Ending a Venture-g

8/13/2019 Ending a Venture-g

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Hisrich

Peters

Shepherd

Chapter 15Succession Planning andStrategies for Harvestingand Ending the Venture

Copyright 2010 by The M cGraw-Hi ll Companies, Inc. All ri ghts reserved.McGraw-Hill/Irwin


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Exit Strategy

Exit strategies include:

Initial public offering (IPO).

Private sale of stock.

Succession by a family member or a nonfamilymember.

Merger with another company.

Liquidation.


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Table 15.1 - Succession PlanningTips


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Succession of Business

Transfer to Family Members

Role of owner - full-time/part-time/retire.

Family dynamics.

Income for working family members andshareholders.

Transition business environment.

Treatment of loyal employees.

Tax consequences.


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Transfer to Nonfamily Members

Train a key employee and retain some equity.

Retain control and hire a manager.

Sell the business outright.

Succession of Business (cont.)


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Options for Selling the Business

Direct Sale

Strategies to be considered:

Focus on a narrow, well-defined segment.

Control costs and focus on higher margins and profits. Get all financial statements in order.

Prepare a management documentation.

Assess the condition of capital equipment.

Get tax advice.

Get nondisclosures from key employees.

Try to maintain a good management team.

Prepare and plan in advance.


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An important consideration is the type ofpayment the buyer will use.

Business brokers may be helpful.

The best way to communicate the business topotential buyers is through the business plan.

The role of an entrepreneur may varydepending on the sale agreement or contractwith the new owner(s).

Options for Selling the Business(cont.)


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Employee Stock Option Plan

Establishes a new legal entityan employeestock ownership trust.

Obligates the firm to repay the loan plusinterest out of business cash flows.

Results in significant stock values foremployees.



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Advantages:

Motivates employees to put in extra time or effort.

Provides a mechanism to pay back loyal employees.

Allows transfer of business under a planned written

agreement.Permits the company to reap the advantage ofdeducting contributions on ESOP or any dividends paid.


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Management Buyout

Usually involves a direct sale of the venture forsome predetermined price.

To establish a price, the entrepreneur should: Have an appraisal of all the assets.

Determine the goodwill value established from pastrevenue.

Sale of a venture can be:

For cash.

Financed through banks

Through sale of voting or nonvoting stock.

The entrepreneur may agree to carry a note.



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BankruptcyAn Overview

Most common types of bankruptcies:

Type-1 liquidation (69% in 2008).

Type 2 reorganization (19% in 2008).

Type 3 installment payments (12% in 2008).


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Bankruptcy lessons:

Too much time and effort is spent ondiversifying in markets where entrepreneurs

lack knowledge. Bankruptcy protects entrepreneurs from

creditors, not from competitors.

It is difficult to separate entrepreneurs from the

business. Entrepreneurs should file for bankruptcy early.

Bankruptcy needs to be shared with employeesand everybody else involved.

BankruptcyAn Overview (cont.)


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Bankruptcy Act of 1978 (with amendmentsadded in 1984 and 2005) ensures:

Fair distribution of assets to creditors.

Protection of debtors from unfair depletion ofassets.

Protection of debtors from unfair demands bycreditors.

BankruptcyAn Overview (cont.)


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Surviving Bankruptcy

Bankruptcy can be used as a bargaining chip tovoluntarily restructure and reorganize the

venture. File before failure of cash or revenue.

Chapter 11 should be filed only if a chance ofrecovery exists.

Be prepared for examination of transactions forfraud.

Reorganization (cont.)


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Maintain good records.

Understand how protection against creditorsworks.

Transfer litigation to bankruptcy court. Prepare a realistic financial reorganization plan.

Reorganization (cont.)


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Extended Time Payment Plans

Individual creates a five-year repaymentplan under court supervision.

A court appointed trustee receives money

from debtor. Bears responsibility for making scheduled

payments to all creditors.

About two of every three Chapter 13 filers

ultimately fail to meet their plannedobligations, thus resulting in a Chapter 7filing.


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Liquidation

The most extreme case of bankruptcy.

Voluntary bankruptcy - Entrepreneursdecision to file for bankruptcy.

Courts will require a current income andexpense statement.

Involuntary bankruptcy - Petition ofbankruptcy filed by creditors without

consent of entrepreneur.


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Table 15.2 - Liquidation underInvoluntary Bankruptcy


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Strategy During Reorganization

The entrepreneur can speed up the processby:

Taking the initiative in preparing a plan.

Selling the plan to secured creditors. Communicating with groups of creditors.

Not writing checks that cannot be covered.

Enhancing the bankruptcy process by:

Keeping creditors abreast of how the business isdoing.

Stressing the significance of creditors supportduring the process.


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Table 15.3 - Requirements forKeeping a Venture Afloat


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Table 15.4 - Warning Signs ofBankruptcy


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Starting Over

Entrepreneurs are likely to continue startingnew ventures even after failing.

Entrepreneurs who have failed tend to have

a better understanding and appreciation forthe need for:

Market research.

More initial capitalization.

Stronger business skills.

Business failure does not have to be astigma when seeking venture capital.


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The Reality of Failure

Important considerations for theentrepreneur in case of failure:

Consult with family.

Seek outside assistance from professionals,friends, and business associates.

Do not hang on to a venture that will continuallydrain resources.


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Business Turnarounds

Learn to recognize the warning signs ofbankruptcy.

Principles of a successful turnaround:

Aggressive hands-on management. Management must have a plan.

Action.

Documents

Ending a Venture-g