Entrepreneurship Chap 15

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Entrepreneurship Chap 15

  1. 1. HisrichPetersShepherdChapter 15Succession Planning andStrategies for Harvestingand Ending the VentureCopyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
  2. 2. 15-2Exit 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.
  3. 3. 15-3Table 15.1 - Succession PlanningTips
  4. 4. 15-4Succession 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.
  5. 5. 15-5 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.)
  6. 6. 15-6Options 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.
  7. 7. 15-7 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.)
  8. 8. 15-8 Employee Stock Option Plan Establishes a new legal entity—an employeestock ownership trust. Obligates the firm to repay the loan plusinterest out of business cash flows. Results in significant stock values foremployees.Options for Selling the Business(cont.)
  9. 9. 15-9Options 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 writtenagreement.Permits the company to reap the advantage ofdeducting contributions on ESOP or any dividends paid.
  10. 10. 15-10 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.Options for Selling the Business(cont.)
  11. 11. 15-11Bankruptcy—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% in2008).
  12. 12. 15-12 Bankruptcy lessons: Too much time and effort is spent ondiversifying in markets where entrepreneurs lackknowledge. Bankruptcy protects entrepreneurs fromcreditors, not from competitors. It is difficult to separate entrepreneurs from thebusiness. Entrepreneurs should file for bankruptcy early. Bankruptcy needs to be shared with employeesand everybody else involved.Bankruptcy—An Overview (cont.)
  13. 13. 15-13 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.Bankruptcy—An Overview (cont.)
  14. 14. 15-14Chapter 11—Reorganization Courts try to give the venture “breathingroom” to pay its debts. A plan for reorganization is prepared andapproved by the US Bankruptcy Court. Decisions made reflect one or acombination of the following: Extension - Postpone claims. Substitution - Exchange stock for debt. Composition settlement - Debt is prorated tocreditors as settlement.
  15. 15. 15-15 Surviving Bankruptcy Bankruptcy can be used as a bargaining chip tovoluntarily restructure and reorganize theventure. 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.Chapter 11—Reorganization (cont.)
  16. 16. 15-16 Maintain good records. Understand how protection against creditorsworks. Transfer litigation to bankruptcy court. Prepare a realistic financial reorganization plan.Chapter 11—Reorganization (cont.)
  17. 17. 15-17Chapter 13—Extended TimePayment Plans Individual creates a five-year repaymentplan under court supervision. A court appointed trustee receives moneyfrom debtor. Bears responsibility for making scheduledpayments to all creditors. About two of every three Chapter 13 filersultimately fail to meet their plannedobligations, thus resulting in a Chapter 7filing.
  18. 18. 15-18Chapter 7—Liquidation The most extreme case of bankruptcy. Voluntary bankruptcy - Entrepreneur’sdecision to file for bankruptcy. Courts will require a current income andexpense statement. Involuntary bankruptcy - Petition ofbankruptcy filed by creditors withoutconsent of entrepreneur.
  19. 19. 15-19Table 15.2 - Liquidation underChapter 7 Involuntary Bankruptcy
  20. 20. 15-20Strategy 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.
  21. 21. 15-21Table 15.3 - Requirements forKeeping a Venture Afloat
  22. 22. 15-22Table 15.4 - Warning Signs ofBankruptcy
  23. 23. 15-23Starting Over Entrepreneurs are likely to continue startingnew ventures even after failing. Entrepreneurs who have failed tend to havea 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.
  24. 24. 15-24The 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.
  25. 25. 15-25Business Turnarounds Learn to recognize the warning signs ofbankruptcy. Principles of a successful turnaround: Aggressive hands-on management. Management must have a plan. Action.

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