small business chapter 13

potential buyers for a company can come from

-customers -suppliers -employees -friends and family -competitor -business broker

process of build-up LBO began with

1. acquisition of a company 2. then acquire a number of smaller business that complement it *expand capacity in related/completely different business 3. operate for 5 years--successful track record-> sold/taken public -rely heavily on debt financing, lesser extent than bust-up

developing an effective harvest plan

1. anticipate harvest 2. expect conflict, emotional and cultural 3. get good advice 4. understand what motivates u

distributing firm's cash flows=harvest strategy 2 advantages

-owner can retain control -do not have to seek out a buyer/incur expense associated with consummating a sale

distributing firm's cash flows=harvest strategy disadvantage

-reducing investment when threes valuable growth opportunities=> can't sustain competitive advantage *end result=reduced value of business *tax disadvantages to an orderly liquidation -take too much time

IPO requires

-register stock issue with SEC (securities and exchange commissions) -adhere to was that govern public offering at state level -ensure adequate disclosure to investors, prevent fraud

selling a company, 3 basic choices

-sell asset -sel its stock -merge with buyer (if buyer is another firm)

values business based on SYNERGIES they think they can create -our business value= stand-alone char+its synergies -may pay higher price than any other buyer (who value business as a stand-alone entity)

-strategic buyer

harvest is vitally important to a firm's investors as well as its founder

-true -investors->high risk capitals (angels, vc) = want well-thought-out harvest strategy -easy to put money into business, hard to get out

seldom intended as an IMMEDIATE exit strategy -raise capital for growth

IPOs

reason for selling to employee employee stock ownership plans ESOPs

create an incentive for them to work harder *give them a piece of the profits *work well if they do not think in 9-to-5 terms *if they have proper motivation, have owner's mentality

a purchase heavily financed with debt -where the future cash flows of the target company are expected to be sufficient to meet debt repayments

leveraged buyout LBO *financial acquisitions

harvest value is created when

-a firm's return on invested capital is greater than the investor's opportunity cost of funds -grow venture till diminishing returns, sell it to others who can carry it to next level -no precise formula

harvesting is more than merely selling and leaving business, it involves

-capturing value (cash flows) -reducing risk -creating future options (how to benefit yourself over the next few years) -personal, non financial considerations, prepared for a change in lifestyle?

selling a business in difficult economy

-clean up the books, pay f small debts -keep revenue strong (show business is still flourishing -consider ur sector and market (research what business sold in ur sector, when = good time to sell?)

distributing firm's cash flows=harvest strategy disadvantage *tax disadvantage

-corp dist. cash as dividends=double taxation *no double taxation for sole p/partnership/LLC/S corp

recapitalization vs LBO

-debt ratio: lower with recapitalization (less risk, cash flow used to row firm not pay debt -can achieve each generation's goal

nowadays IPO

-decline -average size increase -offering by smaller firms were not as prevalent -most are financial companies, energy, consumer products, tech

firm's valuation and payment method

-harvest value (what the firm is worth) -method of payment

private equity investors 2 advantage than public investor

-immediacy (can sell most of his stock immediately) -flexible (in structuring their investment to met an entrepreneurs' needs)

cost of managing an IPO

-initial cost= 20% of issue -cost of running public traded company --need to report financial results to investors and SEC -cost of sarbanes-oxley act, didd-frank act

rate of return that could be earned on another investment of similar risk

opportunity cost of funds

family-owned business that need to transfer ownership to the next generation through private equity recapitalization *3 goals tradeoff

1. liquidity/cash for the selling family members 2. continued financing for the company's future growth 3. desire of younger generation to maintain control of the firm *older gen wants to cash out of bus *younger gen retain cash needed to finance growth+not lose ownership control

running a public company= info disclosure to stockholders *not required for a privately held firm

1. maintain accounting process (separate business form entrepreneur's personal life) 2. strong BOD : can offer valuable advice 3. manage firm--produce successful track record of performance

methods of harvesting a business

1. selling a firm 2. distributing the cash flows generated by the business to its owner instead of reinvesting the cash 3. offering stock to public through IPO 4. undertaking a private equity recapitalization

reasons for going public *create already market for publicly trading the company's stock

1. signals to investors that a firm=quality business, perform well in the future 2. access to more investors, when need to raise capital 3. stocks=publicly traded, ongoing interest in company, continued development 4. attractive to key personnel whose incentive pay includes the firm's stock

buyer rely heavily on debt to finance LBO, acquired company must be

1. steady earnings over time 2 attractive growth rate 3. effective management team already in place 4. assets that can be used as collateral on the debt

3 types of buyers

1. strategic buyers 2. financial buyers 3. employees

new owners pay debt down rapidly by selling off the acquired firm's assets

LBO-> bust-up LBO

-takes a lot of time and energy -uncertainties that can lower employee morale -stress for everyone, anxious about new order

anticipate harvest

-borrows $$ -buys several small firms (complement each other) -combined into bigger, better large firms

build up LBO

a leveraged buy out involving the purchase of a group of similar companies with the intent of making the firms into one larger company for eventual sale

build-up LBO

bust-up LBO is replaced by -involves pulling together a group of smaller firms to create a larger enterprise that might eventually be sold or taken public via an initial public offering

build-up LBO

a professional who assist in the buying and selling of a business -find buyer -provide guidance to the selling entrepreneur -help facilitate negotiations -expensive

business broker

-borrow heavily to buy firms -sellout aset to repay debt, pay off what they owe, keep rest -make profit -sell out asset= breakdown/tear up business

bust-up LBO

a leveraged buyout involving the purchase of a company with the intent of selling off its assets

bust-up LBO

relieves buyer of responsibility for nay of the selling firm's liabilities, known or unknown

buying assets only

critical issue in strategic acquisitions

degree of strategic fit between the firm to be harvested and the potential buyer's other business interest

-firm's early years *cash-> growing business, company's inflow=0/- --> owners have to seek outside cash -firm mature, opportunities to grow decline=> available cash flow *not reinvest cash in business, begin withdraw cash=> harvesting their investment

distributing firm's cash flows=harvest strategy

aimed at banks and other financial institutions to help avoid a repeat of the most recent financial crisis *add cost requirements for all publicly traded companies

dodd-frank act

taxation of income that occurs twice 1. corporate earnings 2 . stockholder dividends

double taxation

final phase of entrepreneurial process

effective harvest/exit plan *create value by making a difference then finishing well

employee stock ownership plans ESOPs to be effective need

employee education -raise awareness of stock ownership -how it affects their net worth

-use employee's retirement contributions to buy company stock from the owner and hold it in trust -over time, stock is distributed to employee's retirement plan

employee stock ownership plans ESOPs

a method by which a firm is sold either in part or in total to its employees

employee stock ownership plans ESOPs

common to start ___ by selling only a portion of the company -but even if sell all stocks=owners still retain management position, control -tax advantage to seller

employee stock ownership plans ESOPs

-look primarily to a firm's stand-alone, cash generating potential =value -hopes to increase future sales growth, reduce cost -make changes in the firm's operation=pressure on firm's personnel (layoff)

financial buyers

exiting your business

harvest

withdrawal of owner's investment in the form of firm's cash flows *immediate=simply sold of asset of firm, liquidated business => not for value-creating firm

harvest strategy

process used by entrepreneurs and investors to reap the value of a business when they leave it

harvesting/exiting -selling the business -get as much as possible -most profit -least tax

can be best/worst of times depend on

how well you understand -your self -your business -what is required to exit your business effectively

register stock issue with SEC *include

in-depth -financial -management -operational information

IPO?

initial public offering

first sale of shares of a company's stock to the public

initial public offering

a leveraged buyout -firm's top managers become significant shareholders in the acquired firm

management buyout MBO

selling firm's own management initiates an LBO to buy the business from the entrepreneur *can contribute significantly to a firm's operating performance *increase management's focus and intensity *transfer ownership from founder to management team

management buyout MBO

effective for family-owned business that need to transfer ownership to the next generation

private equity recapitalization

private equity investors provide a combination of D+E to business -allow entrepreneur to cash out part of his investment -ent. still manage the business

private equity recapitalization

private equity investors provide additional financing to a business that allows an entrepreneur the opportunity to cash out a portion of his/her investment -while possible continuing to operate the business

private equity recapitalization *private equity recap *method to harvesting

primary reason to going public

raise capital *money raised *used for expansion, pay down debt, increase firm's liquid/cash

financing in which the seller accept a note from a buyer in lieu of cash in partial payment for a business

seller financing *because of recession

seller loans the buyer part of the purchase price of business

seller financing *only pay 2.7 mil in cash for 3.5 mil worth of busses *pay remaining 800,000 in 7 years

-how to value the firm -how to structure payment for the business -motivation to ___: retirement, estate planning, desire to diversify inv -choose buyer, what they wanna accomplish from the sale

selling the firm

if prospective ____ buyer is a current rival -acquisition=longterm, sustainable competitive advantage (e.g economic scale) -willing to pay premium

strategic

-similar in line of business -in a different market -need new products and services to sell to existing customer -unrelated business, wants seller's strength to help their existing business

strategic buyers

already have a company --benefit from buying ours our value --synergy of 2 business

strategic buyers

IPO can also be used to harvest a firm

true

earns attractive rates of return for its investors

value-creating firm *better as a going concern, not dead *owners just stop growing business-> increase cash flows that can be returned to investors