13Entrepreneurship

Exit Strategies for Entrepreneurs: The Concluding Act

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“It’s interesting to leave a place…. Leaving reminds us of what we can part with and what we can’t, then offers us something to look forward to, to dream about.”

--Richard Ford

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Exit Strategies

• Sell or transfer ownership to insiders

• Sell or transfer ownership to outsiders

• Take the company public through an IPO

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Sale or Transfer to Insiders

• Succession

• Leveraged buyout

• Employee stock ownership plan

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All In the Family

• Share power

• Form a limited partnership

• Set up a trust

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Commitment in the Family Business

• Affective commitment

• Normative commitment

• Calculative commitment

• Imperative commitment

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Leveraged Buyouts

• Managers borrow money to pay the owner an agreed-upon price.

• The new owners pledge their stock as collateral, or…

• Lenders accept an equity position in the company to cover part or all of the funds.

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Employee Stock Ownership

• Ordinary ESOP

• Leveraged plan

• Transfer ownership plan

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Selling to Outsiders

• Sell at the right stage• Sell when the business cycle is strong• Compensate for loss of talent• Identify and protect intellectual property• Adopt transparent and conservative

accounting policies• Resolve open questions that make it

difficult to estimate value

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What’s It Worth?

• Balance sheet methods

• Earnings methods

• Market method

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Balance Sheet Methods

• Balance sheet method

Net worth = Assets – Liabilities

• Adjusted balance sheet method

Estimates market value of assets

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Earnings Methods

• Excess earnings method

• Capitalized earnings method

• Discounted future earnings method

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Market Method

• Market value or price-earnings approach

• Comparing the price-earnings ratio of the business to that of other publicly traded companies in the same industry

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• New equity capital

• Liquidity

• Market provides continuing valuation of worth

• Prestige and recognition

• Personal wealth

Benefits of IPOs

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• Loss of control

• Disclosure

• Sarbanes-Oxley Act

• Expense

Disadvantages of IPOs

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Steps to Going Public

• Prepare for listing day

• Prepare documentation

• Distribution exercise and road show

• Flow information to stock analysts and investors

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Other Considerations

• Choosing an underwriter

• Timing

• Government requirements for registration of shares, prospectus

• Aftermarket support

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Bankruptcy Warning Signs

• Payroll taxes not paid promptly• Suppliers demand payment in cash• Growing volume of customer complaints• Loans refused• Unsystematic or lax financial management• Lacking materials to meet orders• Large discounts to secure orders• Sudden departure of key people

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Bargaining Tactics

• Ethical– Beginning with an extreme initial offer

• Unethical– “Big lie” technique– Convincing the other side that you have

an “out”

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• Broadening the pie

• Nonspecific compensation

• Logrolling

• Cost-cutting

• Bridging

Reaching Integrative Agreements

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Changes Over Time

• Physical appearance and energy

• Cognition and memory

• Intelligence

• Creativity