entrepreneurship: the final harvest of a new venture

Table 15.2 Comparison of Entry Strategies for Succession in Privately Held Business

Advantages Disadvantages

Early Entry Strategies

Intimate familiarity with the nature of the business andemployees is acquired.

Skills specificallyrequired by the business are developed.

Exposure to others in the business facilities acceptance and the achievement of credibility.

Conflict results when the owner has difficulty with teaching or relinquishing control to the successor.

Normal mistakes tend to be viewed as incompetence in the successor.

Early Entry Strategies

Strong relationshipswith constituents are readily established.

Knowledge of the environment is limited, and risk of inbreeding are incurred.

Delayed Entry Strategy

The successor’s skills are judged with greater objectivity.

The development of self-confidence and growth independent of familial influence are achieved.

Outside success establishes credibility and serves as a basis for accepting the successor

Specific expertise and understanding of the organization’ key success factors and culture may be lacking.

Set patterns of outside activity may conflict with those prevailing in the family firm.

Delayed Entry Strategy

as a competent executive.

Perspective of the business environment is broadened.

Resentment may result when successors are advanced ahead of long-term employees.

Developing a Succession Strategy

Developing a succession strategy involves several important steps:

1. Understanding the contextual aspects.2. Identifying successor qualities.3. Developing a written succession plan.

Understanding the Contextual Aspects

The five key aspects that must be considered for an effective succession follow

TimeThe earlier the entrepreneur begins to plan for a

successor, the better the chances of finding the right person.

Type of VentureSome entrepreneurs are easy to replace, some

cannot be replaced. To a large degree, this is determined by the type of venture.

Environmental FactorSometimes a successor is needed because the

business environment changes and a parallel change is needed at the top.

Indentifying Successor Qualities

Successors should possess many qualities or characteristics.

1. Sufficient knowledge of the business or a good position from which to acquire this knowledge within an acceptable time frame.

2. Fundamental honesty and capability. 3. Good health4. Energy5. Alertness and perception6. Enthusiasm about the enterprise

7. Personality compatible with the business8. High degree of perseverance 9. Stability and maturity 10. Reasonable amount of aggressiveness 11. Thoroughness and a proper respect for detail12. Problem-solving ability13. Resourcefulness14. Ability to plan and organize 15. Talent to develop people16. Personality of a starter and a finisher17. Appropriate agreement with the owner’s

philosophy about the business.

A Written Succession Strategy

These elements prepare the entrepreneur to develop a management continuity strategy and policy.

1. The owner controls the management continuity strategy entirely.

2. The owner consults with selected family members. 3. The owner works with professional advisors .4. The owner works with family involvement. 5. The owner formulates buy/sell agreements at the

very outset of the company, or soon thereafter, and whenever a major change occurs.

6. The owner considers employee stock ownership plans (ESOPs).

7. The owners sells or liquidates the business when losing enthusiasm for it but is still physically able to go on.

8. The owner sells or liquidates after discovering a terminal illness but still has time for the orderly transfer of management or ownership.

Legal advice is beneficial for all of these strategies, but greater benefit is having advisors who understand the succession issues and are able to recommend a course of action.

The Exit Strategy: Liquidity Events

Exit Strategy-is defined as that component of the business plan where an entrepreneur describes a method by which investors can realize a tangible return on their investment.

The questions of how much, when, and how need to be address.

Liquidity Event- refers to the positioning of the venture for the realization of a cash return for the owners and the investors.

The Initial Public Offering (IPO)

Initial Public Offering- is used to represent the registered public offering of a company’s securities for the first time.

The entire initial public offering process is at once fast-moving and highly structured, governed by an interlocking set of federal and state laws and regulations and self-regulatory organization rules. Each member of the IPO team has specific responsibilities to fulfill; however, the company ultimately calls the plays for the team.

Table 15.3 The IPO Process

The following steps in the IPO process apply to both U.S. and non-U.S. companies.

Present proposal to the board.Restate financial statements and refocus the company.Find an underwriter and execute a “letter of intent”.Draft prospectus.Respond to due diligence.Select a financial printer.Assemble the syndicate.Perform the road show.Prepare, revise, and print the prospectus. Price the offering.Determine the offering size.

The Securities and Exchange Commission (SEC) requires the filing of a registration statement that includes a complete prospectus on the company.

The SEC then reviews the registration, ensuring that full disclosure is made before giving permission to proceed.

The prospectus must disclose fully all pertinent information about a company and must present a fair representation of the firm’s true prospects.

Some of the specific, detailed information that must be presented follows:History and nature of the companyCapital structureDescription of any material contractsDescription of securities being registered Salaries and security holding major offices and directors and the price they paid for holdingsUnderwriting arrangementsEstimate and use of net proceedsAudited financial statementsInformation about the competition with an estimation of the chances of the company’s survival

Some of the more important disclosure requirements for annual reports follow:Audited financial statements that include the balance sheets for the past two years and income and funds statements for the past three yearsFive years of selected financial dataManagement’s discussion and analysis of financial conditions and results of operationsA brief description of the businessLine-of-business disclosures for the past three fiscal years

Identification of directors and executive officers, with the principal occupation and employer of eachIdentification of the principal market in which the firm’s securities are tradedRange of market prices and dividends for each quarter of the two most recent fiscal years An offer to provide a free copy of the 10-K report to shareholders on written request unless the annual report complies with Form 10-K disclosure requirements

Some of the forms the SEC requires follow:Form S-1 (information contained in the prospectus and other additional financial data)Form 10-Q (quarterly financial statements and a summary of all important events that took place during the three month period)Form 8-K (a report of unscheduled material events or corporate changes deemed important to the shareholder and filed with the SEC within 15 days of the end of a month in which a significant material event transpired)Proxy statements (information given in connection with proxy solicitation)

Table 15.4 The Registration Process

Event Participants Agenda TimetablePreliminary

meeting to discuss issue

President, VP Finance,Independent accountants, underwriters, counsel

Discuss financialneeds; introduce and select type of issue to meet needs

1 July (begin)

Form selection Management council

Select appropriate form for use in registrationstatement

3 July (3 days)

Initial meeting ofworking group

President, VP Finance,Independent accountants, underwriters, counsel for underwriter, company council

Assign specific duties to each person in the working group; discuss underwri-ting problems with this issue; discuss accounting prob-lems with the issue

8 July (8 days)

Event Participants Agenda Timetable

Second meeting ofworking group

Same as for initialmeeting

Review work assign-ments; prepare presentation to board of directors

22 July (22 days)

Meeting of board of directors

Board of directors, members of working group

Approve proposed issue and increase of debt or equity; authorize preparation of materials

26 July (26 days)

Meeting of company counselwith underwriters

Company counsel,counsel for underwriters, underwriter

Discuss underwriting terms and blue-sky problems

30 July (30 days)

…cont.

…cont.

Event Participants Agenda TimetableMeeting of working

groupMembers of working

groupReview collected

material and examine discrepancies

6 August (37 days)

Prefiling conference with SEC staff

Working groupmembers, SEC staff, other experts as needed

Review proposedregistration and associated prob-lems: legal, finan-cial, operative.

9 August (40 days)

Additional meetings of working group

Members of workinggroup

Prepare final registration statement and prospectuses

12-30 August (61 days)

Meeting with board of directors

Board of directors, members of working group

Approve registration statements and prospectuses; discuss relatedtopics and problems

6 September (68 days)

…cont.

Event Participants Agenda TimetableMeeting of working group

Members of working group

Draft final correctedregistration statement

10 September (72 days)

Filing registration statement with SEC

Company counsel or representative and SEC staff

File registration statement and pay fee

12 September(74 days)

Distribution of “red herring” prospectus

Underwriters Publicize offering 16 September(78 days)

Receipt of letter of comments


Relate deficiencies in registration statement

15 October (107 days)

Meeting of working group


Correct deficiencies and submit amendments


…cont.

Event Participants Agenda TimetableDue diligence meeting

Management repre-sentatives, indepen-dent accountants, company counsel, underwriter’s council, underwriters, other professionals as needed

Exchange final information and discuss pertinent problems relating to underwriting and issue


Pricing amendment Management, underwriters

Add the amount for the actual price, underwriter’s discount or commission, and net proceeds to company to the amended registra-tionstatement

25 October (117days)

…cont.

Event Participants Agenda TimetableNotice ofacceptance

SEC staff Report from SEC staff on acceptance status of price-amended registration statement


Statements becomes effective

30 October (122days)

Complete Sale of the Venture

Entrepreneurs consider selling their venture for numerous reasons:

1. Boredom and burnout 2. Lack of operating and growth capital3. No heirs to leave the business to 4. Desire for liquidity5. Aging and health problems6. Desire to pursue other interest

Steps for Selling a BusinessThere are generally eight recommended steps for the

proper preparation, development, and realization of the sale of a venture as follows.

Step 1: Prepare a Financial AnalysisThe purpose of such an analysis is to define priorities

and forecast the next few years of the business. These fundamental questions must be answered:

• What will executive and other workforce requirements be, and how will we pay for them?

• If the market potential is so limited that goals cannot be attained, should we plan an acquisition or develop

new products to meet targets for sales and profits?• Must we raise outside capital for continued growth?

How much and when?

Step 2: Segregate AssetsTax accountants and lawyers may suggest the following

steps to reduce taxes:• Place real estate in a separate corporation, owned

individually or by members of the family.• Establish a leasing subsidiary with title to machinery

and rolling stock. You can then lease this property to the operating company.

• Give some or all of the owner’s shares to heirs when values are low, but have the owner retain voting

rights. Thus when a sale is made, part or all of the proceeds can go directly to another generation without double taxation.

• Hold management’s salaries and fringe benefits at reasonable levels to maximize profits.

Step 3: Value the BusinessEstablishing the valuation of a company constitutes a

most important step in its sale.

Step 4: Identify the Appropriate TimingKnowing when to offer a business for sale is a critical

factor. Timing can be everything. A few suggestions follow:

• Sell when business profits show a strong upward trend.

• Sell when the management team is complete and experienced.

• Sell when the business cycle is on the upswing, with potential buyers in the right mood and holding excess capital or credit for acquisitions.

• Sell when you are convinced that your company’s future will be bright.

Step 5: Publicize the Offer to SellA short prospectus on the company that provides

enough information to interest potential investors should be prepared. This prospectus should be circulated through the proper professional channels: bankers, accountants, lawyers, consultants, and business brokers.

Step 6: Finalize the Prospective BuyersInquires need to be made in the trade concerning the

prospective buyers. Characters and managerial reputation should be assessed to find the best buyer.

Step 7: Remain Involved through the Closing

Meeting with the final potential buyers helps to eliminate areas of misunderstanding and to negotiate the major requirements more effectively. Also, the involvement of professionals such as attorney and accountants usually precludes any major problems arising at the closing.

Step 8: Communicate After the SaleProblems between the new owner and the remaining

management team need to be resolved to build a solid transition. Communication between the seller and the buyer and between the buyer and the current management personnel is a key step.

In addition to these eight steps, an entrepreneur must be aware of the tax implications that arise from the sale of a business. For professional advice, a tax accountant specializing in business valuations and sales should be consulted.