Entrepreneurship Chap 15

Hisrich
Peters
Shepherd
Chapter 15
Succession Planning and
Strategies for Harvesting
and Ending the Venture
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

15-2
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.

15-3
Table 15.1 - Succession Planning
Tips

15-4
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.

15-5
 Transfer to Nonfamily Members
 Train a key employee and retain some equity.
 Retain control and hire a manager.
 Sell the business outright.
Succession of Business (cont.)

15-6
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.
 Get nondisclosures from key employees.
 Try to maintain a good management team.
 Prepare and plan in advance.

15-7
 An important consideration is the type of
payment the buyer will use.
 Business brokers may be helpful.
 The best way to communicate the business to
potential buyers is through the business plan.
 The role of an entrepreneur may vary
depending on the sale agreement or contract
with the new owner(s).
(cont.)

15-8
 Employee Stock Option Plan
 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.
(cont.)

15-9
(cont.)
Advantages:
Motivates employees to put in extra time or effort.
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 or any dividends paid.

15-10
 Management Buyout
 Usually involves a 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.
 Sale of a venture can be:
 For cash.
 Financed through banks
 Through sale of voting or nonvoting stock.
 The entrepreneur may agree to carry a note.
(cont.)

15-11
Bankruptcy—An Overview
 Most common types of bankruptcies:
 Chapter 7 or liquidation (69% in 2008).
 Chapter 11 or reorganization (19% in 2008).
 Chapter 13 or installment payments (12% in
2008).

15-12
 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.
 It is difficult to separate entrepreneurs from the
business.
 Entrepreneurs should file for bankruptcy early.
 Bankruptcy needs to be shared with employees
and everybody else involved.
Bankruptcy—An Overview (cont.)

15-13
 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.
Bankruptcy—An Overview (cont.)

15-14
Chapter 11—Reorganization
 Courts try to give the venture “breathing
room” to pay its debts.
 A 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.
 Composition settlement - Debt is prorated to
creditors as settlement.

15-15
 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.
Chapter 11—Reorganization (cont.)

15-16
 Maintain good records.
 Understand how protection against creditors
works.
 Transfer litigation to bankruptcy court.
 Prepare a realistic financial reorganization plan.
Chapter 11—Reorganization (cont.)

15-17
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
ultimately fail to meet their planned
obligations, thus resulting in a Chapter 7
filing.

15-18
Chapter 7—Liquidation
 The most 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.

15-19
Table 15.2 - Liquidation under
Chapter 7 Involuntary Bankruptcy

15-20
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.
 Enhancing the bankruptcy process by:
 Keeping creditors abreast of how the business is
doing.
 Stressing the significance of creditors’ support
during the process.

15-21
Table 15.3 - Requirements for
Keeping a Venture Afloat

15-22
Table 15.4 - Warning Signs of
Bankruptcy

15-23
Starting Over
 Entrepreneurs are likely to continue starting
new ventures even after failing.
 Entrepreneurs who have failed tend to have
a better understanding and appreciation for
the need for:
 Market research.
 More initial capitalization.
 Stronger business skills.
 Business failure does not have to be a
stigma when seeking venture capital.

15-24
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.

15-25
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.

Entrepreneurship Chap 15

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Entrepreneurship Chap 15