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.
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.)
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.
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.)
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.)
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.
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.)
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).
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.)
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.)
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 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.)
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.)
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.
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.
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.
15-21Table 15.3 - Requirements forKeeping a Venture Afloat
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.
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.
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.