Topic 9: Harvesting &

Exiting A Business Venture

Sources:
Adapted from Hisrich, Peters Shephard, Entrepreneurship; McGraw-Hill
International Edition 2013

OPENING PROFILE:
DAVID HARTSTEIN

David Hartstein, the

founder and CEO of
KaBloom and a Suffolk
University alumnus
who teaches
marketing as
executive in residence
at Suffolk University's
Sawyer Business
School.

Topic Outline

Succession as an Exit Strategy

Transfer to Family Members
Transfer to Non-Family Members

Options for Selling

Direct Sale
Employee stock option Plan
Management Buyout

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

Table 15.1 - Succession

Planning Tips

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

Succession of Business

Transfer to nonfamily members

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

Succession of Business

In an S corporation or an LLC:
Senior management of the company must be
committed to any succession plan
Well-defined job descriptions and a clear
designation of skills
Process needs to be an open one

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

Options for Selling the Business

Get nondisclosures from key employees
Try to maintain a good management team
Prepare and plan in advance

Type of payment the buyer will use

Business brokers
Business plan
Sale agreement or contract with the new
owners

Options for Selling the Business

Employee stock option plan: A two-to

three-year plan to sell the business to
employees
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

Options for Selling the Business

Advantages
Motivates employees to put in extra time
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

Options for Selling the Business

Disadvantages
Quite complex to establish
Raises issues such as:
Taxes, payout ratios, amount of equity to be transferred
per year, and the amount actually invested by the
employees

Options for Selling the Business

Management buyout
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

Options for Selling the Business

Sale of a venture
For cash
Financed through banks
Entrepreneur could also agree to carry the note

Sale of voting or nonvoting stock