the same market,compatible operations,andcomplementarytechnologies.Unrelatedacquisitions have no obviousfitbetweenthe firms.The primarydriverof unrelatedacquisitionsisthe need to findnewindustriesorbusinesssegmentswithmore potential.Overall,relatedacquisitions have a higherprobabilityof successthanunrelated acquisitions. A transactionwhere twofirmsagree tointegrate theiroperationsonarelativelyco-equal basis because theyhave resourcesandcapabilitiesthattheircomingtogethermaycreate a stronger competitiveadvantage isknownasmerger. a. The benefitsandpotentialproblemsof acquisitions: Benefitsof Acquisitions: Increasedmarket power: Acquisitionstrategiesmayincrease marketpowerbyproviding marketdevelopment,productdevelopment,anddiversificationopportunities.All three are revenue enhancingstrategies. Overcome entry barriers: Acquiringanotherfrimalreadyinothermarketslowersthe barriersto marketentry.Lowerentrybarriersmayfacilitatesmarketdevelopmentanddiversification revenue increasingstrategies.Inaddition,reducedentrybarrierswill lowerthe expenseof enteringnewmarkets.Consequently,lowerentrybarrierswill increase revenueandreduces expenses. Lower cost of new product developmentandincreasedspeedto market (economiesof scale): Lowerproduct developmentcostsreducesexpensesandfacilitatesproductdevelopmentand diversificationstrategiesforincreasedrevenue.Increasedspeedtomarketalsoaidsrevenue enhancingandcost reductionstrategies.
- 2. Lower risk compared to developingnewproducts:-A firmcan run itsownresearchand development(R&D) programor utilize the existingproductsof anotherfirmtoengage ina productor diversificationstrategy.Costsavingsandnew productavailabilitysave costsand enhance revenue. Increaseddiversification-Obviouslyanyrevenueenhance resultingfromadiversification strategywouldbe facilitatedbyacquisitionsactivities.Itiseasierandcheapertouse another firm’sproductsandmarketsthan create and developyourown. Reshapingthe firm’scompetitive scope:- oftenthe existingcompetitive positionof afirmneeds to be overhauled.Thisisanothercase where itmaybe cheaperandeasierto use the successof anotherfirmthan yourownfirm. Learning and developingnewcapabilities: ProblemsAssociatedwith Acquisitions:- Integrationdifficulties:Puttingdissimilarcultures,processes,policies,employees,managers, etc.Oftenmake Acquisitionstrategiesdifficulttoimplement.The mostdifficultintegrationis corporate culture.Completelycompatible corporate culturesare rare tofind.Twostrong but dissimilarculturesmaybe virtuallyimpossible tomeldtogether. Inadequate evaluationof target firm:- “Due diligence”iscritical forsuccessfulacquisitions.Itis importantto findany“skeletonsinthe closet”sotospeak,suchas pendinglaw suits,restrictive debtcovenants,unresolvedcustomerproblems,financialconcernsetc.Mostfirmshave enough problemsof theirown withouttakingonahost of problemsfromanotherfirm. Large or extraordinary debt:Much of the financingforacquisitionactivityisfinanced bydebt. Nothingis“toogood to passup” if it meansputtingthe firm ina financial bindtoservice large amountsof newdebt. Inabilityto achieve a Synergy:- Synergy isachievedwhenassetsare worthmore working togetherthanseparately.The integrationof twofirmsmayprove difficulttoproduce anyreal synergy. Too much diversification:- Diversification canenhance the competitive positionof manyfirms, but intoday’sbusinessenvironment,there needstobe some relationtothe core businesses involvedinaacquisition.Historyhasproventhatunrelateddiversificationhasa poorchance of success. Become too large:-Increasingsize producesavarietyof problemssuchasstructure change, culture pressure,financial concerns,andlackof sufficient managementattention,increased expectations,andthe needfornew assets.Many firmsare tryingto findwaysto be big,but act small.Unfortunately,there maybe apointwhena firmisjust toolarge to manage. b. The acquisitionprocess: i. Evaluate whetheran acquisitionstrategy is good for the company: Firmbust evaluate the pros andcons of an acquisitionbasedontheirsituation.Anacquisitionstrategyisactually not foreveryone,butitshouldn’tbe overlooked.Obviously,anyfirmthathas justopened
- 3. the door mustdevelopitscore businessbefore lookingforlookingtoacquire,butthe more mature firmmay findthe acquisitionstrategyveryappealing. ii. Positionyour firm to acquire another firm: The goal of a firmwantingto engage in Acquisitionactivityistopositionitself aswhatpeopleinthe acquisitionindustrycall a “platform”company.A platformcompanyisone that is well-positionedforacquisitionsand has such characteristicsas managementthathassolidunderstandingof the market,systems and proceduresthatare scalable (canbe usedin a largerfirmwithoutmuchchange),a well- developedandsolidcore business,etc.The bottomline isafirmneedstobe well managed and have a solidcore businessbeforeconsideringanacquisitionstrategy. iii. Finda company to purchase: Many firmsfindfirmstoacquire ontheirown,butmore and more are usingthe servicesof businessbrokers.FirmssuchasMerfeld&Schine,inc.provide a varietyof servicestofacilitatesacquisitionsfromboththe buyer’sandaseller’s perspective.A firmcalledBusinessBrokersmaintainadata base of businesssale bystate and businesstypes. iv. Value the deal:- A critical phase of the processisto put a value onthe firmto be acquired . The value of a business tobe acquireddependsonavarietyof factors,such as: Nature and historyof the business Outlookforthe economy Bookvalue Future earningcapacity Evaluate paststock sales Market price of comparable firms Assessmentof goodwillandotherintangibles, suchasintellectual property. Some valuationtechniques thatare commonlyused, includes: Earningsor cash flow value is10x EBITDA For smallerfirms,The multiple is5to 7 timesEBITDA Under certaincircumstancesthe multiple couldbe low as4 Private heldfirmsmaysell fora30 to 35 percentdiscount. Hightech firmsmaysell for6 timesrevenue-notcashflow. Balance sheetdataor otherdata to determine value andcurrentsituationsof the firm. Capitalize earningsusinganearningmultiplier.Earningscanbe statedina varietyof wayssuch as netincome,operatingincome,orearningsbefore interest,taxes, depreciationsandamortization(EBITDA). Presentvalue of future earningsmethod. v. Structure the deal:The processstarts withacquiringfirmprovidinga“letterof intent” statingthe buyer’sinitial commitmenttopurchase.The acquiringfirmconductsitsextensive due diligence of the firmbeingacquired.Finally,the termsof the deal are finalized. Obviously,the final termsof the deal will be determinedbynegotiationbetweentwo parties. vi. Financingthe deal:For a firmto be consideredtobe a platformfirm, theymusthave access to deeppocketsforfinancing.ManyAcquisitionsare financedbyprivate equitygroups (PEG) whichoftenbecome the deeppockets.Mostacquisitionsare financedona 50/50 split
- 4. betweendebtandequity.Oftenpartof the acquisitionprice isfinancedby“ownerwill carry” where the ownerwill aseller’snote forthe partof the purchase price. vii. Close the deal:- Closingthe deal isthe final stepinthe process.Notonlyare the final details completedandpaperssigned,butitisthe time tointegrate the twofirms. Integrationislike a marriage:duringthe courtshipeveryone isontheirbestbehaviors,butafterthe honeymoon,the real jobof livingtogetherbegins.Ittakespatience andflexibilitytoforma strongunion. c. Conditionsrequiredfora successful acquisitions: Conditions ResultsProduced 1. Acquiredfirmhasassetsor resources that are complimentarytothe acquiring firm’score business Highprobabilityof synergyandcompetitive advantage bymaintainingstrength. 2. Acquisitionsisfriendly Fasterand more effectiveintegrationand possiblylowercosts. 3. Acquiringfirmconductseffectivedue diligence Firmswithstrongestfitare acquiredand overpaymentisavoided. 4. Acquiringfirmhassufficientfinancial resources( cash or favorable debt position) Financingbyeitherdebtorequityiseasierand lesscostlytoobtain 5. Mergedfirmmaintainslowmoderate debtposition Low financingcosts,lowerriskof bankruptcy,and avoidance of trade-offsassociatedwithhigh debt. 6. Acquiringfirmhassustainedand consistentemphasisonResearchand Development. Maintainlong-termcompetitive advantagesin markets 7. Acquiringfirmmanageschange well and isflexible andadaptable Fasterand more effectiveintegrationfacilitates achievementof synergy. In conclusion:With thisdetailsexplanationsof benefitsandpotentials problemsof acquisitions,the acquisitionprocessandconditionsrequiredforasuccessful acquisition.JohnBullockthe founderof Guadalupe Technologiesshouldbe able toknow all he needstoaboutacquisitionanddetermine,if he will goaheadwiththe acquisitionof otherfirmforhisbusinessexpansion. (MSEDEEDEN 6345 Course learningmodule).
- 5. 2. Mr. Jim B. “Nutty” Rockefeller’sexitStrategy. There are variousexitstrategieswhichMr.JimB. “Nutty”Rockefellermayconsideredforhispeanutoil businessexit,forhimtoretire tohis ranch nearVictoriaTexas.The mostcommonexitstrategiesinclude sellingthe firm,transferringthe ownershiptofamily,mergingwithanotherfirm, liquidatingthe venture, and takingthe firmpublicusingthe initial publicoffering(IPO).Andthe mostcommonlossprevention strategyisto seekprotectionunderfederal bankruptcylaws. Developingabusinessexitstrategywill allowMr.JimB. “Nutty”Rockefeller,tohave a well thoughtout planfor the successionortransferof ownershipof the business. EXITS STRATEGIES:- 1. Sellingthe firm: There are a varietyof waysto sell a businessandthismayinclude:-directsale, employeestockownershipplan(ESOP),anda managementleveragedbuyout(LBO).Before any sale,however,the firmneedstoperformtwocritical activities-prepare the businessforsale and establishafirmvalue. Preparingthe businessfor sale:-There isnosubstitute foradvancedpreparationand planningtofacilitate aprofitablesale.The followinglistof activitiesand conditionsare designedtopositionthe businessesforsale andmaximizevalue: i. The businessmodel mustbe well-definedandworking,customersidentified, and internal processesrunningsmoothly. ii. The businessshouldconcentrate onkeepingcostsundercontrol andfocuson highermarginsandprofits. iii. The businessshouldconcentrate onkeeping costsundercontrol andfocuson highermarginsandprofits. iv. The financial statementsmustbe inorder,includingbudgetsandcashflow projections. v. Prepare documentationof the businessexplaininghow the businessis organizedandhow it operates. vi. Assessthe conditionof capital equipment.Up-to-date,state-of-the-art,andwell maintainedequipmentincreasesfirmvalue. vii. Get competenttax advice.The sale of a firmcan have significanttax consequences. viii. Get competentlegal adviceaboutpotentialsale contracts. ix. Get nondisclosuresfromkeyemployees. x. Try to maintainthe managementteam.Allow the managementteamtotake overmajor responsibilities. Establishingthe Value:-The value of abusinessdependsonvarietyof factors,that include: i. Nature and historyof the business:Obviouslythe historyandsuccessof the firm wouldinfluence valuegreatly.
- 6. ii. Outlookforthe economy:General marketconditionsinfluence valuebecause value isnotonlybasedon past performance,butalsoonthe outlookforthe firm. iii. BookValue:Bookvalue isbasicallythe owner’sequityinthe firm.Whilenota goodindicationof marketvalue,itdoesindicate the valueof the underlying assets. iv. Future earningcapacity.Oftenvaluesare inflatedbecauseof anticipated earningcapacity,A positive earningsforecastisvaluable,butvalue isnot maximize untilearningsprojectionsare realized. v. Evaluate paststock sales.If the firmhasa previoushistoryof stocksalesto eitherprivate investorsorVCs,the qualityandperformance of pastsaleswill influencefuture value. vi. Market price of comparable forms:-The stockprice of similarfirms(often competitors) influencesthe value of afirm.Comparingvalue tootherfirmsisa commonevaluationmethod. vii. Assessmentof goodwillandotherintangibles:- Establishedbrandrecognition, protectedintellectual property,andaqualityworkforce quality are justafew examplesof intangible assetsthatmayincrease value. Direct Sales:-The mostcommonformof exitstrategyisthe directsale of the firmto an investor or as part of a merger.Most firmsemploythe servicesof professionalbusinessbrokersto handle the sale.Firmssuchas Merfeld&Schine,Inc.provide avarietyof servicestofacilitates businessessalesfrombothabuyer’sanda seller’sperspective.A firmcalledBusinessBrokers maintaina data base of businessesforsale bystate and businesstype (www.businessbroker.net).Thissite actslike abusiness “multiplelistingservice”.Itiscommon to needfrom30 to 100 people perspective buyerstofindaqualifiedandinterestedprospect. Usinga professional businessbrokerprovidesaccesstosufficientprospects. There are several considerationsinsellingabusiness:- Time required:A commontime frame for a sale issix month.Thisisbrokendowninto one monthof the brokerworkingwiththe ownerpreparingtoputthe businessonthe market.Thisprocessismade easierif the firmhas done the pre-sale planning.Twoto three monthstofinda buyer.Andtwo monthstoclose the deal.Closingthe deal is measuredfromthe time thatthe “Letterof intent”spellingout the commitmentfrom the buyerisreceivedbythe sellerthroughthe buyers andsellersdue diligence assessmenttothe final transferof ownership. Deal Structure:-A commondeal structure is 50% debtand 50% equity(cash).Oftenthe ownerwill carrya note (sellerfinancing) forhalf the value andrequirecashforthe other half.The ownermayalso receive an“earnout” whichare paymentsbasedonthe future profitsof the businessaftersale.The ownerdoesface ariskof nonpaymentif the new ownersare unable tomake the businessprofitable.Oftenasprotection,the owners may require non-businessassetsasadditional collateral.Muchof the cash is often providedbyprivate equityfirms. Cost of Sale:-The costof sale can vary widely,butusuallyincludesanupfront “engagementfree”plusfeesbasedonthe salesprice. “Businessbroker’sfeesmay
- 7. range as highas 10 to 12 percentof the salesprice fora smallerbusiness.Businesses over$1 millionmaybe chargedusinga formulasuchas “5 percentof the salesprice up to $1 million;4percentof the salesprice between$1millionand$2 million;and3 percentof any salesprice above $2 million.If yougoto a mergerand acquisition professional,one maybe chargedforcosts andexpenses,andmayhave toagree to pay a minimumfee. Confidentiality:The salesprocessrequiresthe release of sensitive informationtoa varietyof concernedparties.Itisimportantthateach partythat is privytothe informationsignaconfidentialityagreementtoprotect the firm’ssensitive information. Type of Buyer: Buyersare normallylookingforfirmstostrengthentheirstrategicplan or improve theirfinancialsituation.The value of the firmforstrategicbuyersishowwell it will fitandstrengthencurrentoperations.Theyare lookingformanagement, customer,production,ormarketingfit.Financial buyersvalue abusinessthatwill improve itsfinancial situationbyprovidingquickprofits,cashflow,orinvestment opportunity.Knowingthe buyerwill make iteasiertopositionthe firmfora sale. The successful directsale isprobablythe easiestandfastestwayforthe entrepreneurto exitthe firm. Preparinga SalesAgreements: No matterwhichoptionsyouchoose,inordertosell yourbusinessofficially, there is needtoprepare a salesagreement. A salesagreementiskeydocumentinsellingthe businessassetsorstockof a corporation.Itis importanttomake sure the agreementisaccurate andcontainsall the termsof the purchase. Itemsthat shouldbe addressedinthe salesagreementinclude; i. Namesof the seller,buyer,andbusiness ii. Backgroundinformation iii. Assetsbeingsold iv. Purchase price andAllocationof Assets v. A non-compete clauseorCovenantnottocompete vi. Anyadjustmentstobe made vii. The agreementand paymentterms. viii. List of inventoryincludedinthe sale. ix. Anyrepresentationandwarrantiesof the sellerandbuyer x. Determinationastothe accessto any businessinformation xi. Determinationastothe runningof the businesspriortoclosing xii. Contingencies xiii. Fees,includingbrokerfees xiv. Date of closing Aftercollectedthisinformation,thenmeetwithattorneytodevelopthe formal salesagreement. Havingall of the informationpriortosittingdownwithattorneywill helptomanage the costs.Thisis a legal contract,so there isneedtowork attorneytomake sure that the contract iscomplete and enforceable.
- 8. Employee Stock OwnershipPlans (ESOP): ESOP (Employee Stock OwnershipPlan) As of 2017, the National CenterforEmployeeOwnership(NCEO) estimate there are roughly7,000 employeestockownershipplans(ESOPs) coveringabout14 millionemployees.Since the beginningof the 21st centurythere hasbeena decline inthe numberof plansbutan increase inthe numberof participants.There alsoare about2,000 profitsharingandstock bonusplansthatare substantially investedincompanystockandare like ESOPsinotherways. Inaddition,itwasestimatedthatroughly9 millionemployeesparticipate inplansthatprovide stockoptionsorotherindividualequitytomostor all employees.Upto5 millionparticipate in401(k) plansthatare primarilyinvestedinemployerstock.As manyas 11 millionemployeesbuysharesintheiremployerthroughemployee stockpurchase plans. Eliminatingoverlap,itisestimatedthatapproximately28 millionemployeesparticipate inanemployee ownershipplan.These numbersare estimates,butare probablyconservative.Overall,employeesnow control about 8% of corporate equity. Major Usesof ESOPs Abouttwo-thirdsof ESOPsare usedto provide amarketfor the sharesof a departingownerof a profitable,closelyheldcompany.Mostof the remainderare usedeitherasa supplemental employee benefitplanorasa meansto borrowmoneyina tax-favoredmanner.Lessthan10% of plansare in publiccompanies.Incontrast,stockoptionorotherequitycompensationplansare usedprimarilyin publicfirmsasan employee benefitandinrapidlygrowingprivate companies. Employee Ownershipand Corporate Performance A 2000 RutgersstudyfoundthatESOP companiesgrow 2.3% to 2.4% fasteraftersettinguptheirESOP than wouldhave beenexpectedwithoutit.Companiesthatcombine employee ownershipwith employeeworkplace participationprogramsshow evenmore substantialgainsinperformance.A 1986 NCEOstudy foundthatemployeeownershipfirmsthatpractice participativemanagementgrow 8%to 11% peryear fasterwiththeirownershipplansthantheywouldhave without them.Note,however,that participationplansalone have littleimpactoncompanyperformance.TheseNCEOdatahave been confirmedbyseveral subsequentacademicstudiesthatfindboththe same directionandmagnitude of results. How ESOPs Work Companiessetupa trust fundforemployeesandcontribute eithercashtobuycompanystock, contribute sharesdirectlytothe plan,orhave the planborrow moneytobuyshares.If the planborrows money,the companymakescontributionstothe planto enable ittorepaythe loan.Contributionstothe planare tax-deductible.Employeespaynotax on the contributionsuntil theyreceivethe stockwhen theyleave orretire.Theytheneithersellitonthe marketor back to the company.Providedthatan ESOP owns30% or more of companystock and the companyisa C corporation,ownersof aprivate firm sellingtoanESOP can defertaxationontheirgainsbyreinvestinginsecuritiesof othercompanies.S corporationscan have ESOPsas well.Earningsattributable tothe ESOP'sownershipshare inS corporationsare not taxable.
- 9. In otherplans,approximately800employerspartiallymatchemployee401(k) contributionswith contributionsof employerstock.Employeescanalsochoose toinvestinemployerstock.Instockoption and otherindividual equityplans,companiesgive employeesthe righttopurchase sharesat a fixedprice for a setnumberof years intothe future.(Donotconfuse stockoptionswithU.S.ESOPs;in India,for example,employeestockoptionplansare called "ESOPs,"butthe U.S.ESOPhas nothingtodo with stock options.) How EmployeesFare ParticipantsinESOPsdowell.A 1997 WashingtonState studyfoundthatESOPparticipantsmade 5% to 12% more inwagesand had almostthree timesthe retirementassetsas didworkersincomparable non- ESOP companies. Accordingto a 2010 NCEO analysisof ESOPcompanygovernmentfilingsin2008, the average ESOP participantreceivesabout$4,443 per yearincompany contributionstothe ESOPandhas an account balance of $55,836. People inthe planformanyyearswouldhave muchlargerbalances.Inaddition, 56% of the ESOP companieshave atleastone additional employeeretirementplan.Bycontrast,only about44% of all companiesotherwise comparable toESOPshave anyretirementplan,andmanyof these are fundedentirelybyemployees. Examplesof Major ESOP Companies ESOPscan be foundinall kindsof sizesof companies.Some of the more notable majorityemployee- ownedcompaniesare PublixSuperMarkets(182,500 employees),Lifetouch(21,000 employees),W.L. Gore andAssociates(makerof Gore-Tex,10,000 employees),andDaveyTree Expert(8,260 employees). CompanieswithESOPsandotherbroad-basedemployeeownershipplansaccountforwell overhalf of Fortune Magazine's"100 BestCompaniestoWork forin America"listyearafteryear. https://www.esop.org/ Leveragedbuyout (LBO) : Whena group of employees,management,oranindividual usedborrowedfundstopurchase afirmfor cash, a LBO has takenplace.The earningpowerof the firmalongwiththe firm’sassetsisusedas collateral forthe loan.Banks,Venture capital firms,private equityfirms,andinsurance companiesare oftenthe source of the loans.
- 10. 2. Transfer Ownershipto family: Business ownershave several optionswhenitcomestotransferringownershiprights,itis importantto considerall optionsbefore makingadecision. The firstoptionto be consideris outright sale.By sellingabusinessinfull,youwill transfer ownershipimmediatelyandreceivepaymentforthe assetsrightaway. The nextoptionisa gradual sale.Thisisa flexibleoptionintransferringabusinessthattendsto benefiteveryone.Aftertransferringbusinessownership,younolongerhave toworryabout runningyourbusinessbutstill receive amonthlyincomefromthe gradual sale. Anotheroptionis a lease agreement: By transferringbusinessownershipthroughalease,the businessownercommittoacontract that detailsthe conditionsandpaymentshe will receive for the temporaryrightsto the business. The final transferoptionistransferringbusinesstoa familymember.Transferringfamily businesscan be a little more complicated thanexpected.Additional tax implications,suchas estate andgifttaxes,generallyarise forbothparties.The businesstypewillaffectwhatsteps are requiredtotransferownershipaswell asthe tax implicationsof the transfer. (www.sba.gov). In orderto improve the oddsof success,effective successionplansneedtoconsiderthe following: The role of the ownerinthe transitionstage Familydynamicssuchasthe abilityof the familytoworktogether. The form and amountof compensationforworkingfamilymembersandshareholders. The current businessenvironmentduringthe transition. The fate andfuture of loyal employees. Tax consequences,especiallyestatesandgifttaxes. The potential forinternal conflictamongfamilymembersandcurrentemployees. Developmentof managementcompetenciesformanagingfamilymembers. The realityisthat a transferto familymembersneedstobe plannedfarinadvance.A successful family successionwill occurwhenfamilymembershave the strategicvision,leadershipskills,andinnovative mindsetrequiredtomanage andbuilda successful firm,.(EDEN 6354 course handout). 3. Liquidation of the firm: Thisis anotherexitstrategyinwhichthe businessownerjustwanttoend the venture by strippingthe free cashflowfromthe firmandmay be finallyliquidatingthe assets.Obviously thisstrategyisrare for mature firmsthat are usuallysoldtoan outsiderortakenpublic,butit doeshappenforsmallerfirmsalso. The firm’svalue maybe harvestedbysellingoff the assetsof the firmandeventuallythe firm will cease operations.A more commonscenarioisthatas the firmmaturesthe opportunityfor future profitable investmentbeginstofade.The firmismakingmoney,butitdoes notmake sense tore-investthe moneyatalow rate of return.The optionisto harvestthe value bytaking the free cash flowoutof the firm.Free cashflow = operatingprofitsaftertax + depreciation –
- 11. cash needtomaintainthe firmandits currentrate of growth.The free cashflowsare passedon to the ownersto investastheywish. The primaryadvantagesto strippingthe free cashflow are thatit allowsthe ownerstoretain control while the value isharvested,andthere isnoneedtofinda buyer. The downside isthat cash that may be neededforlimitedgrowthormaintenance isnotavailable andthe double taxationof the corporationmay make strippingcashexpensive.Finallythe strippingprocesscan take a longtime torecoverall the full value the entrepreneurhascreated.Mostothermethods are muchfaster. Stepsin the asset liquidationprocess: Prepare an inventoryanddetermineassetsforsale Secure merchandize Setliquidationvalue of assetswithaqualifiedappraiser Use that value to estimate netsale processandre-evaluate decision Choose sale type:negotiated, consignment,internet,sealedbid,orretail Selectthe besttime andlocationforthe sale Hire an auctioneer,dealer,broker,orotherexperttoconduct Use a non-recourse billof sale sobuyeracceptsthe associatedrisks.(www.sba.gov). 4. Taking the firm publicusingthe IPO: Whyfirms are not going public(BloombergBusinessWeek) • Newlegislation,suchasSarbanes-Oxley,andSecurities&Exchange Commissionrules,sharply raisesthe cost of beingpublic.Itisestimatedthatthe annual costof regulatorycompliance for companieswithmarketcapsunder$900 millionhasdoubledsince 2002 to $2.3 millionperyear. • Investmentbanksare cuttingbackon researchon smallerfirms.Unlessthe firmhasamarket cap (value) inexcessof $200 million,theyfall underthe analytical radarof investmentbanks.If investmentbanksdon’ttrackthe firm’sstock,the marketfor the stock islimited. • Stockmarketsare increasinglybeingdominatedbyinstitutionalinvestorswhodon’tinvestin smallerfirms’stockbecause theycannottrade blocksof stocklarge enoughfortheirpurposes. • There isgrowingcapital inthe private offeringsegment.Thiseliminatesthe needforpublic funds. The resultof these factorsis illustratedbythe size of firmsgoingpublic.Overthe pastseveral years,the medianannual salesprice of firmsgoingpublichasrisenfrom$15 millionin1999 and 2000 to $66.5 million today(in2016 latestdata – see 2017 IPOreportlinkedbelow).The medianIPOofferingsizeis$94.5 millionin2016 downfrom$140.4 millionin2011. Infact, a recentconference presentationsuggestedminimumsalesof $500 million(19% of all IPOs).In addition,the minimumfirmmarketvalue shouldbe inexcessof $50 millionbutthe minimum may needtobe as much as $200 millionasmentionedabove.Inthe final analysis,formost firms,goingpublicisnotworththe hassle or expense(Inexcessof $3millionin2014). See 2017 IPOreport byWilmerHale forcurrent data) The IPOishandledbywhatare calledinvestment bankers(managingunderwriter).These firmsmanage the IPOprocessforthe businessgoing public.Inreality,the stockissuedduringthe IPOispurchasedbythe underwriterandthensold to the public.Oftenthe underwriterwill solicithelpfromotherfirmsbyformingasyndicate to helpsell the stock.
- 12. A. Goingpublic AdvantagesInclude: i.Obtainingcapital withlessdilutiontofounders ii.Enhancedabilitytoborrow iii.Enhancedabilitytoraise equity iv.Liquidityandvaluation(stockcanbe easilyboughtandsoldata marketprice) v. Prestige vi.Personal wealthtothe entrepreneur B . Disadvantages (costs) i.Expense – average $700K, butcan be muchhigher. 1. Accounting- ($200K) 2. Legal $150K – ($350K) 3. Underwriter- (7% -10% of IPO) 4. Filingfees$8K – ($30K) 5. Printing$50K – ($200k) 6. Annual follow-up($50K - $250K) {inrecentyearsthiscan be $2.3 million} ii. Disclosure of information –everythingbecomespublicinformation iii.Pressure tomaintaingrowth iv.Loss of control II.Are youready? a. Is the firmbigenough?(Foran IPOto be profitable foraninvestmentbanker,there needsto be a minimumof $20 millionof stockissued.If the ownerwantstomaintain60% ownership,the value of the firmmust be at least$50 million.) b. Have you done yourhomework?(i.e.three yearsof auditedfinancialstatements,properly constructedboardof directors) c. Doesthe companyhave a historyof strong earningsandearningsgrowth? d. Isthe markettimingproper? e.How quicklyisthe moneyneeded?(The IPOprocesscantake months) f.What are the future needsof the entrepreneurs? III. IPO Process a. Selectthe managingunderwriter(The underwriteristhe investmentbankthathandlesthe offering.) The selectioncriteriaare: i.Theirreputation ii.Theirabilitytoforma syndicate (Oftenthe managingunderwriterisnotlarge enoughtosell all of the securitiesand will enlistthe helpof otherinvestmentbanks.The groupiscalledthe syndicate.) iii.Theirabilitytohandle anIPO(There are underwritersthatspecialize insmall offeringsand othersthat concentrate onlarge IPOs.) iv.Theirfee b. File the registrationstatement(SEC - Full andFair Disclosure) i.“All hands”meeting(establishthe processandtime table) ii.Prepare andreviewthe initial registrationstatement(FormS- 1 or S-18)
- 13. 1. Prospectus – (detailsof the IPO) a. Preliminary“RedHerring”prospects(allinvestorinfo.butpricing) b. Final prospectus(Complete information) 2. Prepare final registrationstatement –supplemental information 3. Reviewof filingbyFinancialIndustryRegulatoryAuthorityFormallythe National Association of SecuritiesDealers(NASD) 4. Reviewbyeachstate’s“Blue SkyLaws” (Nota fraudulentofferof securities) 5. Distribute tounderwritinggroups“The RoadShow” - potential investorpresentations 6. Observe the “QuietPeriod”(nopublicstatementcanbe made bymanagementthatcould influencethe investingpublic) IV.Approval andsale to individual investors. V.Afterthe IPO a. Keepthe price upevenitsthe underwriterhastopurchase the stock b. Buildrelationswiththe financialcommunity c. Annual reportingtothe SEC i.10K (annual) ii.10Q (quarterlyreport) Comment:the IPO processislengthyandcostly(i.e.,inexcessof $3 millionaverage).The firm needstobe large enough,needspubliccapital,andmusttime the marketcorrectlyto really benefitfromanIPO.Foradditional informationonanypartof the processor otherareas coveredbythe SEC, please use the SECtopiclist. 5. Bankruptcy: Thisis anotherexitstrategywhichnoentrepreneurwantshisorher businesstofall into,buteveryday theyfindthemselvesinit.The primarystrategyfora failedbusinessistofile bankruptcy.Whilesome firmsmaybe able tosurvive bankruptcy,the oddsare againstit.The three typesof bankruptcyare Chapter7,Chapter11, and Chapter13 (all three are namedforthe sectionof the bankruptcylaw where theycan be found).Each isdesignedtodischarge (release) the debtorfromfinancial liability.The type of discharge available variesbytype of bankruptcy. Chapter7 - This isthe most commontype of bankruptcyand requiresthe firmtoliquidate all of its assetsand use the proceedstopay creditors.The firmmaychose Chapter7 bankruptcyor be forced intoit byits creditors. Chapter11 – Chapter11 providesthe firmanopportunitytoreorganize and make the venture solvent. Basically,creditor’sclaimsare putonholduntil the firmcan make a financial recovery.Thistype of bankruptcyisoftenusedasa delaystrategytobuytime for the firmto recover.Asmentionedbefore, the oddsof recoveryare quite slim. Chapter13 – Thistype of voluntarybankruptcyallowsanentrepreneurwitharegularincome tohave the opportunitytomake extendedtime payments.Chapter13 wouldbe appropriate whenthe entrepreneurhasa full-time jobandafailingbusinessonthe side.Bankruptcyiscoveredunderfederal lawand isadministeredbyfederal BankruptcyCourts.Checkoutbankruptcybasicsformore
- 14. information.Allthree formsof bankruptcycanhave veryimportanttax consequencesthatmustbe considered.There isaninterestingsite maintainedbyMoneyManagementInternational called bankruptcy.orgthatprovidesinformationtobothconsumersandattorneys.In2005 PresidentBush signedintolawthe BankruptcyAbuse PreventionandConsumerProtectionActof 2005 ("BAPCPA"). BAPCPA made substantial changestothe BankruptcyCode.Manyfeel thatthe revisionshave made it more difficultforindividualsandfirmstoreceive alenientdischarge.Because the bankruptcylaw is complex,it’sagoodideato seekcompetentlegaladvice.Thereare some earlywarningsignsthatafirm isin financial trouble.If yousee anyof these,be aware.5 • Managementof financesbecomessolax,thatnoone can explainhow moneyisbeingspent. • Directorscannotdocumentor explainmajortransactions.(The Enronsymptom.) • Customersare givenlarge discountstoenhance paymentsbecause of poorcashflow. • Contracts are acceptedbelowstandardamountstogenerate cash. • Keypersonnel leave the company. • Materialsto meetordersare lacking. • Payroll taxesare notpaid. • Suppliersdemandpaymentincash. • Customers’complaintsregardingservice andproductqualityincrease. • Survivingbankruptcyisalong-shot,butthere are some suggestionstoimprove theodds.6 • The threat of bankruptcycan be a bargainingchipwithcreditorstoall to allow the entrepreneur to voluntaryrestructure andreorganize the firm. • File bankruptcybefore the cashrunsoutor income has stoppedsothatexpensesnotcoveredby bankruptcycan be paid. • Don’tfile forChapter11 unlessthere’sareal chance of firmrecovery. • Be preparedtoletcreditorssee atleast12 monthsof detailedfinancial data.The firmmust avoidanysuggestionof financial fraud. • Maintaingoodrecords. • Completelyunderstandhowprotectionagainstcreditorsworks andhow tokeepprotectionsin place. • Transferany existinglitigationtothe bankruptcycourt. • Prepare a realisticfinancial recoveryplan.
- 15. Comment:No firmof any size wantsto face the realityof bankruptcy,butit can happen.Evenlarge mature firmsare notexempt.The bestwayto survive istoavoidbankruptcybyprovidingthe strategic vision,leadership,andinnovationtosustaingrowthandprofitability. 2 b. Recommendation: I will recommendselling the firmoptiontoMr.JimB. Rockefeller,amongotherexitstrategies.A firm witha revenue of approximately$100 million,thisisindeedaverythrivingandviable firmandwill attracts a lotof good investors.Sellingthe firmwillgenerateabiggerprofitandwill be fastertosell because itdoesn’thave anycumbersome processtosell. Once he gotthe servicesof aprofessional businessbrokertohandle the sale.He cango and relax until the deal isfinalize.Andwithaservice of afirmsuch as calledBusinessBrokersthatmaintainsadata base of businessesforsale bystate andbusinesstype.Mr.JimB. “Nutty”Rockefeller’sfirmcanbe listed on thissite,andthiswouldallowthe qualifiedandinterestedprospective buyerstosee itandnegotiate on itwiththe professional firmhiredtohandle it.Thissavestime,reducedcostof sale,ensure confidentiality Andsince commondeal structure of directsale is50% debtand 50% equity(cash).Once the deal is sealed,Mr.Jm B. “Nutty”Rockefeller, cangetthe 50% cash half deal and startedhisnew life inhisranch nearVictoria,while enjoyingthe otherhalf of 50% financingproceed.The buyertakesoverthe startup usingcash or stock as a compensation,andkeyexecutivesandemployeesfromthe startupoftenstayat the companyfor a periodof time inorderto be able tocash out and vesttheirstock.Exitsprovide capital to startupinvestors,whichcanthenreturnthe moneytotheirlimitedpartners(inthe case of Venture Capitalists)orto the investorsthemselves(inthe case of businessangels). Anotherpurestfriendlybuyoutoccurswhenthe businessispasseddowntothe family.Butwe remember,the keyto"familybusiness"isthe word"family."Isthe familyfunctional?Nosoonerthan youleave the familybusinesstothe kids,it'slikelythey'll endupfightingoverwhogotthe largershare, whodoesor doesn'tdeserve the ownershiptheygot,andwhogetsthe final word.They'll finger-point for a decade while the businessslowlydeclinesintoruin,thenblame himfornotleavingclearer instructions.If he decide togothisroute,he has a lot of planningtodo before gettingout.Research suggestthathalf of the attemptsto transferfromthe firstto secondgenerationsfailandwithonly14% of successtothe thirdgeneration.SoIwill reallyemphasishe goeswithdirectsale of the firm. IPOstandsfor ‘initial publicoffering’anditbasicallymeansthatacompanystarts floatingona stock market,sellingasignificantnumberof theirsharesinthe processto institutional andnon-institutional investors.These large companiesare thatVCsdreamof,as theyoftenprovide large sumsof capital toall parts involved(founders,earlyemployeesandinvestors).Thisisnotalsoa goodoption forthisbusiness, it ismainlyrelevantforbusinessesseekingexpansionorlookingforstartupcapital. Otherexitstrategies,suchasLiquidationof the firm, Bankruptcyare notrelevanttothisfirmbecause the firmis doinggoodwithsucha colossal revenueof $100 million,itisa profitmakingfirm.These two optionsare onlyavailable forafailedcompaniesthatisgoingoutof businessdue toinabilityof meeting currentobligations.
- 16. Of course,the buyerneedn'tcome fromoutside.Sellingbusiness tocurrentemployeesormanagers. Ofteninthiskindof sale,the sellerfinancesthe sale andletsthe buyerpayitoff overtime.The owner still makesmore thiswaythanhe wouldbyclosing,it’sawin-winforeveryone involvedinthiskind sellingtransaction. 3. GoingGlobal SeminarOutline GoingGlobal Seminars GoingGlobal: In today’scompetitive globalbusinessenvironmentmore andmore small andmediumsizedcompanies are exploringinternationalexpansiontoincrease revenuesandwinnew customers.Thisgoingglobal seminarbringssmall andmediumsizedenterprise(SMEs),industryandgovernmentleaderstodiscuss the opportunitiesandchallengesof doingbusinessabroad. Seminar Overview: The Going Global seminarisa full-dayeventthatprovidesCEOsandseniorexecutivesof small and mediumsizedcompanieswithvaluableinsightsondoingbusinessinternationally. The seminarwill focusonstrategiestoexpandintonew regionaroundthe world.Thisseminarwillgive that participantsthe opportunitiesof hearingfromthe industryexpertswhowilldiscusskey opportunitiesandchallengesof goingglobal.Participantswill alsohave anopportunitytoengage in interactive discussions,Q&A session andone-on-one meetingswiththe questspeaker. Venue: The seminarwill heldinUniversityof Houston,VictoriaStudentAuditoriumonThursday,21st December,2017. Duration: 6 hours Seminar Agenda: If you are lookingforanewways toidentifyandseize opportunitiesinlucrative overseasmarkets.Going Global isfor you!Whetheryouare interestedingoingglobal oralreadyconductingbusinessoverseas; thisseminarwill provideyouwiththe solutionsandpractical strategiestohelpmaximize successand impactyour company. Outlines: i. Introduction: • What isglobal market?(Conceptof globalization).................................30minutes
- 17. Thistopic will discussonthe emergence of global markets,conceptof globalization,andhow technological advancementturnthe worldintoa global villageandfacilitateinternational businesses. Thistopic will enablethe participantstounderstandthe conceptof globalization. • Why go global?(ThinkingBeyondthe DomesticMarket.)...........................30 minutes Thiswill enable the participantstohave deepperspectiveof the reasonsof goingglobal withtheir businessesandthe possibledesiredresultsontheirfirms.Participantswill learnof the reasonstogo global andthe desiredresultsthiswill have onthe firms. ii. Determinantsof firm desire to globalize:………………………………………………………….1hour Thistopic will discussonhowthe size of domesticmarketandfirmsize wouldfacilitatesthe decisionsof a firmto go global: we shall be lookingatenthusiastic,follower,andoccasional internationalizer factors.The topicwill letthe participantssee how the firmsize andmarketconditionsdetermine the desirabilityof global expansion. 12 pm- 1.00 pm…………………………………………………………………………………………….Breaktime iii. SelectingGlobal opportunities…………………………………………………………………………….:1hour Selectingcountriesforglobal expansionisanimportantdecisionthatshouldbe done withcarefuldue diligence:We shall be lookingattwoprimarydriversof the selectiondecision,whichincludefirm’s strategicgoalsand the differencesbetweenculture andbusinessconditions.We shall review some global marketconditions;suchascultures,marketsize,currency,state of economy,Regulatory environment,Trade barriersandpolitical environmentsandhow theyimpactglobal business.Thistopic isveryimportantinhelpingfirmstomake decisiononwhichcountrytheydobusiness. iv. DecisionProcess:…………………………………………………………………………………………1hour Decisionanalysishelptomatchthe conditionswith the desiredglobal strategyandcome intoan acceptable balance of commitmentandriskversuspotential return.While Decisionprocessisbestdone inorderlyfashion,followingthe fivestepsof decisionprocess.Thisanalysisisimportant,asithelpsthe firmsto match theirstrategicgoalswithothercountrycritical conditions.Thiswill thenuse todecide withcountrybestsuittheirfirm. v. How to enterglobal market………………………………………………………………………………..1hour Thistopic will lookentrymodes,suchas equityandnon-equitymodesandmatchthese modeswiththe level of commitmentandrisksinorderto decide whichmode isgoodforthe firm.Thisisimportantin decidingthe mode of entryintoglobal markets,takingintoconsiderationthe level of commitmentand risk.
- 18. 4. A. CORPORATE SOCIAL RESPONSIBILITY There are a numberof validreasonsforthisquestion,thatCSRisa goodbusinessEthics. Businessethicsregardswhatismorallyrightandwrongwitha company'sactivitiesand behaviors. I am insupportof the socioeconomicproponentsthatmaintainthatabusinessmustbe more than simplyseekprofitstosupporttheirpositionandtheyofferthatbusinesses cannot ignore social issuesbecause abusinessisapart of our society.Moreover,a businesshasthe technical,financial,andmanagerial resourcesthatare neededtotackle today'scomplex social issues.Thisismore ethical view. Additionally,byhelpingresolve social issues,businesscancreate amore stable environmentforlong-termprofitability, and that thisdebtisgreaterthan the debtof the individual membersof society'. Corporate Social ResponsibilityisWayCompanygivesbacktoor improvesthe community.Organizationscanshow CSRin manyways,includinginthe formof donationstocharities,employee volunteering,environmentallyconsciousproduction processes,ethical laborpractices,andmore. . Overthe decades,there have beennumerouscontroversial reportsof social and ethical issuesbusinessorganizationsfaced.A few of the visible exampleshave included accusationsagainstH.B. FullerCo.thatit hasbeensellingglueinHondurasthathas beenabusedbythe Honduranstreetchildrenforglue sniffing,lawsuitsagainstDow Corningforits salesof defectivesilicone breastimplants,andaccusationsandlawsuits againstthe tobacco industryformanufacturingandmarketingwhatpeople considerto be an dangerousproductwhichmay be harmful tothe society. Although,the Corporate Social Responsibility(CSR) isaself-regulatorymechanism incorporatedbycorporationsintheirbusinessmodel.The termCSRis alsousedfor activitiescarriedoutbycompaniesaroundthe globe togive backto the society.The conceptof CSRhas beenacknowledgedbycompaniesaroundthe world anditis consideredtoanessential partof the operationsof the companies.Inthe recentpast, there have beenseveral advancementsinthe corporate worldwhichhave necessitated the needforincorporatingCSRinthe core businessmodel,specificallyforlarge scale corporationswithoperationssituatedinmultiple territoriesall aroundthe world. Many corporationshave acknowledgedthatcarryingoutCSR activitiesreflectspositively on theirbrandimage.Incase of financial reporting,companiesare requiredtofollow strict standardizedrequirements;howeverincase of CSR, there are no strict regulations whichmake CSR mandatory.Despite the lackof regulations,the regulatoryauthorities
- 19. encourage companiestoengage inCSRas expensesincurredunderCSRare deductible for tax purposesdependinguponlocal laws.Inthe race to outruntheircompetitors, corporationsconductbiggerandbiggerCSR activitiestoearnhighergoodwill among consumers.CorporationsbenefitfromCSRaswell because consumerprefercarrying out businesswithcompanieswhichhave apositive image inthe market. There are manydifferentwaysacorporationcansupporta social initiative andstill make profits.A goodexample isthe MarriottCorporation(ref),whowasmotivatedbya desire tohelpthe communitywhile still helpingthe bottomline,bytrainingandhiring 6000 personsonwelfare.Marriottwasstill able tocut costs andincrease productivity.It can be ina company'sbestinteresttoprovide aneededservice withinalow income area.By incorporatinga service thatimprovesthe resourcesandinfrastructureof a community,itcan offeraneconomicreturnforthe organizationthroughrecognitionor directcommunityinvestments.Inthissense,abusinesshasanobligationtobothprofit and serve the community,forall stakeholdersinvolved.Thisshowsthatwhena companypractice in goodCSR, itgainsbetterreputationandbrandimage meaningan extensionof bettersales,more investorsandcustomerloyaltyplate form.Thisis supportedbythe surveydone byHill & Knowlton/Harris(2001) showedthat91 % of all customersurveysaidthattheywouldswitchtoothercompanies,if the corporationhad a negative image. -(www.essay.uk.com/essays/business/corporate-social- responsibilty/). 4B. .1. Although,(CSR) doesnotgenerate anyprofitsdirectly,itdoeshelpthe organizationinstrengthening itsgoodwill inthe marketwhichstabilizes,andattimes,expandsthe consumerbase of the organization resultingingreaterrevenuesandtherefore largerprofits. . 2. Despite notbeingarevenue generatingactivity,ithelpsthe corporationsstrengthentheirbrand image andstabilize theirconsumerbase inthe market. 3. When an organizationfunctionswith CSR,itsendsamessage tothe greatercommunitythatit recognizesitisina positiontohelpsociety,andisactinguponthat acknowledgement. 4. Through thisprocessof do-goodwork,companiesnotonlyhelptheircommunity –theyalsoreapa fewbenefits.Here are three majorbenefitsof practicingCSR.Considerthemasyouthinkabouthow your organizationcanbe an active playerinthe community,beyonditstraditional businessmodel. I. Engagedemployees The way an organizationtreatsthe communitysuggestsgoodthingstoitsemployeesabouthow it perceivesandrespectsthem.Employeesthatfeelrespectedbytheiremployerfeelmore comfortable bringingtheirmostauthenticself toworkwhich,studiesshow,leadstoincreasedengagement.
- 20. Additionally,accordingtoa surveyproducedbyApparoin2017, organizationsthatencourage their employeestovolunteerthroughprobonoworkduringpaidbusinesshourscreate motivatedemployees whofeel thattheircompanyrespectstheirpersonal development.These employeesalsofeel energized by the opportunitytobe creative withtheirskillsetforagood cause. Ii. Loyal customers Consumersthinkconsciouslyaboutthe productsandservicestheybuy.InaNielsonsurvey,66percent of participantssaidtheypaymore forproductsand servicesfromsociallyresponsiblecompanies.When examiningthe populationof participantswillingtopaymore,56 percentsaid“a brandbeingknownfor itssocial value”wasa toppurchase driver.Anotherpurchase drive,“abrandwithcommunity commitment,”wasmarkedby53 percentof those will topaymore.Customerswill be loyal toyour companyif your valuesalignwiththeirs. ii.Active CSRpositionsyourorganizationasa leaderinthe community,andapositive role model for othersto followsuit.Besides,whencompaniesstandoutforthe goodworkthey’re doinginthe community,the mediagainsinterest.Withanabundance of not-so-pleasantstoriescirculatinginthe papers,it’snice havingapositive newsstorytoshare.Notto mention,there are plentyof awardsupfor grabs forcompanieswhopromote goodinthe community.Take,forexample,ConsultingMagazine’s national Social andCommunityInvestmentAwards(threeof whichwere wonbyCharlotte companiesin 2017, includingApparo). 4. Corporate sponsorshipsare anotherwaytosupporta goodcause,as these allow forthe continuation of capacity-buildingprojectsfornonprofitsinthe Charlotte area.