Assignment 7

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Chapter17-PlanningforGrowthandChange.pptx

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CHAPTER 17 Planning for Growth and Change

CHAPTER OBJECTIVES

Explain the stages of growth in a new venture.

Discuss the differences between market exploitation and market exploration.

Explore ways to go global.

Identify the various risks facing a growing venture and how to mitigate them.

Discuss how to plan for harvest and exit.

GROWTH

Expansion is a natural by-product of a successful startup.

Growth helps a new business secure or maintain its competitive advantage and establish a firm foothold in the market.

Growth is the result of an entrepreneur’s strong vision that guides decision making and ensures that the company stays on course and meets its goals.

Some entrepreneurs shy away from growth because they’re afraid of losing control.

That fear is not unfounded; many businesses falter during rapid growth because of the enormous demands placed on the company’s resources.

GROWTH STRATEGY (slide 1 of 2)

Any level of growth requires a successful strategy, but it’s not the same type of strategy that businesses have followed in the past.

The business environment has changed so that what we used to see as sustainable competitive advantage—a unique product, a market niche, a brand, or relationships with customers—in many industries is becoming more challenging.

GROWTH STRATEGY (slide 2 of 2)

There are three ways that strategies for growth are changing:

Growth strategy is now about the general direction in which you want to take your company based on its capabilities that you plan to consistently improve on.

The rapid pace at which the business world moves today means that strategy and plans need to be more fluid.

Because of increasing uncertainty, it is not possible to predict the future with any degree of confidence.

That means your company has to be set up for change—fast product development, testing, learning, and adapting.

Maintaining a flatter organizational structure that puts you, your operational team, and the customer in close contact will help you respond quickly to change.

17.1 STAGES OF GROWTH IN A NEW VENTURE

Rates and stages of growth in a new venture vary by industry and business type; however, there appear to be some commonalities that suggest a pattern that will help you anticipate events and requirements before they occur.

The stages of growth are as follows:

1. Startup.

2. Initial growth.

3. Rapid growth.

4. Stable growth.

FIGURE 17.1 Stages of Growth and Company Focus

17.1a Startup Success

During startup, your main concerns are to:

Validate your customer and your business model.

Acquire sufficient capital.

Design a way to deliver your product or service.

At this point, you really are a jack-of-all-trades, doing everything that needs to be done to get the business up and running.

Although your primary goal in the first year or so is survival, some of the following signs signal that you’re at the point where it’s time to think about growth:

Customers are coming to you faster than you expected; you don’t have to go out and get them like you did in the beginning.

You’re easily meeting your goals.

Your sales have caught up to the capital invested and you have enough money to spend on growth.

You have the right team on board with the skills you will need to expand.

17.1b Initial Growth

If your new venture survives startup, you now have a business that is probably generating revenue and your focus shifts to the issue of cash flow.

At this point, your venture is usually relatively small, there are few employees, and you are still playing an integral role in all facets of the business, but particularly in securing the resources for growth.

This is a crucial stage, for the decisions made here will determine whether your business will remain small or move into a period of rapid growth, which calls for some significant changes in organization and strategy.

17.1c Rapid Growth

If the decision is to grow, sufficient resources must be gathered together to finance that growth.

This is a very risky stage because growth is expensive, and there are no guarantees that you will be successful in the attempt to reach the next level.

Depending on your business, you may need a plan for scaling production and distribution, and putting control systems in place to monitor quality.

You will also need to hire the right talent because there will be no time to do effective hiring during a period of rapid growth.

If rapid growth is accomplished, it is at this stage that entrepreneurs often sell the company at a substantial profit or, if appropriate, consider a public offering to raise substantial growth capital.

It is also at this stage that some entrepreneurs are replaced by their boards of directors, investors, or creditors because the skills that made them so important at startup are not the same skills the company needs to grow to the next level and become a more professionally managed company.

17.1d Stable Growth and Maintenance

Once your business has successfully passed through the phase of rapid growth and you are able to effectively manage the financial gains of growth, your business has reached the fourth stage: stable growth and maintenance of market share.

Here the company, which is usually large at this point, can remain in a fairly stable condition as long as it continues to be innovative, competitive, and flexible.

If it does not, sooner or later it will begin to lose market share and could ultimately fail or become a much smaller business.

17.1e Factors That Affect Growth (slide 1 of 4)

The factors that affect the success of a growth strategy can be grouped into three major areas:

Market and industry factors.

Management factors.

Scale factors.

Market and Industry Factors

The degree of growth and the rate at which a new venture grows are dependent on market strategy.

If the niche market that your company is entering is by nature small and relatively stable in terms of growth without new avenues to expand, it will be more difficult to achieve the spectacular growth and size of the most rapidly growing companies.

On the other hand, if a product or service you’re offering can expand to a global market, growth and size are more likely to be attained.

17.1e Factors That Affect Growth (slide 2 of 4)

Market and Industry Factors (continued)

Entering a market dominated by large companies is not in and of itself an automatic deterrent to growth.

A small, well-organized company is often able to produce its product or service at a very competitive price while maintaining high-quality standards, because it doesn’t have the enormous overhead of the larger companies.

As your company grows, you will need to tackle forces that may work against you and turn them into advantages.

Some industries, simply by virtue of their size and maturity, are difficult for a new venture to enter and penetrate enough to make a profit.

Other industries are prohibitive to new entrants because the cost of participating (plant and equipment, fees, and / or compliance with regulations) is so high.

17.1e Factors That Affect Growth (slide 3 of 4)

Management Factors

When a new company has survived and is successful, there is a tendency to believe that it must be doing everything right and should continue in the same manner.

That is a fatal error because change is a by-product of success.

Most entrepreneurs have a difficult time moving from the entrepreneur role to the executive role, which requires adapting their leadership capabilities to the needs of the growing company.

Four leadership tendencies seem to be a problem for entrepreneurs attempting to manage growing organizations:

Too much loyalty to the original founding team and failing to see the need for change.

Too much focus on details.

Too much focus on the destination.

Working in isolation.

17.1e Factors That Affect Growth (slide 4 of 4)

Scaling Factors

Growing your business is important, but finding ways to scale the business is arguably more important.

Growing requires adding resources to generate equivalent revenue.

By contrast, scaling adds revenue at an exponential rate relative to the resources used.

You’re rapidly increasing revenue while incrementally increasing cost, which serves to increase your margins, resulting in more profit.

To effectively scale your business, you need to find areas of your business model that can be replicated and applied in new ways quickly and at relatively low cost.

TABLE 17.1 A Framework for Growth (slide 1 of 3)

STRATEGIES	TACTICS
Scan and assess the environment.	1. Analyze the environment. a. Is the customer base growing or shrinking? Why? b. How are competitors doing? c. Is the market growing? d. How does your company compare technologically with others in the industry? 2. Do a SWOT analysis (strengths, weaknesses, opportunities, threats).

TABLE 17.1 A Framework for Growth (slide 2 of 3)

STRATEGIES

TACTICS

Plan the growth strategy.

Determine the problem to be solved. Where is the pain? Brainstorm solutions. a. Don’t limit yourself to what you know and have done in the past. b. Think about how you can innovate strategically. c. Choose two or three solutions to test. Set a major goal for significant change in the organization. Set smaller, achievable goals that will put you on the path to achieve the major goal. Dedicate resources (funding and staff) toward the achievement of these goals. Examine your business model for scalable aspects that will allow your company to grow rapidly at lower cost.

TABLE 17.1 A Framework for Growth (slide 3 of 3)

STRATEGIES	TACTICS
Hire for growth.	9. Put someone in charge of the growth plan. 10. Bring in key professional management with experience in growing companies. 11. Provide education and training for employees to prepare them for growth and change.
Create a growth culture.	12. Involve everyone in the organization in the growth plan. 13. Reward achievement in interim goals.
Build a strategy advisory board.	14. Invite key people from the industry who can keep you apprised of changes. 15. Make industry partners and customers part of the planning process. 16. Invite more outsiders than insiders onto the advisory board.

FIGURE 17.2 Categories of Growth Strategies for Entrepreneurs

17.2 GROWING THE MARKET

As your company grows, you will need to capture adjacent markets beyond the first market.

If a growing company spends too long in its target market, ignoring exploration beyond what it knows, it could end up in an inertial situation that will ultimately destroy its business model and its competitive advantage.

One of the critical tasks of growth is to constantly monitor and refine your business model and the marketing strategy that helps you execute that model.

There are generally two broad methods for implementing growth in the market:

Market exploitation.

Market exploration.

17.2a Market Exploitation

With market exploitation, you attempt to increase sales by using more effective marketing strategies within the current target market.

Under this strategy, your company would expand gradually from the initial target market, whether it is a geographic area or a customer base.

To implement a market exploitation strategy, you might do the following:

Get your first customers solidified and happy and then gradually move on to other target customers.

Attract customers from competitors by offering a value proposition that better meets their needs.

Once your product is firmly established in the market, go after noncustomers who typically have not purchased because the product or service is too costly, has too steep a learning curve, or has high switching costs.

17.2b Market Exploration (slide 1 of 5)

Market exploration strategies involve seeking out new markets, using new approaches, or launching new products or channels of distribution.

Market exploration consists of taking a product or service to a broader geographic area or innovating new products even in areas where the company has not played previously.

Two effective ways to expand a market geographically:

Franchising.

Licensing.

Franchising

Franchising enables a business to grow quickly into several geographic markets at once.

17.2b Market Exploration (slide 2 of 5)

Franchising (continued)

The franchiser sells to the franchisee:

The right to do business under a particular name.

The right to a product, process, or service.

Training and assistance in setting up the business.

Ongoing marketing and quality control support once the business is established.

The franchisee pays a fee and royalty on sales, typically 3 to 8 percent, and in return may get:

A product or service that has a proven market.

Trade names and / or trademarks.

A patented design, process, or formula.

An accounting and financial control system.

A marketing plan.

The benefit of volume purchasing and advertising.

17.2b Market Exploration (slide 3 of 5)

Franchising (continued)

Although it is a popular vehicle for growth, franchising a business is not without its risks.

It is much like creating a whole new business, because the franchiser must carefully document all processes and procedures in a manual that will be used to train the franchisees.

Potential franchisees need to be scrutinized to ensure that they are qualified to assume the responsibilities of operating a franchise.

The cost of preparing a business to franchise is considerable and includes legal, accounting, consulting, and training expenses.

It may take as long as three to five years to show a profit.

17.2b Market Exploration (slide 4 of 5)

Franchising (continued)

A successful franchise system will need to have the following characteristics:

A successful prototype with proven profitability and a good reputation so that the potential franchisee will begin with instant recognition.

A registered trademark and a consistent image and appearance for all outlets.

A business that can be systematized and easily replicated many times.

A product that can be sold in a variety of geographic regions.

Adequate funding.

A well-documented prospectus that spells out the franchisee’s rights, responsibilities, and risks.

An operations manual that details every aspect of running the business.

A training and support system for franchisees.

Site selection criteria and architectural standards.

17.2b Market Exploration (slide 5 of 5)

Licensing

Licensing is a way to grow a company without investing large amounts of capital in plant, equipment, and employees.

A license agreement is a grant to someone else to use your company’s intellectual property and exploit it in the marketplace by manufacturing, distributing, or using it to create a new product.

Anything that can be patented, copyrighted, or trademarked, and anything that is a trade secret, has the potential to be licensed.

17.3 GROWING WITHIN THE INDUSTRY

There are many opportunities for entrepreneurs to pursue integrative growth strategies by growing their ventures through acquisition.

Acquisition is in many respects less about your financial ability to purchase another company and more about the ability to negotiate a good deal.

In general, you want to target opportunities that:

Integrate well with your core business.

Can be implemented quickly.

Ensure the continuation of smooth operating processes.

Entrepreneurs typically use three strategies to grow within their industries:

Vertical integration strategies.

Horizontal integration strategies.

Alliance strategies.

17.3a Vertical Integration Strategies

An entrepreneurial venture can grow by moving backward or forward within the distribution channel.

This is called vertical integration.

With a backward strategy, either your company gains control of some or all of your suppliers or the company becomes its own supplier by starting another business from scratch or acquiring an existing supplier that has a successful operation.

With a forward strategy, your company attempts to control the distribution of its products by either selling directly to the customer or acquiring the distributors of its products, the wholesalers.

17.3b Horizontal Integration Strategies

Another way to grow your business within the current industry is to buy up competitors or start a competing business (sell the same product under another label).

This is known as horizontal integration.

Example: If you own a chain of sporting goods outlets, you could purchase a business that has complementary products, such as a batting cage business, so that customers can buy their bats, balls, helmets, and other items from your retail store and use them at your batting cage.

17.3c Alliance Strategies

Another way for your company to grow within its industry is for you to focus on what you do best and let others do the rest.

You do this by forming alliances or partnerships with entities that offer some capability or product that you need.

Typically, an alliance involves less interaction and coordination than a merger but more than a license agreement.

They are usually formed as joint ventures to develop new technology, conduct research, produce products, or co-market products.

17.4 GROWING BY GOING GLOBAL (slide 1 of 2)

Today, the question for a growth-oriented company is not “Should we go global?” but “When should we go global?”

Some entrepreneurs will launch companies that are born global.

The term born global usually denotes a company that generates at least 25 percent of its sales in the first three years from the international marketplace and that derives a competitive advantage from outsourcing and selling in several countries.

17.4 GROWING BY GOING GLOBAL (slide 2 of 2)

Research has found the following seven characteristics of a successful global startup:

A global vision from the start.

Internationally experienced managers.

Strong international business networks.

Preemptive technology.

A unique intangible asset, such as know-how.

Closely linked product or service extensions.

A closely coordinated organization on a worldwide basis.

However, going global is a risky proposition.

Building a customer base and a distribution network is a colossal challenge in foreign markets.

Financing is more difficult in global markets because of currency fluctuations, communication problems, and regulations that vary from country to country, to name just a few of the challenges.

17.4a Finding the Best Global Market

Finding the best market for a product or service can be a daunting task, but consulting certain sources of information can make the job easier.

A good place to start is the International Trade Statistics Yearbook of the United States, which can be found at any major library and also online.

With the United Nations Standard Industrial Trade Classification (S I T C) codes found in this reference book, it is possible to locate information about international demand for a product or service in specific countries.

17.4b Export Financing

To make a sale in the global market, your company needs funds to purchase the raw materials or inventory to fill the order.

Entrepreneurs who want to export can look for capital from several sources, including:

Bank financing.

Internal cash flow from the business.

Venture capital or private investor capital.

Prepayment, down payment, or progress payments from the foreign company placing the order.

Asking buyers to pay a deposit upfront, enough to cover the purchase of raw materials, can also be a real asset to a young company with limited cash flow.

17.4c Foreign Agents, Distributors, and Trading Companies (slide 1 of 2)

Every country has a number of sales representatives, agents, and distributors who specialize in importing U.S. goods.

Sales representatives work on commission; they do not buy and hold products.

Consequently, you are still responsible for collecting receivables.

Agents purchase a product at a discount off list price and then sell it and handle collections themselves.

However, using an agent means losing control over what happens to the product once it leaves your hands.

17.4c Foreign Agents, Distributors, and Trading Companies (slide 2 of 2)

Entrepreneurs who are just starting to export or are exporting to areas not large enough to warrant an agent should consider putting an ad in U.S. trade journals that showcase U.S. products internationally.

Another option is to use an export trading company (E T C) that specializes in certain countries or regions where it has established a network of sales representatives.

What typically happens is that a sales representative may report to the E T C that a particular country is interested in a certain product.

The E T C then locates a manufacturer, buys the product, and sells it in the foreign country.

17.4d Choosing an Intermediary

Before deciding on an intermediary to handle the exporting of products, you should undertake some due diligence.

Check the intermediary’s current listing of products to see whether there is a good match.

Understand the competition and question whether the intermediary also handles these competitors, a potential conflict of interest.

Find out whether the intermediary has enough representatives in the foreign country to handle your market.

Look at the sales volume of the intermediary, which should show a rather consistent level of growth.

Make sure the intermediary has sufficient warehouse space and up-to-date communication systems.

Examine the intermediary’s marketing plan, and make sure the intermediary can handle the servicing of your product.

Once a decision has been made, an agreement detailing the terms and conditions of the relationship should be drafted.

17.5 PREPARING FOR CHANGE (slide 1 of 2)

There is no way to avoid change in today’s global environment; therefore, you must be ready and willing to adapt to new conditions, new threats, and new opportunities.

To deal with change, an entrepreneur must have a contingency plan in place.

17.5 PREPARING FOR CHANGE (slide 2 of 2)

An effective contingency plan will answer the following questions:

In the event of a problem, which suppliers will be willing to extend your repayment time and for how much?

What nonessential assets does the business have that can be turned into cash quickly?

Is there additional investment capital that can be tapped?

Does the business have customers who might be willing to prepay or purchase earlier than planned?

Has a good relationship with a banker and accountant been established? How can they help the business get through the crunch?

After answering these questions, you can:

Identify the potential risks associated with your venture.

Calculate the probability that those identified risks will in fact occur.

Assign a level of importance to the losses.

Calculate the overall loss risk.

FIGURE 17.3 Managing Risk in a New Venture

17.5a Identifying Potential Risks (slide 1 of 6)

Risk is a fact of business life, and your company’s exposure to risk increases as it grows.

Understanding where the risk lies enables you to respond effectively through process improvement strategies and buffer strategies.

Process improvement strategies involve reducing the probability that the risk will occur by forming strategic alliances with strong partners or by developing backup suppliers and better communication with suppliers.

Buffer strategies are used to protect a company against potential risk that can’t be prevented.

Examples: Maintaining sufficient inventory and alternative sources of supply.

17.5a Identifying Potential Risks (slide 2 of 6)

Supply Chain Risks

The financial health of a supplier is critical to the stability of the business.

When a supplier faces financial hardships and cannot provide supplies, raw materials, and so forth in a timely manner and you have no backup, the results can be loss of customers and, in some cases, the failure of your business.

When demand fluctuates or increases precipitously, suppliers may not be able to ramp up quickly enough to meet the demand.

Quality-related risks and the inability of suppliers to keep up with technological change can raise the cost of producing a product.

Changes in customer needs can affect product design and, by extension, the types and quantities of supplies needed.

Disasters—floods, fires, earthquakes—can disrupt supply chains and affect your ability to manufacture and distribute products.

17.5a Identifying Potential Risks (slide 3 of 6)

Taxes and Regulations

During the life of every business, new laws, regulations, and rules will be enacted, and frequently there is no way to prepare for them.

Intellectual Piracy

Although piracy cannot be completely stopped, small companies can fight back by:

Investigating suppliers and manufacturers before doing business with them.

Contractually requiring their foreign partners to submit to international binding arbitration to avoid having to navigate the local courts of a country.

Registering all trademarks in whatever country your company is doing business in.

17.5a Identifying Potential Risks (slide 4 of 6)

Product Liability

More and more of the risk of product-related injuries has been shifted to manufacturers, creating a legal minefield that could prove disastrous to a growing company.

Most product liability insurance covers the cost of defense, personal injury, or property damage, but not lost sales and the cost of product redesign.

Cyber Risk

Cyber risk includes:

Hacker attacks.

Phishing attacks.

Spy bots.

Viruses and worms.

17.5a Identifying Potential Risks (slide 5 of 6)

Cyber Risk (continued)

Here are a few things you must do to protect your business:

Back up all your data to a secure location, whether to cloud storage or an offsite server.

Work with your website developer to ensure that the platform you’re using is secure.

Do not publicize a company client list, as it may make your company vulnerable to attack by hackers.

Be careful to guard customer data; you could be held accountable if your systems are breached and sensitive customer data becomes public.

Use different passwords for every one of your accounts and change them regularly.

Train your employees to spot phishing attacks and other unusual behavior that could signal that someone is attempting to gain access to your business data.

17.5a Identifying Potential Risks (slide 6 of 6)

Decline in Sales

When there is a decline in sales, it is especially important to look not only at the economy but at the following sources as well:

The credit status of customers and distributors.

Your inventory turnover rate.

Any new competitor(s) that offers a product or service more in line with current tastes and preferences.

To prepare the best defense against a cash flow crisis:

Remain committed to producing exceptional-quality products.

Control the cost of overhead, particularly where that overhead does not contribute directly to revenue generation.

Keep production costs down by subcontracting and being frugal about facilities.

Make liquidity and positive cash flow the prime directive, so that your company can ride out temporary periods of declining demand.

17.5b Calculating Risk Probability and the Cost to the Business

It is extremely difficult to calculate the probability that a given risk will occur with any degree of accuracy.

Nonetheless, it is important to gauge, based on industry and customer knowledge, the chance that a particular risk will occur and what the impact of that occurrence will be on the company.

The overall risk of loss can be found by the following formula:

where

P = The probability the risk will occur.

C = The impact to the business.

S = The level of significance of that impact.

17.6 LEADERSHIP SUCCESSION

No company can count on keeping the same management team over the life of the business.

Succession planning—identifying people who can take over key company positions in an emergency or in a change of ownership—is an important part of planning for change.

Ideally your replacement will come from within the company, a person who has worked his or her way up the ladder.

Unfortunately, lean startups and growing companies often don’t have a strong bench of potential candidates to tap so they need to seek qualified outsiders.

17.6a Change of Ownership in Small Enterprises (slide 1 of 3)

Employing a simple process for succession planning will increase the likelihood that the process will actually result in an effective succession plan.

Situation assessment.

You need to determine:

The timing of succession.

The criteria for selection.

The likely internal candidates.

A plan for identifying possible external candidates.

Plans for engaging the appropriate stakeholders in the process.

17.6a Change of Ownership in Small Enterprises (slide 2 of 3)

Announcement of the process.

Once the company’s situation is assessed, you should announce the plans and process to relevant stakeholders such as board members, advisors, and employees.

Execution of the search.

At this stage, management moves forward to search and select either an internal or external candidate.

This can be accomplished through referrals or by employing a search firm.

Transition.

Once the selection has been made, you need to help the new leader during the transfer of power, smooth the transition with important stakeholders, and make a graceful exit at the appropriate time.

17.6a Change of Ownership in Small Enterprises (slide 3 of 3)

To prepare for the possible unexpected loss of a key employee like the C E O or C F O, it is a good idea to purchase key-person insurance, which will cover the costs associated with abruptly having to replace someone.

Bringing in a consultant to guide your management team in succession planning is a valuable exercise for any growing venture.

Another solution is to cross-train people in key positions so that someone can step in, at least for the short term, in the event of an emergency.

17.6b Succession Planning in Family-Owned Businesses (slide 1 of 2)

About a third of all family businesses survive the transition from first- to second-generation ownership, and only about 12 percent remain viable into the third generation.

This is partly because the owner must deal not only with business issues related to succession—ownership, management, strategic planning—but also with the unexpected, such as a death or relationship issues with family members.

Succession planning tends to expose family issues that may have been kept in the background but have been building over time.

Succession planning in family businesses takes a long time due to:

Physiological and emotional issues that stem from the interrelations of family members.

The complexity of succession, particularly since the owner typically has no experience in this area.

Relevant laws and taxation that impact the financial status of the company.

17.6b Succession Planning in Family-Owned Businesses (slide 2 of 2)

To start the process of succession planning, all the active family members should participate on a committee to explore the options and answer the following questions:

Is the next generation being sufficiently prepared to take over the business when the time comes?

What is the second generation’s expectation for the future of the business, and is it congruent with the company’s vision?

What skills and experience does the second generation need to acquire?

What would the ideal succession plan look like?

Then, with the help of an attorney, buy–sell agreements should be developed to ensure that heirs receive a fair price for their interest in the business upon an owner’s death and to protect against irreparable damage in the event of a shareholder’s permanent disability by outlining provisions for buying out the disabled shareholder’s interest.

17.7 PLANNING FOR HARVEST AND EXIT

Exiting the business does not necessarily mean exiting the role of entrepreneur.

It may mean taking the financial rewards of having grown a successful business and investing them in a new venture.

Serial entrepreneurs start businesses and then sell them or let others run them.

Whether or not you intend to exit your business at any point, you should have a plan for harvesting the rewards of having started the business in the first place.

Having a harvest plan is essential because many entrepreneurs take investor capital at some point in the growth of their companies, and investors require a liquidity event so that they can exit the business with their principal and any return on investment they have accrued.

17.7a Selling the Business

Selling a business is a life-changing event because for several years you have probably devoted the majority of your time and attention to growing the business, and it played an important role in structuring your life.

The best way to sell a business is to know almost from the beginning that selling is what you eventually want to do, so that you will make decisions for the business that will place it in the best position to become an acquisition target several years later.

The purchasing firm or individual should be thoroughly checked out against a list of criteria you developed; specifically, it should:

Have the resources necessary to continue the growth of the business.

Be familiar with the industry and the type of business being purchased.

Have a good reputation in the industry.

Offer skills and contacts that will ensure that the business continues in a positive direction.

17.7b Cashing Out but Staying In (slide 1 of 2)

Sometimes entrepreneurs reach the point where they would like to take the bulk of their investment and gain out of the business but continue to run the business or at least retain a minority interest.

There are several ways this can be accomplished.

If your company is still privately owned, the remaining shareholders may want to purchase your stock at current market rates so that control doesn’t end up in outsiders’ hands.

If your company is publicly traded, and you own a substantial portion of the issued stock, strict guidelines set out by the S E C must be followed when liquidating your interests.

If an entrepreneur wants to turn over the reins to a son, daughter, or other individual, the business can be split into two firms, with the entrepreneur owning the firm that holds all the assets and the other individual owning the operating aspect of the business while leasing the assets from the entrepreneur’s company.

FIGURE 17.4 Restructuring the Family Business

17.7b Cashing Out but Staying In (slide 2 of 2)

A Phased Sale

Some entrepreneurs want to soften the emotional blow of selling the business by agreeing with the buyer—an individual or another firm—to sell in two phases.

During the first phase, you sell a percentage of the company but remain in control of operations and can continue to grow the company to the point at which the buyer has agreed to complete the purchase.

In the second phase, the business is sold at a prearranged price, usually a multiple of earnings.

This approach is fairly complex and should always be guided by an attorney experienced in acquisitions and buy–sell agreements.

The buy–sell agreement, which specifies the terms of the purchase, specifies the amount of control the new owner can exert over the business before the sale has been completed and the amount of proprietary information that will be shared with the buyer between Phases 1 and 2.

17.7c Being Acquired (slide 1 of 2)

Over the past decade, the number of mergers and acquisitions has been soaring due to strong equity markets and valuations.

Acquirers can be categorized in two ways:

1. Financial acquirers.

Private equity or buyout firms that provide growth capital with the intention of selling for a profit.

2. Strategic acquirers.

Large, often public, firms that are established in the market and are seeking to diversify or expand their offerings.

17.7c Being Acquired (slide 2 of 2)

Mergers and acquisitions are not without their challenges.

Some of the reasons why acquisitions do not go well are the following:

The products of the two companies are not complementary.

Difficulty in getting the salesforce up to speed on the new products being acquired.

R & D approaches and expertise are very different.

The cultures of the two companies don’t mesh.

By all accounts, being acquired will continue to be the most common way that entrepreneurs and investors harvest the wealth they have created.

17.7d Dealing with Failure: Bankruptcy (slide 1 of 2)

What forces a company into bankruptcy is difficult to pinpoint.

The immediately precipitating cause is usually the failure to pay debt; however, myriad other events contribute to that cause, including:

A lack of understanding of economic and business cycles.

Carrying excessive debt and surplus overhead.

Shifts in market demand.

Excessive expenses.

Poor dividend policies.

Union and supplier problems.

Poor financial management.

The common denominator for all these factors is poor management.

17.7d Dealing with Failure: Bankruptcy (slide 2 of 2)

Two chapters of bankruptcy available to entrepreneurs:

Chapter 7 bankruptcy.

This is essentially liquidation of the business assets and the discharge of most types of debt.

The debtor files a petition and several required schedules of assets and liabilities with a bankruptcy court.

A trustee is appointed to manage the disposition of the business.

The goal of the bankruptcy is to reduce the business to cash and distribute the cash to the creditors where authorized.

Chapter 11 bankruptcy.

This is a reorganization of the finances of the business so that it can continue to operate and begin to pay its debts.

The entrepreneur remains in control of the business; only in the case where the creditors believe that management is unable to carry out the terms of the reorganization plan is a trustee appointed to run the company until the debt has been repaid.

17.8 SOME FINAL THOUGHTS

The definition of the term entrepreneurship has changed over the past 50 years and is now used to describe all kinds of ventures, from the small “mom-and-pop” to the Fortune 500 conglomerate to even successful artists, scientists, and journalists whether or not they start a business.

This book has focused on the birth and early growth of innovative, growth-oriented new ventures and has used a classic definition of the term entrepreneurship: the creation, evaluation, and exploitation of opportunities that are innovative, growth oriented, and that create new value for customers.

Entrepreneurship is more than just new venture creation; it is a way of viewing the world and a skill set that can be learned.

Entrepreneurship is for everyone who wants to experience the freedom and independence that come from knowing that opportunities and the resources to make those opportunities a reality are within their grasp.

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PCS

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