2. 17-2
Class Discussion
Role play 1. One student prepares and presents a
speech as if she or he is an entrepreneur informing
employees that her or his business has failed and will
not be operating from tomorrow on. The rest of the
class can respond and ask questions as if they are
devoted employees upset about their jobs.
Role play 2. In small groups, role-play the interchange
between an entrepreneur of a failed business
expressing his or her negative emotions and a friend
providing advice on how to best cope with the
situation.
3. 17-3
Bankruptcy’s Lessons
Too much time and effort spent on diversifying in
markets where entrepreneurs lack knowledge.
Bankruptcy protects entrepreneurs from creditors, not
from competitors.
Difficult to separate entrepreneurs from the business.
Entrepreneurs recognize failure too late.
Bankruptcy is emotionally painful.
6. 17-6
Bankruptcy Warning Signs
Financial management
becomes lax.
Inability to document/
explain transactions.
Large discounts given to
speed up cash flow.
Contracts are accepted
below standard amounts.
Bank requests
subordination.
Key personnel leave.
Lack of materials.
Unpaid taxes.
Demand for cash
payment.
Customer complaints
increase.
7. 17-7
Failure
Q. Is it relevant?
Should we even care?...
Q. Is it important?
Does it even matter?...
Failure is simply inevitable- We all make
mistakes!
Knowing that we do make mistakes, why not try
to understand it, try to manage it and take
advantage of it?
8. 17-8
Failure
In 2009, 60,837 businesses in the U.S. declared
bankruptcy. In any given year, approximately 8-10%
of all firms in a U.S. industry exit
The annual average number of corporate bankruptcies
during the 1990s
Japan: 14,500 Germany: 21,000 Great Britain: 47,000
While every entrepreneur is interested in success;
unfortunately, a majority of entrepreneurial firms (but
not all) fail, and end up in bankruptcy
Failure can often be devastating at the very
personal level…Emotionally, mentally,
physically, economically, socially…
9. 17-9
Evolution - Historically, technological
advancement has been contingent on learning
from previous failures
All-time greatest failures…
e.g., Tacoma Bridge (1940, US)
http://www.youtube.com/watch?v=pl0vzOMYsUU&feat
ure=related
Failure boosted research in each field,
influencing the designs of all models since
then…
But is that all? Failure as the seed for
innovation?
http://www.youtube.com/watch?v=L1FzkY9qzCE
http://ecorner.stanford.edu/authorMaterialInfo.h
tml?mid=2103
10. 17-10
What is failure?
Definition into a context…
Sharing your failure experience
Who? When? Where? What? Why?
What is the essence of failure
(that defines what it is)?
16. 17-16
Business Turnaround
Entrepreneur needs to recognize the warning signs of
bankruptcy.
Consider following principles:
Aggressive hands-on management.
Management must have a plan.
Action.
17. 17-17
Harvesting: Direct Sale
Many entrepreneurs sell so they can move on to new
endeavors.
Requires time and planning.
Buyer payment method.
Business broker.
Business plan.
Employment contract.
Covenant not to compete
Successful small businesses are in demand by larger
firms that wish to grow by acquisition.
Often buyers will purchase a business using notes based
on future profits, but there are future pitfalls.
18. 17-18
Harvesting: Employee Stock Option
Employee stock option
2-3 year plan to sell to employees.
The employee stock option plan (ESOP) is often considered
an alternative to a pension plan.
Its purpose is to reward
employees and to clarify the succession decision.
The ESOP is highly regulated,
where the founder creates a trust fund and contributes stock or
cash for buying the owner’s interest in the venture.
19. 17-19
Harvesting: Management buy-out
based on value of goodwill & asset appraisal
Management buyouts usually involve a direct sale for
some predetermined price.
Sale of a venture to key employees can either be for
cash or could be financed in other ways.
A cash sale would be unlikely if the value of the
business is substantial.
Financing can either be accomplished through a bank
or
the entrepreneur could agree to carry the note.
Other methods of transferring a business are through a
public offering or merger with another business.
22. 17-22
Succession Planning
Transfer to family member
Role of owner- full-time/ part-time/ retire.
Members able to work together?
Income.
Transition business environment.
Loyal employees.
Tax consequences.
Transfer to non-family
Train key employee: retain some equity.
Retain control: hire manager.
Sell.
