Entrepreneurship

Exit Strategies for Entrepreneurs: When—and

How—To Harvest the Rewards

Ch. 14

“All things change…There is nothing in the whole world which is permanent. Everything flows onward…the ages themselves glide by in constant movement.”

--Ovid, 10 B.C.

Exit Strategies Sell or transfer ownership to insiders Sell or transfer ownership to outsiders Take the company public through an

IPO

Sale or Transfer to Insiders Succession Leveraged buyout Employee stock

ownership plan

All In the Family Share power Form a limited

partnership Set up a trust

Leveraged Buyouts Managers borrow money to pay the

owner an agreed-upon price. The new owners pledge their stock as

collateral, or… Lenders accept an equity position in the

company to cover part or all of the funds.

Employee Stock Ownership Ordinary ESOP Leveraged plan Transfer ownership

plan

Selling to Outsiders Sell at the right stage Sell when the business cycle is strong Compensate for loss of talent Identify and protect intellectual property Adopt transparent and conservative

accounting policies Resolve open questions that make it difficult

to estimate value

Factors in Terms of the Sale Valuation of the

company Negotiation

process

What’s It Worth? Balance sheet

methods Earnings methods Market method

Balance Sheet Methods Balance sheet method

Net worth = Assets – Liabilities Adjusted balance sheet method

Estimates market value of assets

Earnings Methods Excess earnings method Capitalized earnings method Discounted future earnings method

Advantages of IPOs Cash Aura of respectability Market provides continuing valuation of

worth Ability to use stock options for

employees Ability to use stock to acquire other

companies

Disadvantages of IPOs A tremendously

expensive process Lock-up

agreements Subject to careful

scrutiny

Bargaining Tactics Beginning with an extreme initial offer Using the “big lie” technique Convincing the other side you have an

“out”

Unethical Negotiation Tactics False promises Misrepresentation Inappropriate information gathering

Reaching Integrative Agreements Logrolling Nonspecific compensation Broadening the pie Cost-cutting Bridging

Changes Over Time Physical appearance and energy Cognition and memory Intelligence Creativity

Eras of Our Lives Age 30 transition Midlife transition Late-adult transition Consider your stage in life

as you consider your exit strategy