Chapter 15

Succession Planning and

Strategies for Harvesting
and Ending the Venture
McGraw-Hill/Irwin

Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Hisrich
Peters
Shepherd

Exit Strategy
Exit strategies include:
Initial public offering (IPO).
Private sale of stock.
Succession by a family member or a nonfamily
member.
Merger with another company.
Liquidation.

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Table 15.1 - Succession Planning

Tips

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Succession of Business
Transfer to Family Members
Role of owner - full-time/part-time/retire.
Family dynamics.
Income for working family members and
shareholders.
Transition business environment.
Treatment of loyal employees.
Tax consequences.

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Succession of Business

(cont.)

Transfer to Nonfamily Members

Train a key employee and retain some equity.
Retain control and hire a manager.
Sell the business outright.

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Options for Selling the Business

Direct Sale
Strategies to be considered:

Focus on a narrow, well-defined segment.

Control costs and focus on higher margins and profits.
Get all financial statements in order.
Prepare a management documentation.
Assess the condition of capital equipment.
Get tax advice.
Get nondisclosures from key employees.
Try to maintain a good management team.
Prepare and plan in advance.

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Options for Selling the Business

(cont.)

An important consideration is the type of

payment the buyer will use.
Business brokers may be helpful.
The best way to communicate the business to
potential buyers is through the business plan.
The role of an entrepreneur may vary
depending on the sale agreement or contract
with the new owner(s).

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Options for Selling the Business

(cont.)

Employee Stock Option Plan

Establishes a new legal entityan employee
stock ownership trust that borrows the money
against future profits.
Obligates the firm to repay the loan plus
interest out of business cash flows.
Results in significant stock values for
employees.

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Options for Selling the Business

(cont.)

Advantages:
Motivates employees to put in extra time or effort.
Provides a mechanism to pay back loyal employees.
Allows transfer of business under a planned written
agreement.
Permits the company to reap the advantage of
deducting contributions on ESOP or any dividends paid.

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Options for Selling the Business

(cont.)

Management Buyout
Usually involves a direct sale of the venture for
some predetermined price.
To establish a price, the entrepreneur should:
Have an appraisal of all the assets.
Determine the goodwill value established from past
revenue.

Sale of a venture to key employees can be:

For cash.
Financed through banks
Through sale of voting or nonvoting stock.

The entrepreneur may agree to carry a note.

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BankruptcyAn Overview
Most common types of bankruptcies:
Chapter 7 or liquidation (69% in 2008).
Chapter 11 or reorganization (19% in 2008).
Chapter 13 or installment payments (12% in
2008).

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BankruptcyAn Overview

(cont.)

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

(cont.)

Bankruptcy Act of 1978 (with amendments

added in 1984 and 2005) ensures:
Fair distribution of assets to creditors.
Protection of debtors from unfair depletion of
assets.
Protection of debtors from unfair demands by
creditors.

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Chapter 11Reorganization
Courts try to give the venture breathing
room to pay its debts.
A plan for reorganization is prepared and
approved by the US Bankruptcy Court.
Decisions made reflect one or a
combination of the following:
Extension - Postpone claims.
Substitution - Exchange stock for debt.
Composition settlement - Debt is prorated to
creditors as settlement.
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Chapter 11Reorganization

(cont.)

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

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Chapter 11Reorganization

(cont.)

Maintain good records.

Understand how protection against creditors
works.
Transfer litigation to bankruptcy court.
Prepare a realistic financial reorganization plan.

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Chapter 13Extended Time

Payment Plans
Individual creates a five-year repayment
plan under court supervision.
A court appointed trustee receives money
from debtor.
Bears responsibility for making scheduled
payments to all creditors.

About two of every three Chapter 13 filers

ultimately fail to meet their planned
obligations, thus resulting in a Chapter 7
filing.
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Chapter 7Liquidation
The most extreme case of bankruptcy.
Voluntary bankruptcy - Entrepreneurs
decision to file for bankruptcy.
Courts will require a current income and
expense statement.

Involuntary bankruptcy - Petition of

bankruptcy filed by creditors without
consent of entrepreneur.

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Table 15.2 - Liquidation under

Chapter 7 Involuntary Bankruptcy

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Strategy During Reorganization

The entrepreneur can speed up the process
by:

Taking the initiative in preparing a plan.

Selling the plan to secured creditors.
Communicating with groups of creditors.
Not writing checks that cannot be covered.

Enhancing the bankruptcy process by:

Keeping creditors abreast of how the business is
doing.
Stressing the significance of creditors support
during the process.
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Table 15.3 - Requirements for

Keeping a Venture Afloat

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Table 15.4 - Warning Signs of

Bankruptcy

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Starting Over
Entrepreneurs are likely to continue starting
new ventures even after failing.
Entrepreneurs who have failed tend to have
a better understanding and appreciation for
the need for:
Market research.
More initial capitalization.
Stronger business skills.

Business failure does not have to be a

stigma when seeking venture capital.
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The Reality of Failure

Important considerations for the
entrepreneur in case of failure:
Consult with family.
Seek outside assistance from professionals,
friends, and business associates.
Do not hang on to a venture that will continually
drain resources.

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Business Turnarounds
Learn to recognize the warning signs of
bankruptcy.
Principles of a successful turnaround:
Aggressive hands-on management.
Management must have a plan.
Action.

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