Succession Planning and Strategies for

Harvesting and Ending the Venture

Exit Strategy

}  Exit strategies include:

}  Initial public offering (IPO).
}  Private sale of stock.
}  Succession by a family member or a nonfamily member.
}  Merger with another company.
}  Liquidation.
Succession of Business
}  Transfer to Family Members
}  Role of owner - full-time/part-time/retire.
}  Family dynamics.
}  Income for working family members and shareholders.
}  Transition business environment.
}  Treatment of loyal employees.
}  Tax consequences.
Succession of Business (cont.)
}  Transfer to Nonfamily Members
}  Train a key employee and retain some equity.
}  Retain control and hire a manager.
}  Sell the business outright.
Options 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.
Options for Selling the Business
(cont.)
}  An important consideration is the type of payment the buyer
will use.
}  Business brokers may be helpful.
}  The best way to communicate the business to potential buyers
is through the business plan.
}  The role of an entrepreneur may vary depending on the sale
agreement or contract with the new owner(s).
Options for Selling the Business
(cont.)
}  Employee Stock Option Plan
}  Establishes a new legal entity—an employee stock ownership
trust.
}  Obligates the firm to repay the loan plus interest out of
business cash flows.
}  Results in significant stock values for employees.
Options 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 written
agreement.
§ Permits the company to reap the advantage of
deducting contributions on ESOP or any dividends paid.
Options for Selling the Business
(cont.)
}  Management Buyout
}  Usually involves a direct sale of the venture for some
predetermined price.
}  To establish a price, the entrepreneur should:
}  Have an appraisal of all the assets.
}  Determine the goodwill value established from past revenue.
}  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.
Bankruptcy—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% in 2008).
Bankruptcy—An Overview (cont.)

}  Bankruptcy lessons:
}  Too much time and effort is spent on diversifying in markets
where entrepreneurs lack knowledge.
}  Bankruptcy protects entrepreneurs from creditors, not from
competitors.
}  It is difficult to separate entrepreneurs from the business.
}  Entrepreneurs should file for bankruptcy early.
}  Bankruptcy needs to be shared with employees and everybody
else involved.
Bankruptcy—An Overview (cont.)

}  Bankruptcy Act of 1978 (with amendments added in 1984

and 2005) ensures:
}  Fair distribution of assets to creditors.
}  Protection of debtors from unfair depletion of assets.
}  Protection of debtors from unfair demands by creditors.
Chapter 11—Reorganization
}  Courts try to give the venture “breathing room” to pay its
debts.
}  A plan for reorganization is prepared and approved by the
US Bankruptcy Court.
}  Decisions made reflect one or a combination of the
following:
}  Extension - Postpone claims.
}  Substitution - Exchange stock for debt.
}  Composition settlement - Debt is prorated to creditors as
settlement.
Chapter 11—Reorganization (cont.)

}  Surviving Bankruptcy
}  Bankruptcy can be used as a bargaining chip to voluntarily
restructure and reorganize the venture.
}  File before failure of cash or revenue.
}  Chapter 11 should be filed only if a chance of recovery exists.
}  Be prepared for examination of transactions for fraud.
Chapter 11—Reorganization (cont.)

}  Maintain good records.

}  Understand how protection against creditors works.
}  Transfer litigation to bankruptcy court.
}  Prepare a realistic financial reorganization plan.
Chapter 13 - Extended Time Payment
Plans
}  Individual creates a five-year repayment plan under court
supervision.
}  A court appointed trustee receives money from debtor.
}  Bears responsibility for making scheduled payments to all
creditors.
}  About two of every three Chapter 13 filers ultimately fail
to meet their planned obligations, thus resulting in a
Chapter 7 filing.
Chapter 7 - Liquidation
}  The most extreme case of bankruptcy.
}  Voluntary bankruptcy - Entrepreneur’s decision to file for
bankruptcy.
}  Courts will require a current income and expense statement.
}  Involuntary bankruptcy - Petition of bankruptcy filed by
creditors without consent of entrepreneur.
Liquidation under Chapter 7 Involuntary
Bankruptcy
Strategy During Reorganization
}  The entrepreneur can speed up the process by:
}  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 is doing.
}  Stressing the significance of creditors’ support during the
process.
Requirements for Keeping a Venture
Afloat
Warning Signs of Bankruptcy
Starting Over

}  Entrepreneurs are likely to continue starting new ventures

even after failing.
}  Entrepreneurs who have failed tend to have a better
understanding and appreciation for the need for:
}  Market research.
}  More initial capitalization.
}  Stronger business skills.
}  Business failure does not have to be a stigma when seeking
venture capital.
The Reality of Failure
}  Important considerations for the entrepreneur 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 continually drain
resources.
Business Turnarounds
}  Learn to recognize the warning signs of bankruptcy.
}  Principles of a successful turnaround:
}  Aggressive hands-on management.
}  Management must have a plan.
}  Action.