Ebook small business management: Launching and growing entrepreneurial ventures - Part 1 include of the following content: Entrepreneurship: a world of opportunity; starting from scratch or joining an existing business; developing the new venture business plan.
Small Business Management Launching and Growing Entrepreneurial Ventures Justin G Longenecker Baylor University Carlos W Moore Baylor University 14e J William Petty Baylor University Leslie E Palich Baylor University Australia • Brazil • Canada • Mexico • Singapore • Spain • United Kingdom • United States Small Business Management: Launching and Growing Entrepreneurial Ventures, 14e Justin G Longenecker, Carlos W Moore, J William Petty, Leslie E Palich VP/Editorial Director: Jack W Calhoun Content Project Manager: Jacquelyn K Featherly Senior Art Director: Tippy McIntosh Editor-in-Chief: Melissa Acuna Technology Project Manager: Kristen Meere Cover and Internal Designer: Grannan Graphic Design Ltd Senior Acquisitions Editor: Michele Rhoades Senior Manufacturing Coordinator: Doug Wilke Senior Developmental Editor: Susanna C Smart Production House/Compositor: Lifland et al., Bookmakers/ ICC Macmillan Inc Cover Images: PhotoAlto Agency/Getty Images; Youngblood’s Books Editorial Assistant: Ruth Belanger Senior Marketing Manager: Clint Kernen/Kimberly Kanakes Senior Marketing Communications Manager: Jim Overly COPYRIGHT © 2008, 2006 Thomson South-Western, a part of The Thomson Corporation Thomson, the Star logo, and South-Western are trademarks used herein under license Printed in the United States of America 11 10 09 08 Student Edition Package ISBN 13: 978-0-324-56972-8 Student Edition Package ISBN 10: 0-324-56972-6 Student Edition ISBN 13: 978-0-324-58397-7 Student Edition ISBN 10: 0-324-58397-4 Instructor’s Edition Package ISBN 13: 978-0-324-57882-9 Instructor’s Edition Package ISBN 10: 0-324-57882-2 Instructor’s Edition ISBN 13: 978-0-324-58396-0 Instructor’s Edition ISBN 10: 0-324-58396-6 Copyeditor: Jeanne Yost Photography Manager: John Hill Photo Researcher: Rose Alcorn Printer: Transcontinental Beauceville, Quebec ALL RIGHTS RESERVED No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means— graphic, electronic, or mechanical, including photocopying, recording, taping, Web distribution or information storage and retrieval systems, or in any other manner—without the written permission of the publisher For permission to use material from this text or product, submit a request online at http://www.thomsonrights.com Library of Congress Control Number: 2007938373 For more information about our products, contact us at: Thomson Learning Academic Resource Center 1-800-423-0563 Thomson Higher Education 5191 Natorp Boulevard Mason, OH 45040 USA In Remembrance Justin G Longenecker Professor Emeritus of Management Hankamer School of Business Baylor University May 4, 1917–September 14, 2005 Carlos W Moore Edwin Streetman Professor of Marketing Hankamer School of Business Baylor University February 3, 1943–May 27, 2007 It is with deep sadness that we inform you of the deaths of our two co-authors and dear friends We cannot put into words the loss we feel Their deaths cannot be measured by their absence in revising this book They were not only our colleagues, but also our confidants and mentors They were tremendous role models for us and for literally thousands of individuals who knew and loved them In this book, we encourage you to consider the legacy you will leave at the end of your entrepreneurial journey Justin and Carlos left a legacy that few can ever dream of leaving They will be missed for many years to come In working with Justin and Carlos for over a decade, we have developed a shared vision about the book So, while the specific responsibilities have changed for this edition, the dream of helping others become entrepreneurs lives on Be assured that we will continue to build on the great legacy of this textbook Justin and Carlos would be disappointed with anything less, and we are not about to let them down iii This page intentionally left blank Brief Contents Part Entrepreneurship: A World of Opportunity 1 THE ENTREPRENEURIAL LIFE 2 ENTREPRENEURIAL INTEGRITY AND ETHICS: A GATEWAY TO SMALL BUSINESS OPPORTUNITY 32 Part Starting from Scratch or Joining an Existing Business 61 GETTING STARTED 62 FRANCHISES AND BUYOUTS 94 THE FAMILY BUSINESS 120 Part Developing the New Venture Business Plan THE BUSINESS PLAN 150 THE MARKETING PLAN 180 THE ORGANIZATIONAL PLAN: TEAMS, LEGAL FORMS, AND STRATEGIC ALLIANCES 206 THE LOCATION PLAN 236 10 THE FINANCIAL PLAN: PROJECTING FINANCIAL REQUIREMENTS 11 A FIRM’S SOURCES OF FINANCING 298 12 THE HARVEST PLAN 326 Part 347 BUILDING CUSTOMER RELATIONSHIPS 348 PRODUCT AND SUPPLY CHAIN MANAGEMENT 370 PRICING AND CREDIT DECISIONS 396 PROMOTIONAL PLANNING 420 GLOBAL MARKETING 443 Managing Growth in the Small Business 18 19 20 21 Part 260 Focusing on the Customer: Marketing Growth Strategies 13 14 15 16 17 Part 149 PROFESSIONAL MANAGEMENT IN THE ENTREPRENEURIAL FIRM MANAGING HUMAN RESOURCES 500 MANAGING OPERATIONS 524 MANAGING RISK 550 Understanding What the Numbers Mean 22 MANAGING THE FIRM’S ASSETS 572 23 EVALUATING FINANCIAL PERFORMANCE Cases Appendix A Sample Business Plan Appendix B Valuing a Business 471 472 571 596 620 669 690 v Contents Preface About the Authors xv xxiii Part Entrepreneurship: A World of Opportunity THE ENTREPRENEURIAL LIFE In the Video Spotlight: Bridgecreek Entrepreneurial Opportunities Three Success Stories Evidence of Opportunities 4 6 Who Are the Entrepreneurs? What Is Small Business? LIVING THE DREAM In the Pink Make Money (Profit) Be Your Own Boss (Independence) Escape a Bad Situation (Freedom) Enjoy a Satisfying Life (Personal Satisfaction) LIVING THE DREAM Thinking Entrepreneurially Works for Any Kind of Startup The Many Varieties of Entrepreneurship Founder Entrepreneurs versus Other Business Owners and Franchisees High-Potential Ventures versus Attractive Small Firms and Microbusinesses Artisan versus Opportunistic Entrepreneurs LIVING THE DREAM The Guitar Man Women Entrepreneurs Entrepreneurial Teams The Winning Hand of Entrepreneurship Customer Focus vi 16 16 17 17 18 Entrepreneurship and Small Business The Payoff of Entrepreneurship Quality Performance Integrity and Responsibility LIVING THE DREAM A Customer-Oriented Body Shop Innovation Special Niche 9 10 10 11 12 12 12 13 14 14 15 15 16 Getting Started Age and Entrepreneurial Opportunity Characteristics of Successful Entrepreneurs LIVING THE DREAM Reading, Writing, Running a Company Taking the Plunge Finding “Go-To” Persons Growing and Managing the Business HOW THEY SEE IT The Go-To Team LIVING THE DREAM Don’t Go It Alone— Find Mentors 18 18 19 20 21 21 21 22 23 Success in Business and Success in Life 24 Looking Back at an Entrepreneurial Career Evaluating Accomplishments Winning the Wrong Game HOW THEY SEE IT On Mentoring Crafting a Worthy Legacy Beginning with the End in Mind 24 24 24 25 27 28 ENTREPRENEURIAL INTEGRITY AND ETHICS: A GATEWAY TO SMALL BUSINESS OPPORTUNITY In the Video Spotlight: Joseph’s Lite Cookies Integrity and Entrepreneurship What Is Integrity? HOW THEY SEE IT Doing the Right Thing Doing the Right Thing 32 32 33 35 35 36 Contents A Framework for Integrity Promoting the Owners’ Interests Respecting Customers Valuing Employees LIVING THE DREAM Ethics Training Is Good and Good for Business LIVING THE DREAM Clean and Green Social Responsibility and Small Business LIVING THE DREAM Skills-Based Volunteering— Help That Is Right on the Beat Governmental Laws and Regulations HOW THEY SEE IT An Ethical Dilemma The Challenges and Benefits of Acting Ethically The Vulnerability of Small Companies The Integrity Edge 36 38 39 39 40 41 42 43 44 45 46 Integrity in an Expanding Economy Integrity and the Internet International Issues of Integrity Building a Business with Integrity A Strong Foundation Leading with Integrity A Supportive Organizational Culture An Ethical Decision-Making Process Social Entrepreneurship: A Fast-Emerging Trend The Burden of Environmentalism The Potential of Environmentalism vii 47 48 49 49 50 50 51 53 54 55 56 46 47 Part Starting from Scratch or Joining an Existing Business 61 GETTING STARTED In the Video Spotlight: Cybex/Avocent 62 62 Identifying Startup Ideas 64 Creating a New Business from Scratch 65 HOW THEY SEE IT Getting Started Finding Startup Ideas Types of Startup Ideas Sources of Startup Ideas LIVING THE DREAM So You Think You Have a Great Business Idea? In Your Dreams! Applying Innovative Thinking to Business Ideas HOW THEY SEE IT Build on Your Strengths LIVING THE DREAM A Three-Word Revolution: “Buy It Used” Using Internal and External Analyses to Evaluate an Opportunity Outside-In Analysis Inside-Out Analysis Integrating Internal and External Analyses LIVING THE DREAM When a Side Business Hits the Skids, It Might Be Time to “Bag It” Selecting Strategies That Capture Opportunities Putting It All Together 88 FRANCHISES AND BUYOUTS 94 In the Spotlight: Firehouse Subs The Pros and Cons of Franchising Advantages of Franchising LIVING THE DREAM Got Junk? LIVING THE DREAM Are You Ready to Work? Limitations of Franchising 94 95 96 97 98 99 67 67 Franchising Options and the Structure of the Franchising Industry 101 67 68 Franchising Options The Structure of the Franchising Industry 101 102 70 72 73 75 75 76 79 80 82 83 Broad-Based Strategy Options 83 Focus Strategies 84 LIVING THE DREAM A Part-Time Focus Strategy, but a Full-Time Challenge 86 Evaluating Franchise Opportunities Selecting a Franchise Investigating the Potential Franchise HOW THEY SEE IT Buying a Franchise LIVING THE DREAM Get into the Wing Zone Finding Global Franchising Opportunities Considering Legal Issues in Franchising Buying an Existing Business Reasons for Buying an Existing Business Finding a Business to Buy Investigating and Evaluating Available Businesses LIVING THE DREAM Do Your Homework Valuing the Business Nonquantitative Factors in Valuing a Business Negotiating and Closing the Deal 103 103 103 103 106 108 109 109 110 111 111 111 113 113 114 viii Contents THE FAMILY BUSINESS 120 In the Spotlight: Aquascape, Inc 120 The Family Business: A Unique Institution 121 What Is a Family Business? Family and Business Overlap Competition Between Business and Family Advantages of a Family Business 122 122 123 124 Family Business Momentum 126 The Founder’s Imprint on the Family Business Culture The Commitment of Family Members Why Should Anyone Care About Commitment? Breaking with the Past 126 127 128 128 Family Roles and Relationships 129 Mom or Dad, the Founder 130 Husband–Wife Teams 130 Sons and Daughters 130 LIVING THE DREAM A Marriage That Is Always in Fashion 131 Sibling Cooperation, Sibling Rivalry 132 LIVING THE DREAM Having Babies Gives Birth to a Business In-Laws In and Out of the Business The Entrepreneur’s Spouse HOW THEY SEE IT An “Out-Law’s” Perspective Professional Management of the Family Firm The Need for Good Management Nonfamily Employees in a Family Firm Family Retreats Family Councils Family Business Constitutions The Process of Leadership Succession Available Family Talent LIVING THE DREAM An Entrepreneur with a Special Place for Mom in His Heart and Business Stages in the Process of Succession Reluctant Parents and Ambitious Children Transfer of Ownership HOW THEY SEE IT Plan Early 133 134 134 135 136 136 136 137 138 138 138 139 140 141 142 142 143 Part Developing the New Venture Business Plan THE MARKETING PLAN 149 In the Video Spotlight: eHarmony What Is Small Business Marketing? THE BUSINESS PLAN In the Spotlight: Luxe Jewels An Overview of the Business Plan The Purpose of a Business Plan Do You Really Need a Business Plan? HOW THEY SEE IT Getting Started How Much Planning? LIVING THE DREAM Will Your Plan Win a Prize? Preparing a Business Plan The Content and Format of a Business Plan Making an Effective Written Presentation LIVING THE DREAM Dealing with Startup Change Presenting the Business Plan to Investors The Investor’s Short Attention Span Business Plan Features That Attract or Repel Investors Resources for Business Plan Preparation Computer-Aided Business Planning Professional Assistance in Business Planning Keeping the Right Perspective HOW THEY SEE IT Stay Focused 150 150 151 151 152 154 155 155 156 156 164 166 167 167 168 169 169 170 170 170 Marketing Philosophies Make a Difference A Consumer Orientation—The Right Choice The Formal Marketing Plan Market Analysis The Competition Marketing Strategy HOW THEY SEE IT Choosing a Product Name LIVING THE DREAM Distressed Jeans Artist Marketing Research for the New Venture 180 180 182 183 183 184 184 185 185 187 188 188 The Nature of Marketing Research Steps in the Marketing Research Process 188 189 Understanding Potential Target Markets 192 Market Segmentation and Its Variables Marketing Strategies Based on Segmentation Considerations LIVING THE DREAM A Battery of Setbacks Estimating Market Potential The Sales Forecast Limitations to Forecasting The Forecasting Process 193 194 196 197 197 198 199 Contents THE ORGANIZATIONAL PLAN: TEAMS, LEGAL FORMS, AND STRATEGIC ALLIANCES 206 In the Video Spotlight: Biosite, Inc Building a Management Team Achieving Balance LIVING THE DREAM Three Men and a Restaurant Expanding Social Networks Specifying Structure Choosing a Legal Form of Organization The Sole Proprietorship Option The Partnership Option HOW THEY SEE IT Finding the Right Partner The C Corporation Option LIVING THE DREAM Pals in Partnership Criteria for Choosing an Organizational Form Specialized Forms of Organization Forming Strategic Alliances Strategic Alliances with Large Companies HOW THEY SEE IT Forming a Strategic Alliance Strategic Alliances with Small Companies LIVING THE DREAM Kosher.com and Amazon.com: A Marriage Made in Heaven Setting Up and Maintaining Successful Strategic Alliances 206 208 208 209 209 210 211 211 212 214 216 217 219 222 224 225 225 226 227 228 Contributions of Directors Selection of Directors Compensation of Directors An Alternative: An Advisory Council 228 229 230 230 In the Spotlight: An eBay Success Story What Is E-Commerce? Benefits of E-Commerce to Startups E-Commerce Business Models LIVING THE DREAM Student Entrepreneur Turns to Blogging 236 236 237 238 242 Designing and Equipping the Physical Facilities 242 LIVING THE DREAM Incubating a Cure for Hospital Infections Challenges in Designing the Physical Facilities Challenges in Equipping the Physical Facilities Building Image 243 243 243 245 The Attraction of Home-Based Businesses HOW THEY SEE IT Our Virtual Location The Challenges of Home-Based Businesses Technology and Home-Based Businesses 253 In the Spotlight: Planning for Growth Understanding Financial Statements HOW THEY SEE IT Better Know Your Numbers The Income Statement LIVING THE DREAM Everyone’s a CFO The Balance Sheet The Cash Flow Statement Interpreting the Cash Flow Statement LIVING THE DREAM Collect Early and Pay Later 260 261 262 262 266 267 272 274 275 Financial Forecasting HOW THEY SEE IT Know Where You Stand Forecasting Profitability Forecasting Asset and Financing Requirements and Cash Flows 276 277 278 279 Good Forecasting Requires Good Judgment 285 Appendix 10A: Computing Cash Flows for Trimble & Associates Leasing, Inc 293 Appendix 10B: Cash Flow Statements for C&G Products, Inc 297 11 A FIRM’S SOURCES OF FINANCING 298 298 237 The Importance of the Location Decision Key Factors in Selecting a Good Location LIVING THE DREAM Staying Home Locating the Startup in the Entrepreneur’s Home 248 249 249 10 THE FINANCIAL PLAN: PROJECTING FINANCIAL REQUIREMENTS 260 In the Spotlight: Vizio, Inc Locating the Brick-and-Mortar Startup 248 224 Making the Most of a Board of Directors THE LOCATION PLAN Locating the Startup on the Internet ix The Nature of a Firm and Its Financing Sources A Firm’s Economic Potential Company Size and Maturity Types of Assets Owner Preferences for Debt or Equity Debt or Equity Financing? Potential Profitability LIVING THE DREAM Managing Your Debt Financial Risk Voting Control 299 299 300 300 300 300 300 302 303 305 245 245 246 247 248 Sources of Financing Sources Close to Home Bank Financing 305 306 308 332 Part Developing the New Venture Business Plan to employees works only if the company’s employees have an owner’s mentality—that is, they not think in “9-to-5” terms An ESOP may provide a way for the owner to sell the business, but if the employees lack the required mind-set, it will not serve the business well in the future Daniel Brogan, CEO of Earl Walls Associates, an employee-owned design and engineering firm in San Diego, explains, “You have to implement [an ESOP] early enough The staff has to be mentally prepared to take over and run a company And you have to continue hiring people who share an ownership mind-set.”4 Releasing the Firm’s Cash Flows The second harvest strategy involves the orderly withdrawal of the owners’ investment in the form of the firm’s cash flows The withdrawal process could be immediate if the owners simply sold off the assets of the firm and ceased business operations However, for a value-creating firm—one that earns attractive rates of return for its investors—this does not make economic sense The mere fact that a firm is earning high rates of return on its assets indicates that the business is worth more as a going concern than a dead one Thus, shutting down the company is not an economically rational option Instead, the owners might simply stop growing the business; by doing so, they increase the cash flows that can be returned to the investors In a firm’s early years, all its cash is usually devoted to growing the business Thus, the firm’s cash flow during this period is zero—or, more likely, negative—requiring its owners to seek outside cash to finance future growth As the firm matures and opportunities to grow the business decline, sizable cash flows frequently become available to its owners Rather than reinvest all the cash in the firm, the owners can begin to withdraw the cash, thus harvesting their investment If they decide to adopt this approach, only the amount of cash necessary to maintain current markets is retained and reinvested; there is little, if any, effort to grow the present markets or expand into new markets Harvesting by withdrawing a firm’s cash from the business has two important advantages: The owners can retain control of the firm while they harvest their investment, and they not have to seek out a buyer or incur the expenses associated with consummating a sale There are disadvantages, however Reducing reinvestment when the firm faces valuable growth opportunities results in lost value creation and could leave a firm unable to sustain its competitive advantage The end result may be an unintended reduction in harvestable value, below the potential value of the firm as a long-term going concern Also, there may be tax disadvantages to an orderly liquidation, compared with other harvest methods For example, if a firm simply distributes the cash as dividends, the income may be taxed both as corporate income and as personal dividend income to the stockholders (Of course, this would not be a problem for a sole proprietorship, partnership, limited liability company, or S corporation.) Finally, for the entrepreneur who is simply tired of day-to-day operations, siphoning off the cash flows over time may require too much patience Unless other people in the firm are qualified to manage it, this strategy may be destined to fail Going Public initial public offering (IPO) The first sale of shares of a company’s stock to the public The third method of harvesting a firm is going public Many entrepreneurs consider the prospect of an initial public offering (IPO) as the “holy grail” of their career, as firms involved in an IPO are generally star performers However, most entrepreneurs not really understand the IPO process, especially when it comes to how going public relates to the harvest and the actual process by which a firm goes public THE IPO AS A HARVEST STRATEGY An IPO occurs when a company offers its stock to the general public, rather than limiting its sale to founders, friends and family, and other private investors The purpose of this process, described below, is to create a ready market for buying and selling the stock Before the stock is traded publicly, there is no marketplace where the shares can be easily bought and sold, and thus it is difficult to know what the stock is worth IPOs have a number of benefits, including the following: An IPO is one way to signal to investors that a firm is a quality business and will likely perform well in the future.5 The Harvest Plan A firm whose stock is traded publicly has access to more investors when it needs to raise capital to grow the business Being publicly traded helps create ongoing interest in the company and its continued development Publicly traded stock is more attractive to key personnel whose incentive pay includes the firm’s stock While there are several reasons for going public, the primary reason is to raise capital In 80 percent of the cases, money raised from selling a firm’s stock to the public is used for expansion, paying down debt, and increasing the firm’s liquidity (cash) The other 20 percent of public offerings result from the entrepreneurs’ desire to sell their stock.6 Having their firm’s stock traded in a public market gives entrepreneurs a ready means of selling stock, providing a way for them to harvest their investment eventually We say “eventually” because founders are not allowed to sell their shares when the firm first goes public However, over time entrepreneurs can and sell their shares as a way to cash out of their companies Thus, while IPOs are not primarily a way for entrepreneurs to cash out, going public does provide owners with increased liquidity—which facilitates their eventual exit THE IPO PROCESS The basic steps in the IPO process are as follows: Step The firm’s owners decide to go public Step If it has not already done so, the firm must have its financial statements for the past three years audited by a certified public accountant Step An investment banker is selected to guide management in the IPO process Step An S-1 Registration Statement is filed with the Securities Exchange Commission (SEC), which requires about one month to review it Step Management responds to comments by the SEC and issues a Red Herring/ Prospectus, describing the firm and the offering Step Management spends the next 10 to 15 days on the road, presenting the firm to potential investors Step On the day before the offering is released to the public, the actual offering price is set Based on the demand for the offering, the shares are priced to create active trading of the stock Step Months of work come to fruition in a single event—offering the stock to the public and seeing how it is received The IPO process may be one of the most exhilarating—but frustrating and exhausting—experiences of an entrepreneur’s life It is difficult to say when the best time is for a company to go public Nor is it easy to know the conditions that make going public better than other means of exiting a firm.7 We are aware that entrepreneurs frequently not like being exposed to the variability of public capital markets and to the prying questions of public-market investors To many, the costs of the IPO process seem exorbitant Also, they find themselves being misunderstood and having little influence on the decisions being made As a consequence, they are frequently disillusioned with investment bankers and wonder where they lost control of the process To understand an IPO, you must consider the shift in power that occurs during the process When the chain of events begins, the firm’s managers are in control They dictate whether or not to go public and who the investment banker will be After the prospectus has been prepared and the road show is under way, however, the firm’s managers, including the entrepreneur, are no longer the primary decision makers The investment banker is now in control Finally, the marketplace, in concert with the investment banker, begins to take over Ultimately, it is the market that dictates the final outcome Chapter 12 333 334 Part Developing the New Venture Business Plan In addition to being prepared for the shift in control, it is important that the entrepreneur understand the investment banker’s motivations in the IPO process Who is the investment banker’s primary customer? Clearly, the issuing firm is compensating the underwriter for its services through the fees paid and participation in the offering But helping a firm with an IPO usually is not as profitable for the investment banker as are other activities, such as involvement in corporate acquisitions And the investment banker is also selling the securities to the customers on the other side of the trade These are the people who will continue to business with the investment banker in the future Thus, the investment banker is somewhat conflicted as to who is the “customer.” An entrepreneur must also consider more than just the costs of the IPO; he or she must think hard about the costs of running a publicly traded company As you might expect, operating a publicly traded firm is more expensive than operating a private company A publicly traded company has significant ongoing costs associated with reporting its financial results to investors and to the SEC These costs were significantly increased in 2001 when, in response to corporate scandals such as those at Enron and WorldCom, the U.S Congress passed the Sarbanes-Oxley Act The act places a much greater burden on companies to have good corporate governance and accounting practices and controls that will prevent such egregious offenses by managers While much good has come from Sarbanes-Oxley, the costs to a small firm are disproportionate and are no small consideration in the decision as to whether or not to go public So, although many entrepreneurs seek to take their firms public through an IPO, this strategy is appropriate for only a limited number of firms And even for this small group, an IPO is more a means of raising growth capital than an effective harvest strategy Using Private Equity private equity Money provided by venture capitalists or private investors The fourth method of harvesting is the use of private equity Private equity is money provided by venture capitalists or private investors The private investors are usually small groups of individuals who act together to invest in companies Private equity investors offer two key advantages that public investors not: immediacy and flexibility With private equity, an entrepreneur can sell most of her or his stock immediately, an option not available when a company is taken public Also, private equity investors can be more flexible in structuring their investment to meet the entrepreneur’s needs Although the situation is complicated by the different needs of each generation, private equity is particularly effective for family-owned businesses that need to transfer ownership to the next generation In the transfer of ownership between generations, there must be a tradeoff among three important goals: (1) liquidity for the selling family members, (2) continued financing for company growth, and (3) the desire of the buying generation to maintain control of the firm Thus, the older generation wants to get cash out of the business, while the younger generation wants to retain the cash needed to finance the firm’s growth and yet not lose ownership control Recognizing a need for creativity, some investment groups have developed financing approaches that more fully satisfy the needs of exiting family owners whose firms have significant growth potential One such approach is the Private IPO, a trademarked process designed for mature, successful family businesses.8 To understand the Private IPO, consider the following example Assume that a company could be sold for $20 million through a leveraged buyout (LBO), which would most likely be financed through 80 percent debt and 20 percent equity Many entrepreneurs would find such an arrangement intolerable, even though they would have cashed out They simply would not want their company subjected to such a high-leverage transaction Also, with an LBO the family generally loses control of the business As an alternative to an LBO, the entrepreneur might consider a Private IPO, which provides less cash but allows the family to retain control The firm just described would be sold for $18 million—10 percent less than the LBO price The seller would receive $15 million in cash, as opposed to the full $18 million But instead of relinquishing all or most of their ownership, the family owners would receive 51 percent of the equity in exchange for the $3 million retained in the company The remaining $15 million of the purchase price would be financed from two sources: $7 million in senior debt and $8 million from the private investor, consisting of $4 million in preferred stock and $4 million in common stock The The Harvest Plan Chapter 12 Living the Dream 335 entrepreneurial challenges Off-the-Grid IPOs In some respects, it wasn’t such a terrible problem for Martin Lightsey to have: The value of Specialty Blades, Inc., had increased so much since he founded the medical and industrial blade manufacturer in 1985 that some of the company’s 11 shareholders, including Lightsey’s two daughters, wanted to cash in some of their earnings In 12 years, the median $42,000 investment in the business, based in Staunton, Virginia, had soared to a value of more than $350,000 The problem was, Lightsey didn’t have enough cash to fund the buyouts Lightsey briefly toyed with the idea of going public, which would allow his investors to buy and sell shares as they pleased He called Gordon Smith, a securities lawyer at Richmond law firm McGuire Woods, who told him that the legal and accounting fees related to being a publicly held company would amount to roughly a half million dollars every year, overwhelming for a business booking $6 million in annual sales Lightsey asked Smith about a privately held community bank in Staunton that seemed to be trading its shares Smith explained that the bank was taking advantage of a little-known Securities and Exchange Commission exemption called an intrastate offering, which allowed it to sell stock to Virginia residents without registering with the SEC It seemed like a perfect solution for Specialty Blades: Lightsey could cash out the company’s current investors by selling their stock to a new group of shareholders and avoid the hassle and expense of an IPO At the same time, he could spread out ownership to a larger, more diverse pool of investors “The public model is just more stable,” Lightsey says Lightsey spent the next few months researching intrastate offerings before deciding to take the plunge Lightsey began working with Bruce Campbell, then executive vice president of Richmond-based brokerage firm Scott & Stringfellow and a Specialty Blades board member who owned several thousand shares of the company Campbell and some fellow board members estimated a value for the company’s stock, based on factors such as cash flow and earnings, and began contacting clients to gauge their interest A few months later, Lightsey held a gathering at Specialty Blades’ facility for 40 potential investors Lightsey cautiously launched into his dog-andpony show, highlighting the company’s history and growth strategy A few weeks later, investors purchased a total of 30,000 shares at $20 per share, which represented percent of the company All of the shares that were sold belonged to Lightsey’s daughters The offering cost Specialty Blades about $15,000, a small fraction of the price of an IPO The firm regularly updates the stock price, which was recently $124 per share Source: Phaedra Hise, “Off-the-Grid IPOs,” Inc., December 2006, pp 40–42 Copyright 2006 Mansueto Ventures LLC Reproduced with permission of Mansueto Ventures LLC in the format Textbook via Copyright Clearance Center http://www.specialtyblades.com preferred stock would provide an annual dividend, while the common stock would give the new investor 49 percent of the firm’s ownership (see Exhibit 12-2) The differences between the two capital structures are clear The debt ratio is much lower in the Private IPO than in the LBO, allowing for a lower interest rate on the debt and 336 exhibit Part 12-2 Developing the New Venture Business Plan Private Equity Financing Private Equity Investor: $8 million Seller's Cash-Out Common Stock $4 million Preferred Stock $4 million $15 million Seller's Reinvestment Senior Debt $7 million Seller $3 million Debt: $7 million Total Enterprise Value: $18 million permitting the firm’s cash flows to be used to grow the firm, rather than pay down debt This arrangement allows the senior generation of owners to cash out, while the next generation retains control and the cash to grow the firm—a win-win situation The younger generation also has the potential to realize significant economic gains if the firm performs well Explain the issues in valuing a firm that is being harvested and deciding on the method of payment Firm Valuation and the Harvest As a firm moves toward the harvest, two issues are of primary importance: the harvest value (what the firm is worth) and the method of payment The Harvest Value opportunity cost of funds The rate of return that could be earned on another investment of similar risk Valuing a company may be necessary on numerous occasions during the life of the business—but it is never more important than at the time of the exit Owners can harvest only what they have created Value is created when a firm’s return on invested capital is greater than the investors’ opportunity cost of funds, which is the rate of return that could be earned on an investment of similar risk Growing a venture to the point of diminishing returns and then selling it to others who can carry it to the next level is a proven way to create value How this incremental value is shared between the old and the new owners depends largely on the relative strengths of each party in the negotiations—that is, who wants the deal the most or who has the best negotiating skills Business valuation is part science and part art, so there is no precise formula for determining the price of a private company Rather, the price is determined by a sometimes intricate process of negotiation between buyer and seller Much is left to the negotiating skills of the respective parties But one thing is certain: There must be a willing buyer It doesn’t matter what a firm’s owner believes the business is worth; it is worth only what someone who has the cash is prepared to pay The specific approaches to and methods for valuing a company are described in Appendix B at the end of the book As described in the appendix, buyers and sellers frequently The Harvest Plan Chapter 12 Living the Dream 337 entrepreneurial challenges Success Means Independence Lurita Doan wasn’t considered successful at her old job A computer programmer for a large federal contractor, Doan couldn’t help thinking outside the box—and that wasn’t a good thing When she went to her managers 13 years ago with an idea to customize software for their clients, they basically told her to go back to her cubicle and be quiet Devastated and a little angry, Doan quit her job a few weeks later and started her own company, New Technology Management, Inc., an IT company that specializes in border security and systems integration “Success is being my own boss and having it done my way,” says Doan “I’m really hard-headed I know what is right I have a way of doing things that adheres to excellence.” Though her hard work produces a comfortable salary, Doan says she is happy driving a Saturn—because independence is what drives her to work each morning “The most amazing part of owning a business is that it’s up to me to make it work I can what I want, and I don’t have to check with anyone,” Doan says Source: Rex Hammock and Shannon Scully, “Success: What’s Your Definition?” MyBusiness, December/ January 2004, http://www.mybusinessmag.com/fullstory.php3?sid=903, accessed May 2004 http://www.ntmi.com base the harvest value of a firm on a multiple of earnings For instance, a company might be valued at five times its earnings (Entrepreneur Robert Hall sold his firms for a multiple of earnings; his experience provides the basis for the example used in Appendix B.) The Method of Payment The actual value of the firm is only one issue; another is the method of payment When selling a company, an entrepreneur has three basic choices: sell the firm’s assets, sell its stock, or, if the buyer is another company, merge with the buyer (combine the two companies into one firm) The exiting entrepreneur may prefer to sell the firm’s stock so that the gain on the sale will be a capital gain, resulting in lower taxes.9 The buyer, on the other hand, may prefer to purchase the firm’s assets rather than buy the company’s stock Buying the assets relieves the buyer of responsibility for any liabilities, known or unknown Harvesting owners can be paid in cash or in stock of the acquiring firm, with cash generally being preferred over stock Entrepreneurs who accept stock in payment are frequently disappointed, as they are unable to affect the value of the stock once they have sold the firm Only an entrepreneur who has great faith in the acquiring firm’s stock should accept it in payment, and even then he or she is taking a big chance by not being well diversified Having such a large investment in only one stock is risky, to say the least From an investor’s viewpoint, cash is best—except for the tax consequences As one investor advised, “Start with cash and work down from there.” However, venture capitalists may not have a preference between stock and cash if their limited partners— frequently pension funds—have no preference, as long as the sale of the stock is not restricted in any way 338 Part Developing the New Venture Business Plan How They See It: Begin with the End in Mind John Stites When I started my business, I was focused on making money and people—people inside my company and people outside my being successful I had been taught in business school the funda- company What I saw I didn’t like I saw a company finally mentals of being in business I visited other successful individuals making money, but not positively influencing lives and companies to see what I could replicate in my business to en- I have determined that if, at the end of my tenure in our sure its success I went right to work and worked hard for 10 years family business, I have not inspired individuals to be better I did not take the time to sit down and envision what I wanted my spouses, better parents, and better citizens, then I have lost business to look like in the future I did not take the time to set the greatest opportunity to increase the value of the company a mission statement and establish that mission in the day-to-day A company that doesn’t change lives in a positive way and just operations of the business I worked hard, but not smart gives money to employees and provides services to customers After 10 years of mediocre success, I stepped back is not one to be valued very highly and looked at what I was doing and how it was impacting Provide advice on developing an effective harvest plan Developing an Effective Harvest Plan We have discussed why planning for the harvest is important, despite the tendency of many entrepreneurs to ignore it until some crisis or unanticipated event comes along We have also described the methods for exiting However, there is still a lot that can be said about developing a harvest plan In the sections that follow, we provide suggestions on crafting an effective exit strategy.10 Manage for the Harvest Entrepreneurs frequently not appreciate the difficulty of harvesting a company One investor commented that exiting a business is “like brain surgery—it’s done a lot, but there are a lot of things that can go wrong.” Harvesting, whether through a sale or a stock offering, takes a lot of time and energy on the part of the firm’s management team and can be very distracting from day-to-day affairs The result is often a loss of managerial focus and momentum, leading to poor performance Uncertainties accompanying an impending sale often lower employee morale The stress can affect the whole organization, as employees become anxious about the prospect of a new owner Lynn Baker, at Sutter Hill Ventures, offers this advice: “Don’t start running the company for the liquidity event Run the business for the long haul.” Jim Porter, at CCI Triad, describes the situation in Silicon Valley in the 1990s, where some owners carried the practice to an extreme: Some people don’t think in terms of long-term value as much as short-term returns This carries over into developing an IPO exit strategy I see a growing number of people who are already planning their next company before they are finished with the first company They are looking to exit the first one, get the money out and start the second one, get the money out, and pyramid their return In a hot market, you can that and get away with it They are professional company starters So, while an entrepreneur should not be caught unaware, there is also the risk of becoming so attentive to “playing the harvest game” that one forgets to keep first things first Investors are always concerned about how to exit, and entrepreneurs need to have a similar mind-set Peter Hermann, general partner at Heritage Partners, a private equity investment group, notes, “People generally stumble into the exit and don’t plan for it.” The Harvest Plan However, for Hermann, “The exit strategy begins when the money goes in.” Similarly, Gordon Baty, at Zero Stage Capital, Inc., enters each investment with a clear understanding of its investment horizon and harvest plan In his words, “We plan for an acquisition and hope for an IPO.” Jack Kearney, at Dain Rauscher Inc., indicates that an exit strategy should be anticipated in advance, unless “the entrepreneur expects to die in the CEO chair The worst of all worlds is to realize, for health or other reasons, that you have to sell the company right now.” Jim Knister, at the Donnelly Corporation, advises entrepreneurs to start thinking two or three years ahead about how they are going to exit so that they can correctly position their companies This type of advice is particularly important when the entrepreneur is planning an IPO Running a public company requires information disclosures to stockholders that are not required of a privately held firm Specifically, this means (1) maintaining an accounting process that cleanly separates the business from the entrepreneur’s personal life, (2) selecting a strong board of directors that can and will offer valuable business advice, and (3) managing the firm so as to produce a successful track record of performance Having a harvest plan in place is also very important because the window of opportunity can open and close quickly Remember that the opportunity to exit is triggered by the arrival of a willing and able buyer, not just an interested seller For an IPO, a hot market may offer a very attractive opportunity, and a seller must be ready to move when the opportunity arises In summary, an entrepreneur should be sure to anticipate the harvest In the words of Ed Cherney, an entrepreneur who has sold two companies, “Don’t wait to put your package together until something dramatic happens Begin thinking about the exit strategy and start going through the motions, so that if something major happens, you will have time to think through your options.” Expect Conflict—Emotional and Cultural Having bought other companies does not prepare entrepreneurs for the sale of their own company Entrepreneurs who have been involved in the acquisition of other firms are still ill-prepared for the stress associated with selling their own businesses Jim Porter, who has been involved in a number of acquisitions, says, “It’s definitely a lot more fun to buy something than it is to be bought.” One very real difference between selling and buying comes from the entrepreneur’s personal ties to the business that he or she helped create A buyer can be quite unemotional and detached, while a seller is likely to be much more concerned about nonfinancial considerations For this reason and many others, entrepreneurs frequently not make good employees The very qualities that made them successful entrepreneurs can make it difficult for them to work under a new owner In fact, an entrepreneur who plans to stay with the firm after a sale can become disillusioned quickly and end up leaving prematurely Lynn Baker observes, “There is a danger of culture conflict between the acquiring versus the acquired firm’s management The odds are overwhelming that somebody who’s been an entrepreneur is not going to be happy in a corporate culture.” When Ed Bonneau sold his wholesale sunglass distribution firm, he was retained as a consultant, but the buyer never sought his advice Bonneau recalled that he “could not imagine that someone could or would buy a company and not operate it The people who bought the firm had no operations expertise or experience whatsoever and, in fact, didn’t care that much about it.” These conflicts occur to varying degrees whenever an entrepreneur remains with the company after the sale Although the nature of the conflict varies, the intensity of the feelings does not An entrepreneur who stays with the company should expect culture conflict and be pleasantly surprised if it does not occur Get Good Advice Entrepreneurs learn to operate their businesses through experience gained in repeated day-to-day activities However, they may engage in a harvest transaction only once in a lifetime “It’s an emotional roller-coaster ride,” says Ben Buettell, who frequently Chapter 12 339 340 Part Developing the New Venture Business Plan represents sellers of small and mid-sized companies.11 Thus, entrepreneurs have a real need for good advice, both from experienced professionals and from those who have personally been through a harvest In seeking advice, be aware that the experts who helped you build and grow your business may not be the best ones to use when it’s time to sell the company, as they may not have the experience needed in that area So, choose your advisors carefully Bill Dedmon, at Southwest Securities, advises, “Don’t try to it alone, because it’s a demanding process that can distract you from your business.” Jack Furst, at HM Capital, a private equity investor, believes that advisors can give entrepreneurs a reality check He contends that, without independent advice, entrepreneurs frequently fall prey to thinking they want to sell unconditionally, when in fact they really want to sell only if an unrealistically high price is offered Professional advice is vital, but entrepreneurs stress the importance of talking to other entrepreneurs who have sold a firm or taken it public No one can better describe what to expect—both in events and in emotions—than someone who has had the experience This perspective nicely complements that of the professional advisor Perhaps the greatest misconception among entrepreneurs is that an IPO is the end of the line They often feel that taking their firm public through an IPO means they have “made it.” The fact is that going public is but one transition in the life of a firm Many entrepreneurs are surprised to learn that a public offering is just the beginning, not an end An entrepreneur will not be able to cash out for some time after the completion of the IPO In a sense, investors in the new stock offering have chosen to back the entrepreneur as the driving force behind the company—that is, they have invested in the entrepreneur, not the firm While the daily stock price quotes will let the management team keep score, the business will have to reach another plateau before the founder can think about placing it in the hands of a new team and going fishing Ed Bonneau talks of being surprised in this matter: The question of an IPO was put to me a number of times over the years I had some investment bankers come and look at our company to talk about going public; they said,“Yeah, you can go public.” Then they asked me why I wanted to go public I said,“For one thing, I want some money out of the company I have every dime I’ve got stuck in here.” They responded that I couldn’t that I asked what they meant.They responded,“Getting money out [is] not the purpose of going public.” Lynn Baker describes the typical entrepreneur’s thinking about an IPO as “the Bride Magazine syndrome’’: The entrepreneur is like the bride-to-be who becomes fixated on the events of the wedding day without thinking clearly about the years of being married that will follow Life as head of a public corporation is very different from life at the helm of a private firm Major investors will be calling every day expecting answers—sometimes with off-thewall questions Under these circumstances, getting good advice is a must Understand What Motivates You For an entrepreneur, harvesting a business that has been an integral part of life for a long period of time can be a very emotional experience When an entrepreneur has invested a substantial part of his or her working life in growing a business, a real sense of loss may accompany the harvest Walking away from employees, clients, and one’s identity as a small business owner may not be the wonderful ride into the sunset that was expected Thus, entrepreneurs should think very carefully about their motives for exiting and what they plan to after the harvest Frequently, entrepreneurs have great expectations about what life is going to be like with a lot of liquidity, something many of them have never known The harvest does provide the long-sought liquidity, but some entrepreneurs The Harvest Plan Chapter 12 find managing money—in contrast to operating their own company—less rewarding than they had expected Entrepreneurs may also become disillusioned when they come to understand more fully how their sense of personal identity was intertwined with their business While Jim Porter understands that a primary purpose of exiting is to make money, watching a number of owners cash out has led him to conclude that the money is not a very satisfying aspect of the event: The bottom line is that you need more than money to sustain life and feel worthwhile I see people who broke everything to make their money They were willing to sacrifice their wives, their family, and their own sense of values to make money I remember one person who was flying high, did his IPO, and went straight out and bought a flaming red Ferrari He raced it down the street, hit a telephone pole, and died the day his IPO money came down You see these guys go crazy They went out and bought houses in Hawaii, houses in Tahoe, new cars, and got things they didn’t need Peter Hermann believes that “seller’s remorse” is definitely a major issue for a number of entrepreneurs His advice is “Search your soul and make a list of what you want to achieve with the exit Is it dollars, health of the company, your management team or an heir apparent taking over?” The answers to these and similar questions determine to a significant extent whether the exit will prove successful in all dimensions of an entrepreneur’s life There can be conflicting emotions, such as those expressed by Bill Bailey, founder of the Cherokee Corporation: There is a period in your life when you get up in age and you begin thinking more about your family For me, it became important for the first time in my life to have money available to some long-range personal planning for myself, and for my family But if there is any one thing to be understood when you are selling a business or anything else, it is the excitement of the journey and the enjoyment for doing what you’re doing that matters Entrepreneurs are also well advised to be aware of potential problems that may arise after the exit There are stories about people selling a firm or going public and then losing everything Ed Cherney says, “It is more difficult to handle success than it is to handle struggling People forget what got them the success—the work ethic, the commitment to family, whatever characteristics work for an entrepreneur Once the money starts rolling in, people forget and begin having problems.” And for the entrepreneur who believes that it will be easy to adapt to change after the harvest, even possibly to start another company, William Unger, at the Mayfield Fund, quotes from Machiavelli’s The Prince: “It should be remembered that nothing is more difficult than to establish a new order of things.” What’s Next? Entrepreneurs by their very nature are purpose-driven people So, after the exit, an entrepreneur who has been driven to build a profitable business will need something larger than the individual to bring meaning to her or his life Many entrepreneurs have a sense of gratitude for the benefits they have received from living in a capitalist system As a result, they want to give back, both with their time and with their money The good news is that there is no limit to the number of worthy charitable causes, including universities, churches, and civic organizations And it may be that, when all is said and done, the call to help others with a new venture may be too strong for an individual with an entrepreneurial mind-set to resist But whatever you decide to do, it with passion and let your life benefit others in the process 341 342 Part Developing the New Venture Business Plan Looking BACK Explain the importance of having a harvest, or exit, plan • Harvesting, or exiting, is the means entrepreneurs and investors use to get out of a business and, ideally, reap the value of their investment in the firm • Harvesting is about more than merely selling and leaving a business It involves capturing value (cash flows), reducing risk, and creating future options • A firm’s accessibility to investors is driven by the availability of harvest options Describe the options available for harvesting • There are four basic ways to harvest an investment in a privately owned company: (1) selling the firm, (2) releasing the firm’s cash flows to its owners, (3) offering stock to the public through an IPO, and (4) issuing a private placement of the stock • In a sale to a strategic buyer, the value placed on a business depends on the synergies that the buyer believes can be created • Financial buyers look primarily to a firm’s stand-alone, cash-generating potential as the source of its value • In leveraged buyouts (LBOs), high levels of debt financing are used to acquire firms • With bust-up LBOs, the assets are then sold to repay the debt • With build-up LBOs, a number of related businesses are acquired, which may eventually be taken public via an initial public offering (IPO) • A management buyout (MBO) is an LBO in which management is part of the group buying the company • In an employee stock ownership plan (ESOP), employees’ retirement contributions are used to purchase shares in the company • The orderly withdrawal of an owner’s investment in the form of the firm’s cash flows is one method of harvesting a firm • An initial public offering (IPO) is used primarily as a way to raise additional equity capital to finance company growth, and only secondarily as a way to harvest the owner’s investment • Private equity is a form of outside financing that can allow the original owners to cash out • Trying to finance liquidity and growth while retaining control is perhaps the most difficult task facing family firms Explain the issues in valuing a firm that is being harvested and deciding on the method of payment • Value is created when a firm’s return on invested capital is greater than the investors’ opportunity cost of funds • A firm will have greater value in the hands of new owners if the new owners can create more value than the current owners can • Often, buyers and sellers base the harvest value of a firm on a multiple of its earnings • Cash is generally preferred over stock and other forms of payment by those selling a firm Provide advice on developing an effective harvest plan • Investors are always concerned about exit strategy • Entrepreneurs who plan to stay with a business after a sale can become disillusioned quickly and end up leaving prematurely • Entrepreneurs frequently not appreciate the difficulty of selling or exiting a company Having bought other companies does not prepare entrepreneurs for the sale of their own firm • Entrepreneurs have a real need for good advice, both from experienced professionals and from those who have personally been through a harvest • Going public is not the end; it’s only a transition in the life of a firm Key TERMS harvesting (exiting), p 327 leveraged buyout (LBO), p 329 bust-up LBO, p 329 build-up LBO, p 330 management buyout (MBO), p 330 employee stock ownership plan (ESOP), p 330 leveraged ESOP, p 330 initial public offering (IPO), p 332 private equity, p 334 opportunity cost of funds, p 336 The Harvest Plan Chapter 12 343 Discussion QUESTIONS Explain what is meant by the term harvesting What is involved in harvesting an investment in a privately held firm? Why should an owner of a company plan for eventually harvesting his or her company? Contrast a sale to a strategic buyer with one to a financial buyer Explain the term leveraged buyout How is a leveraged buyout different from a management buyout? Distinguish between bust-up LBOs and build-up LBOs 10 What is the primary purpose of an initial public offering (IPO)? How does an IPO relate to a harvest? Why might an entrepreneur find going public a frustrating process? What determines whether a firm has value to a prospective purchaser? What problems can occur when an entrepreneur sells a firm but continues in the management of the company? How may harvesting a firm affect an entrepreneur’s personal identity? You Make the CALL SITUATION SITUATION Bill and Francis Waugh founded Casa Bonita They started with a single fast-food Mexican restaurant in Abilene, Texas At the time, they both worked seven days a week From that small beginning, they expanded to 84 profitable restaurants located in Texas, Oklahoma, Arkansas, and Colorado Over the years, other restaurant owners expressed an interest in buying the firm; however, the Waughs were not interested in selling Then an English firm, Unigate Limited, offered them $32 million for the business and said Bill could remain the firm’s CEO The Waughs were attracted by the idea of having $32 million in liquid assets They flew to London to close the deal On the flight home, however, Bill began having doubts about their decision to sell the business He thought, “We spent 15 years of our lives getting the business where we wanted it, and we’ve lost it.” After their plane landed in New York, they spent the night and then flew back to London the next day They offered the buyers $1 million to cancel the contract, but Unigate’s management declined the offer The Waughs flew home disappointed Ed and Barbara Bonneau started their wholesale sunglass distribution firm 30 years ago with $1,000 of their own money and $5,000 borrowed from a country banker in Ed’s hometown The firm grew quickly, selling sunglasses and reading glasses to such companies as Wal-Mart, Eckerd Drugs, and Phar-Mor In addition, the Bonneaus enjoyed using the company to good things For example, they had a company chaplain, who was available when employees were having family problems, such as a death in the family Although the company had done well, the market had matured recently and profit margins narrowed significantly Wal-Mart, for example, was insisting on better terms, which meant significantly lower profits for the Bonneaus Previously, Ed had set the prices that he needed to make a good return on his investment Now, the buyers had consolidated, and they had the power Ed didn’t enjoy running the company as much as he had in the past, and he was finding greater pleasure in other activities; for instance, he served on a local hospital board and was actively involved in church activities Just as Ed and Barbara began to think about selling the company, they were contacted by a financial buyer, who wanted to use their firm as a platform and then buy up several sunglass companies After negotiations, the Bonneaus sold their firm for about $20 million In addition, Ed received a retainer fee for serving as a consultant to the buyer Also, the Bonneaus’ son-in-law, Question How could the Waughs be disappointed with $32 million? Question What should the Waughs have done to avoid this situation? Question What advice would you offer Bill about continuing to work for the business under the new owners? 344 Part Developing the New Venture Business Plan who was part of the company’s management team, was named the new chief operating officer Question Do you agree with the Bonneaus’ decision to sell? Why or why not? Question Why did the buyers retain Ed as a consultant? (In answering this question, you might consider the quote by Bonneau in the chapter.) Question Do you see any problem with having the Bonneaus’ son-in-law become the new chief operating officer? out of this, there may be some ego pain If they muck it up, they’ve damaged our name and hurt our people Lois Silverman co-founded CRA Managed Care (now known as Concentra Managed Care) When the firm went public in 1995, Silverman’s stake was over $10 million After taking Concentra public, Silverman gave up all involvement in day-to-day operations Along with 12 other successful businesswomen, she formed the not-for-profit Commonwealth Institute, to help women entrepreneurs set up boards and secure capital She also became involved with a newspaper called Women’s Business She later told this story: The other day a man said to me on a golf course, “I hope I hit this ball, because since I’ve left my business, I don’t know what to with myself.” And I said to myself, “I’m so lucky.” SITUATION At age 63, Michael Lipper sold his firm to Reuters His assessment of the sale follows: One of the reasons we sold our business to Reuters was because we knew we probably couldn’t manage the technology of the future by ourselves Any entrepreneur who builds a business for as long as I have would be dishonest if he did not suffer a certain sadness [from selling] If [Reuters] makes a wonderful success Question Compare the people in the above true stories in terms of their feelings about exiting their firms Question What might explain the difference between those who have positive feelings about cashing out and those who not? Experiential EXERCISES Check your local newspaper for a week or so to find a privately held company that has been sold recently Try to determine the motivation for the sale Did it have anything to with the prior owners’ desire to cash out of the business? If so, try to find out what happened Ask a local family business owner about future plans to harvest the business Has the owner ever been involved in a harvest? If so, ask the owner to describe what happened and how it all worked out, as well as what she or he learned from the experience If not, ask whether the owner is aware of any company whose owners cashed out Visit that company owner to inquire about the exit event Visit a local CPA to learn about his or her involvement in helping entrepreneurs cash out of companies Search a business magazine to identify a firm that has successfully completed an initial public offering (IPO) See what you can find out about the event on the Internet Exploring the WEB To find out more about harvest and exit strategies of small firms, go to the U.S Chamber of Commerce website at http://www.uschamber com/sb Choose “Finance” from the Toolkits and in the “I need help on .” dropdown box, select “Getting Out of Your Business.” What exit routes should you consider, according to the Chamber, when you own a small business? Valuing a business is a topic covered extensively at the CCH’s Business Owner Toolkit website, The Harvest Plan which you may have visited before in earlier Web exercises Drill a bit deeper into the site by keying in this URL on firm valuation: http://www toolkit.com/text/small_business_guide/sbg aspx?nid=P11_2200 a Explain the role of a business appraiser b When setting a price for a small business, what must one consider? Go to BizPlanIt’s website at http://www.bizplanit com Choose “Free Business Planning Resources,” “Virtual BizPlan,” “Exit Strategy,” and then “Exit Strategy Business Plan Basics.” Case 12 Tires Plus (p 644) This case discusses the process and options to be considered by an entrepreneur who is exiting a business Chapter 12 345 a What are some common mistakes related to exit strategy and how might they be avoided? b What are the most common exit strategies and what are the advantages and disadvantages of each? c Which exit strategy is the most likely option for your proposed small business? Go to http://www.inc.com/articles/1999/11/ 15743.html for explanations of SEC rules and regulations governing exemptions for small firms going public This page intentionally left blank ... a Business Negotiating and Closing the Deal 10 3 10 3 10 3 10 3 10 6 10 8 10 9 10 9 11 0 11 1 11 1 11 1 11 3 11 3 11 4 viii Contents THE FAMILY BUSINESS 12 0 In the Spotlight: Aquascape, Inc 12 0 The Family Business: ... Professional Assistance in Business Planning Keeping the Right Perspective HOW THEY SEE IT Stay Focused 15 0 15 0 15 1 15 1 15 2 15 4 15 5 15 5 15 6 15 6 16 4 16 6 16 7 16 7 16 8 16 9 16 9 17 0 17 0 17 0 Marketing Philosophies... Reluctant Parents and Ambitious Children Transfer of Ownership HOW THEY SEE IT Plan Early 13 3 13 4 13 4 13 5 13 6 13 6 13 6 13 7 13 8 13 8 13 8 13 9 14 0 14 1 14 2 14 2 14 3 Part Developing the New Venture Business Plan