harvesting the entrepreneurial venture
cash, (iii) offering stock to the public through an
William J. Petty
Most small business owners do not like to think
about the harvest of their venture, even though
few events in the life of an entrepreneur, and the
firm itself, are more significant. Consequently,
the decision to harvest is frequently the result
of an unexpected event, possibly a crisis, rather
than a well-conceived strategy. Ultimately,
though, every entrepreneur exits at some point
in time.
Harvesting (or exiting) is the method owners
and investors use to get out of a business and,
ideally, reap the value of their investment in the
firm. Many entrepreneurs successfully grow
their businesses but fail to develop effective
harvest plans. As a result, they are unable to
capture the full value of the business they have
worked so hard to create.
Harvesting encompasses more than merely
selling and leaving a business; it involves
capturing value (cash flows), reducing risk, and
creating future options – the reason we prefer
the term harvest over exit. In addition, there
are personal, nonfinancial considerations for
the entrepreneur. An owner may receive a lot
of money for the firm but still be disappointed
with the harvest if he or she is not prepared for
a change in lifestyle. Thus, carefully designing
an intentional harvest strategy is as essential to
an entrepreneur’s personal success as it is to his
or her financial success.
The harvest is vitally important to a firm’s
investors as well as to its founder. Investors who
provide high-risk capital – particularly angels
and venture capitalists – generally insist on a
well-thought-out harvest strategy. They realize
that it is easy to put money into a business,
but difficult to get it out. As a result, a firm’s
appeal to investors is driven, in part, by the
availability of harvest options. If investors are
not convinced that opportunities will exist for
harvesting their investment, there will most
likely be no investment.
METHODS OF HARVESTING A BUSINESS
The four basic ways to harvest an investment in a
privately owned company are (i) selling the firm,
(ii) distributing the cash flows generated by the
Wiley Encyclopedia of Management, edited by Professor Sir Cary L Cooper.
Copyright © 2014 John Wiley & Sons, Ltd.
business to its owners instead of reinvesting the
initial public offering (IPO), and (iv) issuing a
private placement of the stock.
Selling the Firm. In any harvest strategy, the
financial questions associated with the sale of a
firm include how to value the firm and how to
structure the payment for the business. Most
frequently, an entrepreneur’s motivation for
selling a company relates to retirement and
estate planning and a desire to diversify her or
his investments. Thus, in choosing a possible
buyer, an entrepreneur should understand what
they want to accomplish from the sale.
Potential buyers for a company can come from
a number of places, including your customers,
suppliers, employees, friends and family, or even
a competitor. Buyers who are unrelated to you
and who may be unearthed by your business
broker can usually be divided into two groups:
financial buyers and strategic buyers. In the
sections that follow, we look at three aspects in
particular: (i) sales to strategic buyers, (ii) sales
to financial buyers, and (iii) sales to employees.
Sales to Strategic Buyers. Usually a strategic
buyer is a firm in a similar line of business in a
different market or is in need of new products
and services to sell to their existing customer.
Another possibility is a buyer in an unre-
lated business that wants to acquire a seller’s
strengths that could help their existing business.
For example, a food manufacturer might acquire
a supply chain management/logistics firm.
Strategic buyers value a business based on
the synergies they think they can create by
combining the acquired firm with another busi-
ness. As the value of a business to a buyer is
derived from both its stand-alone characteristics
and its synergies, strategic buyers may pay a
higher price than will other buyers, who value
the business only as a stand-alone entity. Thus,
in strategic acquisitions, the critical issue is
the degree of strategic fit between the firm to
be harvested and the potential buyer’s other
business interests. If the prospective buyer is a
current rival and if the acquisition would provide
long-term, sustainable competitive advantages
(such as lower cost of production or superior
product quality), the buyer may be willing to
pay a premium for the company.
2 harvesting the entrepreneurial venture
Sales to Financial Buyers. Unlike strategic
buyers, buyers in financial acquisitions look
primarily to a firm’s stand-alone, cash-
generating potential as its source of value. A
financial buyer hopes to increase future sales
growth, reduce costs, or both. This fact has
an important implication for the owner of the
business being purchased. The buyer often
will make changes in the firm’s operations that
translate into greater pressures on the firm’s
personnel, resulting in layoffs that the current
owner might find objectionable.
In earlier years, the leveraged buyout (LBO),
a financial acquisition involving a very high
level of debt financing, became synonymous
with the bust-up LBO, in which the new owners
pay the debt down rapidly by selling off the
acquired firm’s assets. Frequently, acquisitions
were financed with $9 in debt for every $1 in
equity – thus the name LBO. Owing to the
heavy reliance on debt to finance the acquisition,
the acquired company must have the following
characteristics:
• Steady earnings over time
• Attractive growth rates
• An effective management team already in
place
• Assets that can be used as collateral on the
debt
Otherwise, the risk is too great and the trans-
action simply will not work.
To illustrate an LBO, consider Robert Hall,
the former owner of Visador Corporation, who
sold his firm to a financial buyer for $67 million.
The buyer financed the purchase as a LBO,
incurring lots of debt to finance the purchase.
The firm’s total assets and debt and equity (as
presented in the balance sheet) before and after
the sale were as follows:
Before the sale After the sale
Total assets $18 000 000 $67 000 000
Total debt $5 000 000 $60 000 000
Equity 13 000 000 7 000 000
Total debt $18 000 000 $67 000 000
and equity
Visador’s before-sale and after-sale numbers
differ in two important respects. First, the total
assets (and total debt and equity) increased from
$18 million to $67 million. In other words, the
founders of Visador had invested just over $18
million in the firm during their years of owner-
ship, up to the point of the acquisition. However,
the buyer was willing to pay $67 million for the
business, based on future cash flows that were
expected to be generated.
Second, before the sale, the assets were
financed with 28% debt ($5 million total debt ÷
$18 million total assets) compared to 90%
debt ($60 million total debt ÷ $67 million total
assets) after the sale. Consequently, the firm
was exposed to significantly more financial
risk. If sales decrease, the company may not
be able to service its debt. This is typical for
bust-up LBOs.
More recently, the bust-up LBO has been
replaced by the build-up LBO. As the name
suggests, the build-up LBO involves pulling
together a group of smaller firms to create a
larger enterprise that might eventually be sold
or taken public via an IPO.
The process of the build-up LBO begins
with the acquisition of a company, which then
acquires a number of smaller businesses that
in some way complement it. These subsequent
acquisitions may expand capacity in related
or completely different businesses. The newly
formed combination is operated privately for
5 years or so in order to establish a successful
track record, and then it is sold or taken public.
These acquisitions continue to rely heavily on
debt financing, but to a lesser extent than bust-
up LBOs. Build-up LBOs have occurred in a
number of industries where smaller companies
frequently operate, such as funeral services and
automobile dealerships.
Sometimes, the selling firm’s own manage-
ment initiates an LBO to buy the business
from the entrepreneur – in which case the
arrangement is referred to as a management
buyout (MBO). An MBO can contribute signif-
icantly to a firm’s operating performance by
increasing management’s focus and intensity.
Thus, an MBO is a potentially viable means
of transferring ownership from the founder to
the management team. In many entrepreneurial
businesses, managers have a strong incentive to
become owners but lack the financial capacity
to acquire the firm. An MBO can solve this

problem through the use of debt financing,
which is often underwritten in part by the
selling entrepreneur.
Sales to Employees. Established by Congress
in 1974, employee stock ownership plans (ESOPs)
have gradually been embraced by more than
10 000 companies. Once established, an ESOP
uses employees’ retirement contributions to
buy company stock from the owner and holds
it in trust; over time, the stock is distributed to
employees’ retirement plans.
It is common for an owner to start an ESOP
by selling only a portion of the company. But
even if the owner sells all of his or her stock,
he or she can still retain control of the business.
And an ESOP creates significant tax advantages
for the seller. For instance, if the entrepreneur
sells at least 30% of the company, capital gains
taxes can be deferred, in some cases indef-
initely. For example, the owner-managers of
BFW Construction Company in Temple, Texas,
created an ESOP. Then in 2003, they sold their
business and rolled over the money from the
shares into their personal retirement accounts.
As a result, they have not paid taxes from the
time the shares were put into an ESOP and will
not have to do so until they are required to begin
distributing the money, when they are 70.5 years
old.1
A reason frequently given for selling to
employees is to create an incentive for them
to work harder – by giving them a piece of
the profits. However, employee ownership is
not a panacea. Although advocates maintain
that employee ownership improves motivation,
leading to greater effort and reduced waste,
the value of increased employee effort resulting
from improved motivation varies significantly
from firm to firm. Selling all or part of a firm
to employees works only if the company’s emp-
loyees have an owner’s mentality, that is, they
do not think in “9-to-5” terms. An ESOP may
provide a way for the owner to sell the busi-
ness, but if the employees lack the required
mindset, it will not serve the business well in the
future.
To illustrate the need for employee educa-
tion if an ESOP is to be effective, consider the
experience of Van Meter Industrial, Inc. Mick
Slinger, the chief financial officer, thought his
harvesting the entrepreneurial venture 3
company’s employee stock program was a great
perk for employees. But at a company meeting,
an employee stood up and said he did not care at
all about the stock fund, asking, “Why don’t you
just give me a couple hundred bucks for beer and
cigarettes?” It was a wake-up call for Slinger.
Many employees at the 100% employee-owned
company, which is based in Cedar Rapids, Iowa,
“didn’t know what stock was, didn’t know what
an [employee] owner was,” he recalls. “I made
the mistake of thinking that everyone thinks
like me.” So the company created an employee
committee to raise awareness of stock ownership
and to get workers thinking about what each
of them as owners can do to raise the price
of company stock – and how it affects their
own net worth. Today, employees are much
more engaged in the program, and the firm’s
management believes it has made a significant
contribution to increasing its stock price and
lowering employee turnover. But it required a lot
of effort to make the plan work as desired (Covel,
2008).
The approaches that have been described in
this section for selling a company represent
the primary ways small business owners exit
their businesses. But the opportunity to sell a
business can be affected by market conditions.
For instance, in 2009, you could not talk about
selling a business without recognizing the effects
of the recession. There just were not as many
buyers. But neither were there as many sellers.
Entrepreneurs who had been considering an exit
were holding back in the hope of an economic
recovery when they would receive a better price
for the business.
Michael Handelsman, general manager of
BizBuySell, an online marketplace that lists
companies for sale, offered these tips for selling
a business in a difficult economy (see Tice,
2009).
• Clean up the books. Pay off small debts if you
can, and make sure your records are ready for
buyers’ review.
• Keep revenue strong. Continue marketing and
bringing in customers to show buyers that
your business is still flourishing.
• Consider your sector and market. The down-
turn is not the same in every city or every
industry. Research businesses sold in your
4 harvesting the entrepreneurial venture
sector or town to see if now is a good time to
sell.
While Handelsman offers good advice, these
tips are relevant at any time – recession or no
recession – and even when you are not interested
in selling.
The recession also affected the availability
of financing to buy companies. Banks became
reluctant to loan money to entrepreneurs who
wanted to buy a business. As a result, seller
financing, in which the seller gives a loan to
the buyer for part of the purchase price of the
business, became more prevalent. For instance,
an entrepreneur who purchased a business for
$3.5 million paid $2.7 million in cash, and the
seller took a note for the remaining $800 000,
which was to be paid off over the next 7 years.
The $2.7 million in cash came from a bank loan
of $2 million and $700 000 from the buyer’s
personal money. The loan from the seller was
subordinated to the bank loan, so that if the
buyer missed a payment to the bank, she could
not make any payments to the seller until the
bank loan was current.
DISTRIBUTING THE FIRM’S CASH FLOWS
A 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 liquidated
the business. 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 concern. 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 investors.
In a firm’s early years, all its cash is usually
devoted to growing the business. Thus, the
company’s cash flow during this period is
zero – or, more likely, negative – requiring
its owners to seek outside cash to finance its
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 business, 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 slowly withdrawing a firm’s
cash from the business has two important
advantages: the owners can retain control of the
business while they harvest their investment,
and they do not have to seek out a buyer or
incur the expenses associated with consum-
mating a sale. There are disadvantages, however.
Reducing investment when the firm faces valu-
able growth opportunities could leave a firm
unable to sustain its competitive advantage. The
end result may be an unintended reduction in
the value of the business, most likely below its
value of an ongoing concern. Also, there may
be tax disadvantages to an orderly liquidation,
compared with other harvest methods. For
example, if a corporation distributes cash as
dividends, both the company and the stock-
holders will be taxed on the income – what we
call double taxation. (However, there is no double
taxation 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.
INITIAL PUBLIC OFFERING
A third method of harvesting a firm is an IPO,
which occurs when a private firm sells its shares
for the first time to the general public. This
requires registering the stock issue with the
Securities and Exchange Commission (SEC),
and adhering to Blue Sky laws that govern the
public offering at a state level. The purpose
of these federal and state laws is to ensure
adequate disclosure to investors and to prevent
fraud. Businesses intending to conduct an IPO
must file a detailed registration statement with
the SEC, which includes in-depth financial,
management, and operational information.

Many entrepreneurs consider the prospect
of an IPO as the “holy grail” of their career,
bringing with it increased prestige with many in
business circles. However, IPOs were essentially
nonexistent during late 2008 and early 2009.
Since then, there has been a modest increase in
the number of IPOs, which continued into 2011.
Not only have we seen a much smaller number of
IPOs in recent years, the types of companies that
investors like have changed as well. In earlier
years, the more established but highly leveraged
firms were in vogue. In 2010, most of the IPOs
were fast-growing, high-tech companies, with a
smaller number of financial services and an occa-
sional entertainment and consumer company
(Tiko, 2010). But for entrepreneurs and also any
investors wanting to take a company public, the
situation has been bleak. Hopefully, in years to
come, the public markets will once again be a
viable option.
DEVELOPING AN EFFECTIVE HARVEST PLAN
We have discussed why planning for the harvest
is important, despite the tendency of many
small business owners to ignore it until some
crisis or unanticipated event comes along. We
have also described the methods for exiting.
However, understanding what the options are
for harvesting in no way guarantees a successful
harvest. More times than not, owners who
harvest their businesses are disappointed with
the process and the outcome. In the sections
that follow, we provide suggestions for crafting
an effective exit strategy.2
Anticipate the Harvest. Entrepreneurs frequ-
ently do 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.
Cash Is King. Other things being the same,
cash is generally preferred over stock and other
forms of remuneration.
harvesting the entrepreneurial venture 5
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 defi-
nitely 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.
Get Good Advice. Entrepreneurs learn
to operate their businesses through experi-
ence gained in repeated day-to-day activities.
However, they may engage in a harvest transac-
tion only once in a lifetime. “It’s an emotional
roller-coaster ride,” says Ben Buettell, who
frequently represents sellers of small and
mid-sized companies (Bailey, 2002). 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
is time to sell the company, as they may not have
the experience needed in that area. So, choose
your advisors carefully.
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 care-
fully about their motives for exiting and what
they plan to do after the harvest. Frequently,
entrepreneurs have great expectations about
what life is going to be like with a lot of liquidity,
6 harvesting the entrepreneurial venture
something many of them have never known. The
harvest does provide the long-sought liquidity,
but some entrepreneurs 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 under-
stands 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:
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 ques-
tions 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 do 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.
CONCLUSION
Harvesting is the means entrepreneurs and
investors use to exit a business and, ideally,
unlock the value of their investment in the firm.
It is more than merely selling and leaving a busi-
ness. It involves capturing value (cash flows),
reducing risk, and creating future options.
There are three basic ways to exit an invest-
ment in a privately owned company: (i) selling
the firm, (ii) releasing the firm’s cash flows to its
owners, or (iii) offering stock either to the public
markets or to private investors.
The following advices are offered to any
entrepreneur wanting to harvest a business
investment:
• Anticipate the harvest.
• Cash is king.
• Selling a firm is not the same as buying.
• Entrepreneurs have a real need for good
advice, both from experienced professionals
and from those who have personally been
through an exit.
• Be careful what you wish for, you may get
it. So understand what is important before
harvesting your personal and financial
investments in your company.
ENDNOTES
1 Personal conversation with Bob Browder,
former CEO, BFW Construction Company,
1 February 2009.
2 Unattributed quotes in this section are taken
from interviews conducted as part of a study
sponsored by the Financial Executive Research
Foundation and cited in Petty, Martin, and
Kensinger, 1999.
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Petty, J.W., Martin, J.D., Kensinger, J. (1999) Harvesting
the Value of a Privately Held Company, Financial Exec-
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Tice, C. (2009) Is it time to sell? Entrepreneur, 37 (1), 30.
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