Building and Exiting

Exiting the Venture

Patterns of Entrepreneurship Management

4th Edition,Chapter 13
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

Presentation Outline

Personal Reasons for Selling

Business Reasons for Selling
Valuing the Company
Determining Best Candidates
Tax Considerations
Selling to Employees or Managers
Transferring to Family Members
IPOs
Running the Business while Selling
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

Personal Reasons for Selling

Investors are demanding a LIQUIDITY event
Entrepreneur wishes to cash-in part or all of their
ownership
Disagreements between shareholders
Acceptable Unsolicited Offer
Business - Burn Out
Personal Event
Poor Health
Retirement Planning
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

Be Clear Why You are Selling

Strategic Reasons
Growth Exceeded Management
Capabilities
Diversify Personal Net Worth
Other Interests
Getting Older - Illness - Divorce
Owner Disagreements
Investors Desire to Liquidate
Copyright 2006 Jack M. Kaplan & Anthony C. Warren

Business Reasons for Selling

Business Requires Significant Capital for
Growth
New Competition Appearing
Limited Opportunity for Growth
Close to Bankruptcy
Market Condition Forecasts are
Unattractive
Consolidation is Occurring in the Sector
Copyright 2006 Jack M. Kaplan & Anthony C. Warren

Determine the Companys Valuation

Before considering a sale of the company, it
is important to estimate the potential value:
Valuation based on purely financial
evaluation
Valuation on strategic fit that might be
perceived by an existing corporate
purchaser. This often attracts a premium in a
competitive market sector.

Copyright 2006 Jack M. Kaplan & Anthony C. Warren

Valuation Techniques for Later Stages

Asset Based

As a company grows and has a few years history of

asset purchases, sales, and profits, conventional
methods for valuation are used:
Asset Valuations include:
Book Value = Current assets + property + equipment
Adjusted Book Value =Current assets + market value of property +
equipment + intangible assets
Liquidation Value does not include intangible factors such as reputation,
talent, or goodwill
Replacement Value is cost of replacing assets after a total loss

Copyright 2006 Jack M. Kaplan & Anthony C. Warren

Valuation Techniques for Later Stages

Earnings Based

Based on either historical or projected earnings, or a blend

Estimate Price/Earnings (P/E) ratio by comparing to similar public
companies if available or use S&P quarterly industry analysis handbook
Modify based on an assessment of these factors on a 1-6 scale
Risk (high/low)
Competitive position (strong/weak)
Industry (attractive/non-attractive)
Growth opportunity (high/low)
Desirability
Sum the factors and take the average as a multiplier for the P/E

Copyright 2006 Jack M. Kaplan & Anthony C. Warren

Valuation Techniques for

Later Stages DCF Based
Once there is a history and solid
projections on future financial
performance the DCF method can be
used effectively for later stage
companies
The discount rate and risk adjustment
factors are much lower than for a prerevenue company
Copyright 2006 Jack M. Kaplan & Anthony C. Warren

Determine Best BUYER Candidates

Strategic Buyers
Competitors
Related or Complementary Businesses
Manufacturers of Related Products
Companies with Announced Acquisition Plans

Financial Buyers
Management ESOP
Management Buy-out Firms
Related Businesses
High Net Worth Individuals

Copyright 2006 Jack M. Kaplan & Anthony C. Warren

The Actual Process of Selling

(Average Time from Beginning to Closing is Up to One Year)

Develop a List of Candidates

Choose a group of strategic buyers

Try to Play the Role of a Reluctant

Suitor
Have Others Make Initial Contacts
Investment Bankers - Consultants - Brokers, etc.

Get More Than One Serious Candidate

Use Competitive Negotiation Strategies
Let All Candidates Know Others Are Interested
Negotiate An Equitable Sales Price And Related
Issues
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

The Actual Process of Selling

(Average Time from Beginning to Closing is Up to One Year)

Select One Candidate

Develop A Letter of Intent
A) All Equity Issues Described How Much
B) A Period of Due Diligence - up to 60 Days

Negotiate a Definitive Agreement of Sale

Closing

Copyright 2013 Jack M. Kaplan & Anthony C. Warren

Types of Transactions

Several different methods of payment are used for a

corporate transaction
In a Stock for Stock purchase the seller takes certain
risks if the buyer is a public company and the stock is
restricted then the final price might decline, for a
private company there may be no liquidity option
Cash for Stock is the preferred method but the final
price is usually lower
Installment transactions are common, in which the final
payment depends on the performance after purchase
which has inherent risks associated with control issues.

Copyright 2006 Jack M. Kaplan & Anthony C. Warren

Up-to-Date Financials
Maintain the finances on a consistent
monthly P & L and cash flow basis long
before a sale is contemplated
Fully audited accounts for the last three
years are mandatory prior to a sale
unless it is a strategic sale of assets

Copyright 2006 Jack M. Kaplan & Anthony C. Warren

3-Year Projections
As well as historical financial records at
least 3- year detailed forecasts are
required:
by Month Actual Account Plus Future
Accounts
by Actual Product Plus New Products
by Region and/or by Location
by Division or Subsidiaries
Copyright 2006 Jack M. Kaplan & Anthony C. Warren

Selling to Employees - ESOPs

Definition of 'Employee Stock Ownership Plan - ESOP
A qualified, defined contribution, employee benefit plan designed to
invest primarily in the stock of the employer. ESOPs are "qualified" in
the sense that the ESOP's sponsoring company, the selling
shareholder and participants receive various tax benefits. ESOPs are
often to align the interests of a company's employees with those of the
company's shareholders
An ESOP can be structured so that over time employees can end up
with owning the company and thereby cashing out the founders
It is also a way in which the culture and uniqueness of the company
can be retained
Although the gross value to the founders may be somewhat lower than
an outright sale to a third party, the net proceeds may be attractive
because of the special tax treatments.
Copyright 2006 Jack M. Kaplan & Anthony C. Warren

Selling to Managers MBOs

Definition of Management Buyout MBO When the managers
and/or executives of a company purchase a controlling interest
in a company from existing shareholders
These shareholders can be founders who feel they wish to cash-out
and allow key managers to continue to run the company
In most cases, the management will buy out all the outstanding
shareholders because it feels it has the expertise to grow
the business better if it controls the ownership completely
If the company is public, the new team will take the company private
Often, management will team up with a venture capitalist
specializing in MBOs to acquire the business because
it's a complicated process that requires significant capital.
Often much of the purchase price is funded through debt in which
case the transaction is referred to as a leveraged buy-out, (LBO)
Copyright 2006 Jack M. Kaplan & Anthony C. Warren

Transferring Ownership to
Family Members
Family owned businesses constitute the largest percentage group
of private companies:

Copyright 2013 Jack M. Kaplan & Anthony C. Warren

Transferring Ownership to
Family Members
Despite the need to transfer ownership to later generations, the
process is fraught with difficulties. This chart shows the survival
rate just through two generational shifts:

Copyright 2013 Jack M. Kaplan & Anthony C. Warren

Transferring Ownership to
Family Members
Transferring to the next family generation is much more difficult that to
an established and trusted management team. Some of the reasons are:
Unwillingness to confront mortality by the founders
Emotional family relationships hinder rational decision making
Failure to prepare the new management team holding onto control
Family members not engaged so passionately to the business as the founders
Company is in poor financial health
Systematic planning is required to hand-over control and preparation for a
smooth transition take several years.
Often the transition is forced for health reasons unexpectedly
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

A Model for Running the Business

for Greater Perceived Value

Develop a Prestigious and Stable Customer List

Keep a Well-Maintained Facility
Show a Continuous Growth in Sales and Profits
Develop Propriety Assets
Patents, Copyrights, Trademarks
Process Know How: Formulations and
Clear Documentation
Develop a Well-Respected Sales Distribution Channel
Document and Organize All Contractual and Legal
Obligations
In General, Do Things That Others Will Value Much
Higher Than Your Cost to Create Them
Copyright 2013 Jack M. Kaplan & Anthony C. Warren