Academic

1. Planning for Harvest

2. The Importance of the
Harvest
 Harvesting (or Exiting)
The process used by entrepreneurs and
investors to reap the value of a business
when they leave it.
The process involves:
Capturing value (cash value)
Reducing risk
Creating future options

3. Methods for Harvesting a Business

4. Selling the Firm:
Buyers’ Reasons for Purchasing a
Firm
 Sales to Strategic Buyers
A purchase in which the value of the
business is based on both the firm’s
stand-alone characteristics and synergies
that the buyer thinks can be created by
the strategic fit of the firm and a potential
buyer.
 Sales to Financial Buyers
A purchase in which the value of the
business is based on the stand-alone
cash generating potential of the firm being

5. Financial Acquisitions
Types of
Leveraged
Buyouts (LBOs)
Bust-Up
LBO
Management
Buyout (MBO)
Build-Up
LBO

6. Choosing a LBO Firm for
Acquisition
Steady
earnings
over time
Assets
useful as
collateral
Attractive
growth rate
for firm
Characteristics of a
Potential LBO Firm
Effective
management
team

7. Selling the Firm: Buyers’
Reasons for Purchasing a
Firm (cont’d)
 Sales to Employees
Employee Stock Ownership Plan (ESOP)
A method by which a firm is sold either in part
or in total to its employees.
 Employees retirement contributions are used to
purchase shares in the firm.
 Frequently is exit method of last resort.
 Motivates employee-owners to perform.

8. Harvesting by Going Public
 Initial Public Offering (IPO)
Benefits of the sale of shares of stock to
the public:
Signals to investors that a firm is a quality
business and will likely perform well in the
future.
Provides access to more investors when the
firm needs to raise capital to grow the
business.
Helps create ongoing interest in the company
and its continued development.
Makes firm’s stock more attractive as incentive

9. Harvesting by Going Public
 Setting the Stage for an IPO
1. Maintain an accounting process that
cleanly separates the business from the
entrepreneur’s personal life
2. Select a strong board of directors that can
and will offer valuable business advice
3. Manage the firm so as to produce a
successful track record of performance

10. Harvesting by Going Public

11. Going Public: The IPO
Process
1. The firm’s owners decide to go public.
2. If not already completed, an audit of the last three years
financial statements is conducted.
3. An investment banker is selected to guide the IPO process.
4. An S-1 registration is drafted and filed with SEC.
5. Management responds to suggested comments by the SEC,
and issues a Red Herring/Prospectus.
6. Firm goes “on the road” explaining its attributes to investors.
7. On the day before public offering, an offering price is decided
upon.
8. Offering the stock to the public and seeing how it is received.

12. Private Equity
Recapitalization
 Private Equity Recapitalization
Private equity investors provide additional
financing to a business that allows an
entrepreneur to cash out a portion of his
or her investment, while possibly
continuing to operate the business.

13. Private Equity
Recapitalization (cont.)
 Factors in the Transfer of Family-
Owned Firms
Liquidity for exiting family members
Continued financing for company growth
Retaining control of the firm by
the younger family member

14. Private Placement—An Illustration

15. Firm Valuation and Payment
Methods
 The Harvest Value
Opportunity cost of funds is the rate of
return that could be earned on another
investment of similar risk

16. Firm Valuation and Payment
Methods (cont.)
 Harvest Value/Market Comparable
Valuations
Establishing the value of a privately held
company based on the value of a similar
or comparable publicly traded company.
Multiple of earnings method is frequently
used.

17. Harvesting: The Method of
Payment
 Payment Alternatives
Cash
Immediate and stable in value
Tax liability consequences
Stock
Purchaser: protection from liabilities
Seller: immediate but uncontrollable in value
Seller: potential problems with disposal of
stock
Merger with Purchasing Firm
Purchased firm is absorbed into purchasing

18. Developing an Effective
Harvest Plan
 Anticipate the Harvest
Manage for the long-term
Avoid playing the harvest game
Prepare by separating your “self” from the
firm

19. Developing an Effective
Harvest Plan (cont.)
 Expect Conflict—Emotional and
Cultural
Strains of selling own business
Personal ties to the business after sale
 Get Good Advice
Advisors with harvest transaction
experience
Other entrepreneurs who have sold their
firms

20. Developing a Harvest Plan
(cont’d)
 Understand What Motivates Your Exit
Motives for exiting:
Money
Independence
Health of the company
Your management team
An heir apparent taking over
Personal identity and the
business itself
Avoid “seller’s remorse”