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