Harvesting and Exit Strategies

Prof. R.S.Mathur
 Stephen Covey in his book,
‘The Seven Habits of Successful People.’

• "Begin with the end in

mind,”
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 Definition…
• Harvest Strategy is also known as ‘asset
reduction strategy by which the
entrepreneur seeks to reduce the
investment in a business by extracting as
much cash out of its operation

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 Entrepreneurial Journey
• Is a journey and not a destination.
• The challenge and exhilaration of the
the journey gives the greatest kick to
the entrepreneur.
• Walt Disney said it best, “I don’t make
movies to make money. I make money
to make movies.”
• It is the thrill of the chase that counts!
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 Entrepreneurial Business ‘Cycle’

• Entrepreneurs live for the struggle of

launching their businesses.
• Decisions made on day one can have
huge implications down the road.
• It's not enough to build a business
worth a fortune; you have to make sure
you have an exit strategy, a way to get
the money back out.
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 EXIT STRATEGIES-Why & When
• The final portion of your business plan outlines your exit
strategy.
• It may seem odd to develop a strategy this soon to leave
your business, but potential investors will want to know
your long-term plans.
• Your exit plans need to be clear in your own mind because
they will dictate how you operate the company.
• For example:
1. if you plan to get listed on the stock market, you’ll want to
follow certain accounting regulations from day one.
2. If you plan to pass the business to your children, you’ll
need to start training them at a certain point.
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 Reasons for Exit
• Lack of profits
• Loss of interest
• Future prospects
• Dissolved partnership
• Growth prospects
• Other opportunities
• Personal reasons
• Favourable economic conditions
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 Long Term Preparation
• Focus
• Large customer base
• Diversified customer base
• Regulatory compliances
• Land documents
• Contracts
• Management

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 Short Term Preparation
• Valuation
• Update books
• Supporting documents
• Take tax advice
• Get a team in place
• Continue business as usual
• First impressions

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 Some available strategies for
entrepreneurs:
1. Exit Strategies for Long-Term
Involvement
2. Exit Strategies for Short-Term
Involvement

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 Exit Strategies for Long-Term
Involvement
1. Let it run dry:
• This can work especially well in small
businesses like sole proprietorships. In the
years before you plan to exit, increase your
personal salary and pay yourself bonuses.
• Make sure you are on track to settle any
remaining debt, and then you can simply
close the doors and liquidate any remaining
assets.
• With the larger income, naturally, comes a
larger tax liability.

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 Exit Strategies for Long-Term
Involvement
2. Sell your shares:
This works particularly well in partnerships
such as law and medical practices.
• When you are ready to retire, you can sell
your equity to the existing partners, or to a
new employee who is eligible for partnership.
• You leave the firm cleanly, plus you gain the
earnings from the sale.

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 Exit Strategies for Long-Term
Involvement
3. Liquidate:
Sell everything at market value and use the
revenue to pay off any remaining debt.
• This is a simple approach, but also likely to reap
the least revenue.
• Since you are simply matching your assets with
buyers, you probably will be eager to sell and
therefore at a disadvantage when negotiating.

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 Exit Strategies for Short-Term
Involvement

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 Exit Strategies for Short-Term
Involvement
1. Go public:
The dot-com boom and bust reminded
everyone of the potential hazards of the
stock market.
• While you may be sitting on the next
Google, IPOs take much time to prepare
and can cost anywhere from several
hundred thousand to several million
rupees, depending on the exchange and the
size of the offering.
• However, the costs can often be covered by
intermediate funding rounds.
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 Issuing an IPO
• Choose investment banker.
• Select underwriter for the issue
• File registration document with the exchange
• Come out with a ‘red herring’ prospectus
indicating initial price range
• Go on a road show
• Set final offer price
• Get listed on appointed date

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 Listing Norms at BSE
• The minimum post-issue paid-up capital of the Company
shall be Rs. 3 crores; and
• The minimum issue size shall be Rs. 3 crores; and
• The minimum market capitalization of the Company shall
be Rs. 5 crores (market capitalization shall be calculated
by multiplying the post-issue paid-up number of equity
shares with the issue price); and
• The minimum income/turnover of the Company should be
Rs. 3 crores in each of the preceding three 12-months
period; and
• The minimum number of public shareholders after the
issue shall be 1000.
• A due diligence study may be conducted by an
independent team of Chartered Accountants or Merchant
Bankers
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 Benefits of an IPO
• Access to risk capital
• Increased public image
• Stock options
• Facilitates M & A activity
• Liquidation

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 Responsibilities on Getting Listed
• Sharing corporate control
• Sharing financial gain
• Managing shareholder value
• Sharing strategic information through
periodic reporting

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 Exit Strategies for Short-Term
Involvement
2. Merge:
Sometimes, two businesses can create more
value as one company.
• If you believe such an opportunity exists for your
firm, then a merger may be your ticket to exit.
• If you’re looking to leave entirely, then the merger
would likely call for the head of the other involved
company to stay on.
• If you don’t want to relinquish all involvement,
consider staying on in an advisory role.

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 Exit Strategies for Short-Term
Involvement
3. Be acquired:
Other companies might want to acquire your
business and keep its value for themselves.
• Make sure the offered sale price meshes with
your business valuation.
• You may even seek to cultivate potential
acquirers by courting companies you think
would benefit from such a deal.
• If you choose your acquirer wisely, the value
of your business can far exceed what you
might otherwise earn in a sale.

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 Exit Strategies for Short-Term
Involvement
4. Sell:
• Selling outright can also allow for an easy exit.
• If you wish, you can take the money from the
sale and sever yourself from the company.
• You may also negotiate for equity in the buying
company, allowing you to earn dividends
afterwards — it clearly is in your interest to
ensure your firm is a good fit for the buyer and
therefore more likely to prosper

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 Seller Financing
Benefits to seller:
• The buyer may be
prepared for a higher
price on such terms
• It assures the buyer that
the seller is convinced of
the long term viability of
the business
• The seller gets further
profits by way of the
interest on the investment
• This may be a good way
to profitably park funds
for a while
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Risks to seller:
• Business may fail before
the buyer makes full
repayment
• The buyer may decide
not to make any further
payments
• The seller might get
persuaded to participate
in the business as well
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 Seller Financing
Benefits to buyer: Risk to buyer:
• It is an easy and • There may be a lot of
readymade source of interference from the
debt finance seller.
• It might be easier to
• The buyer may end up
deal with the ex-owner
than to deal with any paying much more than
other commercial the fair value of the
borrower business.
• The seller may be
persuaded to offer
guidance and direction

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 The Sale Process
• Authorisation from partners/directors
• Get legal or accounting team in place
• Review records and identify issues
• List assets and liabilities
• Draw up the agreement
• Finalise the deal
• Transfer the assets

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