13 entrepreneurship exit strategies for entrepreneurs: the concluding act

13Entrepreneurship

Exit Strategies for Entrepreneurs: The Concluding Act

13-2

“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

13-3

Exit Strategies

• Sell or transfer ownership to insiders

• Sell or transfer ownership to outsiders

• Take the company public through an IPO

13-4

Sale or Transfer to Insiders

• Succession

• Leveraged buyout

• Employee stock ownership plan

13-5

All In the Family

• Share power

• Form a limited partnership

• Set up a trust

13-6

Commitment in the Family Business

• Affective commitment

• Normative commitment

• Calculative commitment

• Imperative commitment

13-7

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.

13-8

Employee Stock Ownership

• Ordinary ESOP

• Leveraged plan

• Transfer ownership plan

13-9

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

13-10

What’s It Worth?

• Balance sheet methods

• Earnings methods

• Market method

13-11

Balance Sheet Methods

• Balance sheet method

Net worth = Assets – Liabilities

• Adjusted balance sheet method

Estimates market value of assets

13-12

Earnings Methods

• Excess earnings method

• Capitalized earnings method

• Discounted future earnings method

13-13

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

13-14

• New equity capital

• Liquidity

• Market provides continuing valuation of worth

• Prestige and recognition

• Personal wealth

Benefits of IPOs

13-15

• Loss of control

• Disclosure

• Sarbanes-Oxley Act

• Expense

Disadvantages of IPOs

13-16

Steps to Going Public

• Prepare for listing day

• Prepare documentation

• Distribution exercise and road show

• Flow information to stock analysts and investors

13-17

Other Considerations

• Choosing an underwriter

• Timing

• Government requirements for registration of shares, prospectus

• Aftermarket support

13-18

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

13-19

Bargaining Tactics

• Ethical– Beginning with an extreme initial offer

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

an “out”

13-20

• Broadening the pie

• Nonspecific compensation

• Logrolling

• Cost-cutting

• Bridging

Reaching Integrative Agreements

13-21

Changes Over Time

• Physical appearance and energy

• Cognition and memory

• Intelligence

• Creativity