entrepreneurship and negotiation exit strategies for entrepreneurs: when—and how—to harvest the...

Entrepreneurshipand Negotiation

Exit Strategies for Entrepreneurs: When—and How—To Harvest the

Rewards

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“All things change…There is nothing in the whole world which is permanent. Everything flows onward…the ages themselves glide by in constant movement.”

--Ovid, 10 B.C.

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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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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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Factors in Terms of the Sale

• Valuation of the company

• Negotiation process

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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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Advantages of IPOs

• Cash

• Aura of respectability

• Market provides continuing valuation of worth

• Ability to use stock options for employees

• Ability to use stock to acquire other companies

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Disadvantages of IPOs

• A tremendously expensive process

• Lock-up agreements

• Subject to careful scrutiny

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Bargaining Tactics

• Beginning with an extreme initial offer

• Using the “big lie” technique

• Convincing the other side you have an “out”

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Unethical Negotiation Tactics

• False promises

• Misrepresentation

• Inappropriate information gathering

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Reaching Integrative Agreements

• Logrolling• Nonspecific compensation• Broadening the pie• Cost-cutting• Bridging