Presentation by:
Iman M. Ahmed Ibrahim
Reem Abdel Hameed Tambal
9/18/2013 1
Ahfad University of Women
MBA-Batch (5)
Exit s...
• Exiting/harvesting : is the process used by
entrepreneurs and investors to reap the value
of a business when they get ou...
When do entrepreneurs exit their
business????????
• When a business is declining i.e. Bankruptcy, rendered
obsolete, etc.;...
• To seize the full value of a business; reduce
risk and create future options;
• To appeal to investors;
• To easily tran...
9/18/2013 5
Source: Longenecker,J.G…….et.al;(2003),p.349
Iman M.A. Ibrahim & Reem A/H. Tambal
• Motivation
• Challenge
9/18/2013 6Iman M.A. Ibrahim & Reem A/H. Tambal
9/18/2013 7
“a purchase in which the value of the
business is based on both the firm stand-
alone characteristics and the ...
9/18/2013 8
The critical issue here is the strategic fit between the
business to be exited and a potential buyer:
The buye...
9/18/2013 9
“A purchase in which the value of the
business is based on the stand-alone cash
generating potential of firm b...
9/18/2013 10
The buyer is interested in a value that stimulates future
sales growth and reduced costs.
The entrepreneur : ...
9/18/2013 11
Employee stock ownership plan ESOP: “a
method by which a firm is sold either in part
or in total to its emplo...
9/18/2013 12
It is the orderly withdrawal of the owners’ investment in the form
of cash flows: selling firm assets and cea...
• It is the first sale of shares of a company stock to
the public, Longenecker,J..et.a;(2003),p.352.
Reasons for going pub...
Private equity is money provided by venture
capitalists or private investors, Longenecker,J.G.et.al;
(2003),p 354.
Difficu...
Business Valuation & Methods of
Payment:
Business Valuation:
- Although, “Business valuation is part science
and part art,...
Methods for valuation:
1. Return on Investment (RoI):
common methods for valuation the business.
2. Market Comparable Valu...
Methods for valuation (cont.):
3. Based on the firm earnings:
The method can be summarized as follow:
Firm Value = EBITDA ...
Method of payment:
Two methods: cash or in stock. Cash is
preferred over stock world widely.
9/18/2013 18Iman M.A. Ibrahim...
Developing an effective exit strategy:
Entrepreneurs should consider the
following points:
1. Management for the exit:
It ...
Developing an effective exit strategy:
In order to achieve this successfully,
entrepreneurs should:
- Have clear and separ...
Developing an effective exit strategy:
2. Expect Conflict – emotional & cultural:
For these reasons: Entrepreneurs are not...
Checklist for some points that should be
considered for developing an effective exit
strategy:
Legal incorporation of the...
What’s Next?
Most of the entrepreneurs exiting their
businesses to start-up new ventures for the
reason that they are “pur...
References:
1. Anonymous (n.d.). Exit Strategies, Chapter 14. Available at
<
http://www.ohiobar.org/General%20Resources/pu...
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Exit strategies in small business

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Exit strategies in small business

  1. 1. Presentation by: Iman M. Ahmed Ibrahim Reem Abdel Hameed Tambal 9/18/2013 1 Ahfad University of Women MBA-Batch (5) Exit strategies in Small Business Iman M.A. Ibrahim & Reem A/H. Tambal
  2. 2. • Exiting/harvesting : is the process used by entrepreneurs and investors to reap the value of a business when they get out of it. Longenecker,J.G.et.al.(2003),p.347; • From a small business point of view, a viable exit strategy is a plan that allows the owners or investors in a small business to walk away with what they want to walk away with. Ward, S. (n.d.) 9/18/2013 2 What is an Exit strategy Iman M.A. Ibrahim & Reem A/H. Tambal
  3. 3. When do entrepreneurs exit their business???????? • When a business is declining i.e. Bankruptcy, rendered obsolete, etc.; • Other reasons (Four D’s for exiting the business): • Death: entrepreneurs just think about it when it is requested by the insurance agencies. • Disability: it creates financial strains that will adversely affect the business. • Divorce: it can ruin both parties (financially, etc). • Departure: in case of partnership. 9/18/2013 3Iman M.A. Ibrahim & Reem A/H. Tambal
  4. 4. • To seize the full value of a business; reduce risk and create future options; • To appeal to investors; • To easily transfer ownership to the next generations; • To be prepared for change in life style. 9/18/2013 4Iman M.A. Ibrahim & Reem A/H. Tambal
  5. 5. 9/18/2013 5 Source: Longenecker,J.G…….et.al;(2003),p.349 Iman M.A. Ibrahim & Reem A/H. Tambal
  6. 6. • Motivation • Challenge 9/18/2013 6Iman M.A. Ibrahim & Reem A/H. Tambal
  7. 7. 9/18/2013 7 “a purchase in which the value of the business is based on both the firm stand- alone characteristics and the synergies that the buyer think can be created”. Longenecker,J.G…….et.al;(2003),p.349 Continued…………………… Iman M.A. Ibrahim & Reem A/H. Tambal
  8. 8. 9/18/2013 8 The critical issue here is the strategic fit between the business to be exited and a potential buyer: The buyer : synergies The entrepreneur: value If the buyer is a current rival and the acquisition would provide sustainable competitive advantage the buyer may be willing to pay a premium for the seller. Iman M.A. Ibrahim & Reem A/H. Tambal
  9. 9. 9/18/2013 9 “A purchase in which the value of the business is based on the stand-alone cash generating potential of firm being acquired” Longenecker,J.G…….et.a;(2003),p.350 Iman M.A. Ibrahim & Reem A/H. Tambal
  10. 10. 9/18/2013 10 The buyer is interested in a value that stimulates future sales growth and reduced costs. The entrepreneur : business source of value is its cash generating potentials. The buyer will often make change in the business operations, pressures on personnel resulting in layoffs that the current owner might find intolerable. Iman M.A. Ibrahim & Reem A/H. Tambal
  11. 11. 9/18/2013 11 Employee stock ownership plan ESOP: “a method by which a firm is sold either in part or in total to its employees”, Longenecker,J.G, et.al; (2003),p.350 A buyer is interested in preserving employment. ESOP provide them a way to acquire ownership interest in the business. Owner: provide a way to cash out. Iman M.A. Ibrahim & Reem A/H. Tambal
  12. 12. 9/18/2013 12 It is the orderly withdrawal of the owners’ investment in the form of cash flows: selling firm assets and ceasing operations. Disadvantage: Reducing reinvestment when the business is at growth result in lost value creation and inability to sustain competitive advantage; Advantages: Owners can retain control of their business while they harvest investment; They don’t have to seek out a buyer or incur sales expenses. Iman M.A. Ibrahim & Reem A/H. Tambal
  13. 13. • It is the first sale of shares of a company stock to the public, Longenecker,J..et.a;(2003),p.352. Reasons for going public: • To raise capital to repay outstanding debt; • To support future growth; • To find future acquisitions; • To create a liquid market for the company stock; • To broaden the company’s shareholder base; • To create ongoing interest in the company and its continued development. 9/18/2013 13Iman M.A. Ibrahim & Reem A/H. Tambal
  14. 14. Private equity is money provided by venture capitalists or private investors, Longenecker,J.G.et.al; (2003),p 354. Difficulties facing family businesses: Trying to meet owners’ need for cash and the firm need for growth capital, while retaining control; Transferring ownership to next generation; Capital and liquidity needs and properties. 9/18/2013 14Iman M.A. Ibrahim & Reem A/H. Tambal
  15. 15. Business Valuation & Methods of Payment: Business Valuation: - Although, “Business valuation is part science and part art, so there is no precise formula for determining the price of a private company”. (Longenecker, J.G. et.al.(2003), p.356) - Valuation is very important in different stages of the business lifecycle (i.e. introduction stage, growth stage, mature stage, and decline stage). 9/18/2013 15Iman M.A. Ibrahim & Reem A/H. Tambal
  16. 16. Methods for valuation: 1. Return on Investment (RoI): common methods for valuation the business. 2. Market Comparable Valuation: compare the firm with other firms in the same business / industry. 9/18/2013 16Iman M.A. Ibrahim & Reem A/H. Tambal
  17. 17. Methods for valuation (cont.): 3. Based on the firm earnings: The method can be summarized as follow: Firm Value = EBITDA * Valuation Multiple (Equity value = Firm Value – Long term debt) Valuation Multiple: is determined through assumptions about Riskiness; Expected Future Growth in Earnings; and Competitive Conditions. This method is very much relying on the experience and judgment of the person doing the valuation. not commonly used! 9/18/2013 17Iman M.A. Ibrahim & Reem A/H. Tambal
  18. 18. Method of payment: Two methods: cash or in stock. Cash is preferred over stock world widely. 9/18/2013 18Iman M.A. Ibrahim & Reem A/H. Tambal
  19. 19. Developing an effective exit strategy: Entrepreneurs should consider the following points: 1. Management for the exit: It means planning for it, since the start-up (it should be in the Business Plan) of the business. In addition, to planning for their next business before exiting the already existing one. 9/18/2013 19Iman M.A. Ibrahim & Reem A/H. Tambal
  20. 20. Developing an effective exit strategy: In order to achieve this successfully, entrepreneurs should: - Have clear and separate accounting process (separate from his/her personal life). - Effective Board of directors to offer valuable business advices (they should be convinced about the importance of having exit strategy). - To have record of accomplishment (it helps in conducting the process of business valuation). 9/18/2013 20Iman M.A. Ibrahim & Reem A/H. Tambal
  21. 21. Developing an effective exit strategy: 2. Expect Conflict – emotional & cultural: For these reasons: Entrepreneurs are not good employees (obsessed by autonomy); cultural conflict between new management and old employees. Nature and degree of conflict varies. 3. Get good advice: • Professional consultants, • Other entrepreneurs who exited their businesses before, 9/18/2013 21Iman M.A. Ibrahim & Reem A/H. Tambal
  22. 22. Checklist for some points that should be considered for developing an effective exit strategy: Legal incorporation of the business, to recognize yourself and your business as separate entities. Annual valuation of the business. Develop an employee benefit plan (in the case of partnership when they died, injured, and retired). Plan for who retains company ownership and who should be paid off.(in case of partnership) 9/18/2013 22Iman M.A. Ibrahim & Reem A/H. Tambal
  23. 23. What’s Next? Most of the entrepreneurs exiting their businesses to start-up new ventures for the reason that they are “purpose-driven people” and whatever they do it, they do it with passion, and seeking high level of achievement (above average!) 9/18/2013 23Iman M.A. Ibrahim & Reem A/H. Tambal
  24. 24. References: 1. Anonymous (n.d.). Exit Strategies, Chapter 14. Available at < http://www.ohiobar.org/General%20Resources/pub/legalbasics/LB%20Chapter% > [Accessed 29th February 2012] 2. Longenecker,J.G., et al., (2003). Small Business Management, An Entrepreneurial Emphasis. 12th ed. Ohio: South – Western, a division of Thomson Learning. 3. Nicola, A., Buy-sellapharmacy.com, (n.d.). Developing an effective business strategy. Available at < http://www.buy-sellapharmacy.com/attachments/article/51/article%20-%20dev > [Accessed 29th February 2012] 9/18/2013 24Iman M.A. Ibrahim & Reem A/H. Tambal

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