ENTR 452ENTR 452Chapter 15: SuccessionChapter 15: Succession

Planning/Ending the VenturePlanning/Ending the Venture

EXIT STRATEGIESEXIT STRATEGIES

Initial public offering (IPO).

Private sale of stock.

Succession by a family member or a nonfamily member.

Merger with another company.

Liquidation.

SUCCESSION OF BUSINESSSUCCESSION OF BUSINESS

Transfer to Family Members– Role of owner - full-time/part-time/retire.– Family dynamics.– Income for working family members and

shareholders.– Transition business environment.– Treatment of loyal employees.– Tax consequences.

Transfer to Nonfamily Members– Train a key employee and retain some equity.– Retain control and hire a manager.– Sell the business outright.

SUCCESSION OF BUSINESSSUCCESSION OF BUSINESS

SELLING THE BUSINESSSELLING THE BUSINESSStrategies to be considered:

Focus on a narrow, well-defined segment.Control costs and focus on higher margins/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.

An important consideration is the type of payment the buyer will use.

Business brokers may be helpful.

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

The role of an entrepreneur may vary depending on the sale agreement or contract with the new owner(s).

SELLING THE BUSINESSSELLING THE BUSINESS

Employee Stock Option Plan– Establishes a new legal entity—an employee

stock ownership trust.– Obligates the firm to repay the loan plus

interest out of business cash flows.– Results in significant stock values for

employees.

SELLING THE BUSINESSSELLING THE BUSINESS

Direct sale of the venture for some predetermined price.

To establish a price, the entrepreneur should:Have an appraisal of all the assets. Determine the goodwill value established from past revenue.

Sale of a venture can be:For cash.Financed through banksThrough sale of voting or nonvoting stock.

The entrepreneur may agree to carry a note.

MANAGEMENT BUYOUTMANAGEMENT BUYOUT

BANKRUPTCYBANKRUPTCY

Most common types of bankruptcies:– Chapter 7 or liquidation (70% in 2011).– Chapter 11 or reorganization (21% in 2011).– Chapter 13 or installment payments (9% in 2011).

Too much time and effort is spent on diversifying 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 employees and everybody else involved.

BANKRUPTCY LESSONSBANKRUPTCY LESSONS

CHAPTER 7—LIQUIDATIONCHAPTER 7—LIQUIDATION

The most extreme case of bankruptcy.

Voluntary bankruptcy – Entrepreneur’s decision to file for bankruptcy.– Courts will require a current income and expense

statement.

Involuntary bankruptcy – Petition of bankruptcy filed by creditors without consent of entrepreneur.

CHAPTER 11(REORGANIZATION) CHAPTER 11(REORGANIZATION) Courts try to give the venture “breathing room” to pay its debts.

A plan for reorganization is prepared and approved by the US Bankruptcy Court.

Decisions made reflect one or a combination of the following:– Extension - Postpone claims.– Substitution - Exchange stock for debt.– Composition settlement - Debt is prorated to creditors as

settlement.

Surviving Bankruptcy– Bankruptcy can be used as a bargaining chip to

voluntarily restructure and reorganize the venture.– File before failure of cash or revenue.– Chapter 11 should be filed only if a chance of

recovery exists.– Be prepared for examination of transactions.– Maintain good records.– Understand how protection against creditors works.– Transfer litigation to bankruptcy court.– Prepare a realistic financial reorganization plan.

CHAPTER 11(REORGANIZATION) CHAPTER 11(REORGANIZATION)

CHAPTER 13—EXTENDED CHAPTER 13—EXTENDED TIME PAYMENT PLANSTIME PAYMENT PLANS

Individual creates a five-year repayment plan under court supervision.

A court appointed trustee receives money from debtor.– Bears responsibility for making scheduled payments

to all creditors.

About two thirds of Chapter 13 filers ultimately fail to meet their planned obligations, thus resulting in a Chapter 7 filing.

REORGANIZATION STRATEGYREORGANIZATION STRATEGY

The entrepreneur can speed up the process by: – 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 is

doing.– Stressing the significance of creditors’ support

during the process.

STARTING OVERSTARTING OVER

Entrepreneurs are likely to continue starting new ventures even after failing.

Entrepreneurs who have failed tend to have a better understanding and appreciation for the need for:

– Market research.– More initial capitalization.– Stronger business skills.

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

THE REALITY OF FAILURETHE REALITY OF FAILURE

Important considerations for the entrepreneur 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 continually

drain resources.

BUSINESS TURNAROUNDSBUSINESS TURNAROUNDS

Learn to recognize the warning signs of bankruptcy!

Principles of a successful turnaround:– Aggressive hands-on management.– Management must have a plan.– Action.