Chapter 15

Succession Planning and

Strategies for Harvesting
Hisrich
and Ending the Venture
Peters

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. 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 entity—an employee
stock ownership trust.
 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 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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Bankruptcy—An 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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Bankruptcy—An 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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Bankruptcy—An 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 11—Reorganization

 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 11—Reorganization (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 11—Reorganization (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 13—Extended 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 7—Liquidation

 The most extreme case of bankruptcy.

 Voluntary bankruptcy - Entrepreneur’s
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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