Chapter 17

Ending
the
Venture

McGraw-Hill/Irwin
Entrepreneurship, 7/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. 17-1
 Class Discussion
 Role play 1. One student prepares and presents a
speech as if she or he is an entrepreneur informing
employees that her or his business has failed and will
not be operating from tomorrow on. The rest of the
class can respond and ask questions as if they are
devoted employees upset about their jobs.
 Role play 2. In small groups, role-play the
interchange between an entrepreneur of a failed
business expressing his or her negative emotions and a
friend providing advice on how to best cope with the
situation.

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 Bankruptcy’s Lessons
 Too much time and effort spent on diversifying in
markets where entrepreneurs lack knowledge.
 Bankruptcy protects entrepreneurs from creditors, not
from competitors.
 Difficult to separate entrepreneurs from the business.
 Entrepreneurs recognize failure too late.
 Bankruptcy is emotionally painful.

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 Strategy During Reorganization
 Prepare plan.
 Sell plan.
 Communicate.
 No checks that can’t be covered/paid.

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Requirements of Keeping a Venture Afloat

 <<Insert Table 17.2>>

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 Bankruptcy Warning Signs
 Financial management  Bank requests
becomes lax. subordination.
 Inability to document/  Key personnel leave.
explain transactions.  Lack of materials.
 Large discounts given to  Unpaid taxes.
speed up cash flow.  Demand for cash
 Contracts are accepted payment.
below standard amounts.  Customer complaints
increase.

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 Failure
 Q. Is it relevant?
 Should we even care?...
 Q. Is it important?
 Does it even matter?...
 Failure is simply inevitable- We all make
mistakes!
 Knowing that we do make mistakes, why not try
to understand it, try to manage it and take
advantage of it?

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 Failure
 In 2009, 60,837 businesses in the U.S. declared
bankruptcy. In any given year, approximately 8-10%
of all firms in a U.S. industry exit
 The annual average number of corporate bankruptcies
during the 1990s
 Japan: 14,500 Germany: 21,000 Great Britain: 47,000
 While every entrepreneur is interested in success;
unfortunately, a majority of entrepreneurial firms (but
not all) fail, and end up in bankruptcy
 Failure can often be devastating at the very
personal level…Emotionally, mentally,
physically, economically, socially…
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 Evolution - Historically, technological
advancement has been contingent on learning
from previous failures
 All-time greatest failures…
 e.g., Tacoma Bridge (1940, US)
http://www.youtube.com/watch?v=pl0vzOMYsUU&feat
ure=related
 Failure boosted research in each field,
influencing the designs of all models since
then…
But is that all? Failure as the seed for
innovation?
http://www.youtube.com/watch?v=L1FzkY9qzCE
http://ecorner.stanford.edu/
authorMaterialInfo.html?mid=2103

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 What is failure?
Definition into a context…
Sharing your failure experience
Who? When? Where? What? Why?
What is the essence of failure
(that defines what it is)?

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 Failure Reality
 Entrepreneur should:

 Consult with family/friends.

 Seek outside assistance.
 Drop venture that is draining resources.

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 Business Turnaround
 Entrepreneur needs to recognize the warning signs of
bankruptcy.

 Consider following principles:

 Aggressive hands-on management.
 Management must have a plan.
 Action.

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 Harvesting: Direct Sale
 Many entrepreneurs sell so they can move on to new
endeavors.
 Requires time and planning.
 Buyer payment method.
 Business broker.
 Business plan.
 Employment contract.
 Covenant not to compete
 Successful small businesses are in
demand by larger
firms that wish to grow by acquisition.
 Often buyers will purchase a business using
notes based
on future profits, but there are future pitfalls. 17-17
 Harvesting: Employee Stock Option
 Employee stock option
 2-3 year plan to sell to employees.
 The employee stock option plan (ESOP) is often considered
an alternative to a pension plan.
 Its purpose is to reward employees and to clarify
the succession decision.
 The ESOP is highly regulated, where the founder
creates a trust fund and contributes stock or cash for buying the
owner’s interest in the venture.

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 Harvesting: Management buy-out
 based on value of goodwill & asset appraisal
 Management buyouts usually involve a direct sale for
some predetermined price.
 Sale of a venture to key employees can
either be for
cash or could be financed in other ways.
 A cash sale would be unlikely if the value of the
business is substantial.
 Financing can either be accomplished
through a bank or
the entrepreneur could agree to carry the note.
 Other methods of transferring a business 17-19
 Succession Planning Issues
 Senior management committed to plan.

 Well-defined job descriptions.

 Open process.

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Succession Planning Tips

 <<Insert Table 17.4>>

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 Succession Planning
 Transfer to family member
 Role of owner- full-time/ part-time/ retire.
 Members able to work together?
 Income.
 Transition business environment.
 Loyal employees.
 Tax consequences.
 Transfer to non-family
 Train key employee: retain some equity.
 Retain control: hire manager.
 Sell.

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