Hisrich

Peters

Shepherd

Chapter 15Succession Planning and Strategies for Harvesting and Ending the Venture

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights 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 nonfamily

member. Merger with another company. Liquidation.

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Table 15.1 - Succession Planning Tips

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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 and

shareholders. 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 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).

Options for Selling the Business (cont.)

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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.

Options for Selling the Business (cont.)

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Options for Selling the Business (cont.)

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 of deducting contributions on ESOP or any dividends paid.

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Management Buyout Usually involves a 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 banks Through sale of voting or nonvoting stock.

The entrepreneur may agree to carry a note.

Options for Selling the Business (cont.)

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Bankruptcy—An Overview

Most common types of bankruptcies: Chapter 7 or liquidation (69% in 2008). Chapter 11 or reorganization (19% in 2008). Chapter 13 or installment payments (12% in

2008).

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Bankruptcy lessons: 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—An Overview (cont.)

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Bankruptcy Act of 1978 (with amendments added in 1984 and 2005) ensures: Fair distribution of assets to creditors. Protection of debtors from unfair depletion of

assets. Protection of debtors from unfair demands by

creditors.

Bankruptcy—An Overview (cont.)

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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.

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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 for

fraud.

Chapter 11—Reorganization (cont.)

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Maintain good records. Understand how protection against creditors

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

Chapter 11—Reorganization (cont.)

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Chapter 13—Extended Time 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 of every three Chapter 13 filers ultimately fail to meet their planned obligations, thus resulting in a Chapter 7 filing.

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Chapter 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.

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Table 15.2 - Liquidation under Chapter 7 Involuntary Bankruptcy

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Strategy During Reorganization

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.

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Table 15.3 - Requirements for Keeping a Venture Afloat

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Table 15.4 - Warning Signs of Bankruptcy

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Starting 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.

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The 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.

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Business Turnarounds

Learn to recognize the warning signs of bankruptcy.

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