Exit strategies (1)final

Ahfad University of Women
MBA-Batch (5)
Exit strategies
in Small Business
Presentation by:
Iman M. Ahmed Ibrahim
Reem Abdel Hameed Tambal
Course instructor:
Dr. Widad Ali Abdelrahman
08/31/14 1

What is an Exit strategy
• Exiting/harvesting : is the process used by
entrepreneurs and investors to reap the value
of a business when they get out of it.
Longenecker,J.G.et.al.(2003),p.347.
• From a small business point of view, a viable
exit strategy is a plan that allows the owners
or investors in a small business to walk away
with what they want to walk away with.
Ward, S. (n.d.)
08/31/14 2

When do entrepreneurs exit their
business
• When a business is declining i.e. Bankruptcy, rendered
obsolete, etc.
• Other reasons (Four D’s for exiting the business):
• Death: entrepreneurs just think about it when it is
requested by the insurance agencies.
• Disability: it creates financial strains that will adversely
affect the business.
• Divorce: it can ruin both parties (financially, etc).
• Departure: in case of partnership.
08/31/14 3

• To seize the full value of a business; reduce
risk and create future options;
• To appeal to investors;
• To easily transfer ownership to the next
generations;
• To be prepared for change in life style.
08/31/14 4

Source: Longenecker,J.G…….et.al;(2003),p.349
08/31/14 5

• Motivation
• Challenge
Source: Longenecker,J.G…….et.al;(2003),p.349 6

“a purchase in which the value of the
business is based on both the firm stand-alone
characteristics and the synergies that
the buyer think can be created”.
Longenecker,J.G…….et.al;(2003),p.349
08/31/14 7

The critical issue here is the strategic fit between the
business to be exited and a potential buyer:
The buyer : synergies
The entrepreneur: value
If the buyer is a current rival and the acquisition would
provide sustainable competitive advantage the buyer
may be willing to pay a premium for the seller.
08/31/14 8

“A purchase in which the value of the
business is based on the stand-alone cash
generating potential of firm being acquired”
Longenecker,J.G…….et.a;(2003),p.350
08/31/14 9

The buyer is interested in a value that stimulates future
sales growth and reduced costs.
The entrepreneur : business source of value is its cash
generating potentials.
The buyer will often make change in the business
operations, pressures on personnel resulting in layoffs
that the current owner might find intolerable.
08/31/14 10

Employee stock ownership plan ESOP: “a
method by which a firm is sold either in part
or in total to its employees”, Longenecker,J.G, et.al;
(2003),p.350
A buyer is interested in preserving
employment. ESOP provide them a way to
acquire ownership interest in the business.
Owner: provide a way to cash out.
08/31/14 11

It is the orderly withdrawal of the owners’ investment in the form
of cash flows: selling firm assets and ceasing operations.
Disadvantage:
Reducing reinvestment when the business is at growth result in
lost value creation and inability to sustain competitive advantage;
Advantages:
Owners can retain control of their business while they harvest
investment;
They don’t have to seek out a buyer or incur sales expenses.
08/31/14 12

• It is the first sale of shares of a company stock to
the public, Longenecker,J..et.a;(2003),p.352.
• Reasons for going public:
• To raise capital to repay outstanding debt;
• To support future growth;
• To find future acquisitions;
• To create a liquid market for the company stock;
• To broaden the company’s shareholder base;
• To create ongoing interest in the company and its
continued development.
08/31/14 13

• Private equity is money provided by venture
capitalists or private investors,
Longenecker,J.G.et.al;(2003),p 354.
• Difficulties facing family businesses:
Trying to meet owners’ need for cash and the
firm need for growth capital, while retaining
control; Transferring ownership to next
generation; Capital and liquidity needs and
properties.
08/31/14 14

Business Valuation & Methods of
Payment:
• Business Valuation:
- Although, “Business valuation is part science
and part art, so there is no precise formula
for determining the price of a private
company”. (Longenecker, J.G. et.al.(2003), p.356)
- Valuation is very important in different stages
of the business lifecycle (i.e. introduction
stage, growth stage, mature stage, and
decline stage).
08/31/14 15

Methods for valuation:
1. Return on Investment (RoI):
common methods for valuation the business.
2. Market Comparable Valuation:
compare the firm with other firms in the same
business / industry.
08/31/14 16

Methods for valuation (cont.):
3. Based on the firm earnings:
The method can be summarized as follow:
Firm Value = EBITDA * Valuation Multiple
(Equity value = Firm Value – Long term debt)
Valuation Multiple: is determined through assumptions
about Riskiness; Expected Future Growth in Earnings; and
Competitive Conditions.
This method is very much relying on the experience and
judgment of the person doing the valuation.
not commonly used!
08/31/14 17

Method of payment:
Two methods: cash or in stock. Cash is
preferred over stock world widely.
08/31/14 18

Developing an effective exit strategy:
The entrepreneurs should consider the
following points:
1. Management for the exit:
It means planning for it, since the start-up
(it should be in the Business Plan) of the
business. In addition, to planning for their
next business before exiting the already
existing one.
08/31/14 19

In order to achieve this successfully,
entrepreneurs should:
- Have clear and separate accounting process
(separate from his/her personal life).
- Effective Board of directors to offer valuable
business advices (they should be convinced
about the importance of having exit strategy).
- To have record of accomplishment (it helps in
conducting the process of business
valuation).
08/31/14 20

2. Expect Conflict – emotional & cultural:
For these reasons: Entrepreneurs are not good
employees (obsessed by autonomy); cultural
conflict between new management and old
employees. Nature and degree of conflict
varies.
3. Get good advice:
• Professional consultants,
• Other entrepreneurs who exited their
businesses before,
08/31/14 21

Checklist for some points that should be
considered for developing an effective exit
strategy:
Legal incorporation of the business, to
recognize yourself and your business as
separate entities.
Annual valuation of the business.
Develop an employee benefit plan (in the
case of partnership when they died, injured,
and retired).
Plan for who retains company ownership and
who should be paid off.(in case of
partnership)
08/31/14 22

What’s Next?
Most of the entrepreneurs exiting their
businesses to start-up new ventures for the
reason that they are “purpose-driven people”
and whatever they do it, they do it with
passion, and seeking high level of
achievement (above average!)
08/31/14 23

References:
1. Anonymous (n.d.). Exit Strategies, Chapter 14. Available at
<
http://www.ohiobar.org/General%20Resources/pub/legalbasics/LB%20Chapter%>
[Accessed 29th February 2012]
2. Longenecker,J.G., et al., (2003). Small Business Management, An
Entrepreneurial Emphasis. 12th ed. Ohio: South – Western, a division of
Thomson Learning.
3. Nicola, A., Buy-sellapharmacy.com, (n.d.). Developing an effective business
strategy. Available at
<
http://www.buy-sellapharmacy.com/attachments/article/51/article%20-%20developing%>
[Accessed 29th February 2012]
08/31/14 24

Exit strategies (1)final

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Exit strategies (1)final