Part IV

Growth Strategies for

Entrepreneurial Ventures

CHAPTER 15
Harvesting the
Entrepreneurial
Venture

© 2009 South-Western, a part of Cengage Learning. PowerPoint Presentation by Charlie Cook

All rights reserved. The University of West Alabama
 Chapter Objectives
1. To present the concept of “harvest” as a plan for
the future.
2. To examine the key factors in the management
succession of a venture.
3. To identify and describe some of the most
important sources of succession
4. To discuss the potential impact of recent legislation
on family business succession
5. To relate the ways to develop a succession
strategy

© 2009 South-Western, a part of Cengage Learning. All rights reserved. 15–2

 Chapter Objectives (cont’d)
6. To examine the specifics of an IPO as a potential
harvest strategy
7. To present “selling out” as a final alternative in the
harvest strategy

© 2009 South-Western, a part of Cengage Learning. All rights reserved. 15–3

 Harvesting the Venture:
A Focus on the Future
• Harvest Plan
 Defines how and when the owners and investors will
realize an actual cash return on their investment.
• Reasons for Harvesting
 To maintain managerial control and succession for
successful continued operations.
 To initiate a “liquidity event” that will generate a
significant amount of cash for the investors.
 An IPO (initial public offering) has become a reality.
 Most realistic opportunity is sale of the business.

© 2009 South-Western, a part of Cengage Learning. All rights reserved. 15–4

 Advantages and Disadvantages of Family Controlled Firms

• Advantages • Disadvantages
 Long-term orientation  Less access to capital
 Greater independence markets may curtail
of action growth
 Family culture as a  Confusing organization
source of pride  Nepotism
 Greater resilience in  Spoiled-kid syndrome
hard times  Paternalistic/autocratic
 Less bureaucratic and rule
impersonal  Financial strain
 Financial benefits  Succession dramas
 Knowing the business
© 2009 South-Western, a part of Cengage Learning. All rights reserved. 15–5
 The Management Succession Strategy
• Management Succession
 Is the transition of managerial decision making
 Is one of the greatest challenges confronting owners
and entrepreneurs in privately held businesses.
• Research on private firms shows:
 Many go out of existence after 10 years; only 3 out of
10 survive into a second generation.
 Only 16% make it to a third generation.
 Their average life expectancy is 24 years, which is
also the average tenure for founders of a business.

© 2009 South-Western, a part of Cengage Learning. All rights reserved. 15–6

 Table
15.1 Barriers to Succession Planning in Privately Held Businesses

Founder/Owner Family
Death anxiety Death as taboo
• Company as a symbol • Discussion is a hostile act
• Loss of identity • Fear of loss/abandonment
Concern about legacy Fear of sibling rivalry
• Dilemma of choice Change of spouse’s position
• Fiction of equality
Generational envy
• Loss of power

Source: Manfred F. R. Kets de Vries, “The Dynamics of Family-Controlled Firms:

The Good News and the Bad News,” Organizational Dynamics (winter 1993): 68.
© 2009 South-Western, a part of Cengage Learning. All rights reserved. 15–7
 Figure
15.1 Pressures and Interests in a Family Business

Inside the Family Outside the Family

Family Managers Employees
Inside the Hanging onto or getting hold of Rewards for loyalty
Business company control Sharing of equity, growth,
Selection of family members as and success
managers Professionalism
Continuity of family investment Bridging family transitions
and involvement Stake in the company
Building a dynasty
Rivalry
The Family Nonfamily Elements
Outside the Income and inheritance Competition
Business Family conflicts and alliances Market, product, supply, and
Degree of involvement in the technology influence
business Tax laws
Regulatory agencies

Source: Adapted and reprinted by permission of the Harvard Business Review. An Exhibit from “Transferring Power in the Family Business,” by Louis
B. Barnes and Simon A. Hershon (July/August 1976): 106. Copyright © 1976 by the President and Fellows of Harvard College; all rights reserved.
© 2009 South-Western, a part of Cengage Learning. All rights reserved. 15–8
 Figure
15.2 Sustainable Family Business Model

Source: Kathryn Stafford, Karen A. Duncan, Sharon Dane, Mary Winter, “A Research Model
of Sustainable Family Business,” Family Business Review (September 1999): 197–208.
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 Key Factors in Succession
• Forcing Events • Pressures and Interests
 Happenings that cause the inside the Firm
replacement of the owner-  Family members
manager:
 Nonfamily employees
• Death
• Illness • Pressures and Interests
• Mental or psychological
outside the Firm
breakdown  Family members
• Abrupt departure  Nonfamily elements
• Legal problems
• Severe business decline
• Financial difficulties

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 Sources of Succession
• Major Questions:
 Inside or outside successor?
 Which entry strategy will be implemented?
 How will power be transferred?
 Can the successor to gain credibility with the firm’s
employees?
• Types of Successors
 Entrepreneurial successor
 Managerial successor
 Interim specialist

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 Table
15.2 Comparison of Entry Strategies for Succession in Family Business

Advantages Disadvantages
Early Entry Intimate familiarity with the nature of the Conflict results when the owner has
Strategy business and employees is acquired. difficulty with teaching or relinquishing
Skills specifically required by the business control to the successor.
are developed. Normal mistakes tend to be viewed as
Exposure to others in the business incompetence in the successor.
facilitates acceptance and the Knowledge of the environment is limited,
achievement of credibility. and risks of inbreeding are incurred.
Strong relationships with constituents are
readily established.
Delayed Entry The successor’s skills are judged with Specific expertise and understanding of
Strategy greater objectivity. the organization’s key success factors
The development of self-confidence and and culture may be lacking.
growth independent of familial influence Set patterns of outside activity may
are achieved. conflict with those prevailing in the family
Outside success establishes credibility firm.
and serves as a basis for accepting the Resentment may result when successors
successor as a competent executive. are advanced ahead of long-term
Perspective of the business environment employees.
is broadened.

Source: Jeffrey A. Barach, Joseph Ganitsky, James A. Carson, and Benjamin A. Doochin, “Entry of the Next
Generation: Strategic Challenge for Family Firms,” Journal of Small Business Management (April 1988): 53.
© 2009 South-Western, a part of Cengage Learning. All rights reserved. 15–12
 Legal Restrictions
• Privately-held Businesses, Nepotism and
Succession Practices:
 Succession case: Oakland Scavenger Company
• “Nepotistic concerns cannot supersede the nation’s
paramount goal of equal economic opportunity for all.”
• Almost any small business can be sued by an employee of a
different ethnic origin than the owner, based upon not being
accorded the same treatment of a son or daughter.

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 Developing a Succession Strategy

Time

Environmental Understanding Type of Venture

Factors the Contextual
Aspects

Entrepreneur’s Capabilities of
Vision Managers

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 Developing a Succession Strategy (cont’d)
• Carrying Out the Succession Plan
 Identify a successor
 Groom an heir
 Agree on a plan
 Consider outside help

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 Identifying Successor Qualities
• Sufficient knowledge of the • Reasonable amount of
business aggressiveness
• Fundamental honesty and • Thoroughness and a proper
capability respect for detail
• Good health; energy, alertness, • Problem-solving ability
and perception • Resourcefulness
• Enthusiasm about the • Ability to plan and organize
enterprise
• Talent to develop people
• Personality compatible with the
business • Personality of a starter and a
finisher; and appropriate
• High degree of perseverance agreement with the owner’s
• Stability and maturity philosophy about the business.

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 Creating a Written Succession Strategy
• Types of Succession Strategies
1. The owner controls the management continuity strategy entirely.
2. The owner consults with selected family members.
3. The owner works with professional advisors.
4. The owner works with family involvement.
5. The owner formulates buy/sell agreements at the very outset of
the company, or soon thereafter, and whenever a major change
occurs.
6. The owner considers employee stock ownership plans (ESOPs).
7. The owner sells or liquidates the business when losing
enthusiasm for it but is still physically able to go on.
8. The owner sells or liquidates after discovering a terminal illness
but still has time for the orderly transfer of management or
ownership.
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 The Exit Strategy: Liquidity Events
• Entrepreneurs consider selling their venture for
numerous reasons:
 Boredom and burnout
 Lack of operating and growth capital
 No heirs to leave the business to
 Desire for liquidity
 Aging and health problems
 Desire to pursue other interests

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 Table
15.3 The IPO Process

• Present proposal to the board.

• Restate financial statements and refocus the company
• Find an underwriter and execute a “letter of intent.”
• Draft prospectus.
• Respond to due diligence.
• Select a financial printer.
• Assemble the syndicate.
• Perform the road show.
• Prepare, revise, and print the prospectus.
• Price the offering.
• Determine the offering size.

Source: Adapted from Going Public (New York: The NASDAQ Stock Market, Inc., 2005),
5–9. [Link] Accessed: April, 2008.
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 Table
15.4 The Registration Process

• Preliminary meeting to discuss issue

• Form selection
• Initial meeting of working group
• Second meeting of working group
• Meeting of board of directors
• Meeting of company counsel with underwriters
• Meeting of working group
• Prefiling conference with SEC staff
• Additional meetings of working group
• Meeting with board of directors
• Meeting of working group
• Filing registration statement with SEC
• Distribution of “red herring” prospectus
• Receipt of letter of comments
• Meeting of working group
• Due diligence meeting
• Pricing amendment
• Notice of acceptance
• Statement becomes effective

Source: From An Introduction to the SEC, 5th ed. by K. Fred Skousen. Copyright ©
1991. Reprinted by permission of South-Western, a division of Cengage Learning.
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 The Initial Public Offering (IPO): Prospectus
• History and nature of the • Underwriting arrangements
company • Estimate and use of net
• Capital structure proceeds
• Description of any material • Audited financial statements
contracts • Information about the
• Description of securities being competition with an estimation
registered of the chances of the company’s
• Salaries and security holdings
survival
of major officers and directors
and the price they paid for
holdings

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 Annual Reports: Disclosure Requirements
• Audited financial statements: • Line-of-business disclosures for
balance sheets for the past 2 the past three fiscal years
years and income and funds
• Directors and executive officers
statements for the past 3 years
• The market in which the firm’s
• Five years of selected financial
securities are traded
data
• Range of market prices and
• Management’s discussion and
dividends for each quarter of
analysis of financial conditions
the two most recent fiscal years
and results of operations
• An offer to provide a free copy
• A brief description of the
of the 10-K report
business

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 SEC-Required Forms
• Form S-1
 Information contained in the prospectus and other additional
financial data
• Form 10-Q
 Quarterly financial statements and a summary of all important
events that took place during the three-month period
• Form 8-K
 A report of unscheduled material events or corporate changes
filed with the SEC within 15 days after the end of a month in
which a significant material event transpired
• Proxy statements
 Information given in connection with a proxy solicitation

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 Complete Sale of the Venture
• Steps for Selling a Business
 Step 1: Prepare a financial analysis
 Step 2: Segregate assets
 Step 3: Value the business
 Step 4: Identify the appropriate timing
 Step 5: Publicize the offer to sell
 Step 6: Finalize the prospective buyers
 Step 7: Remain involved through the closing
 Step 8: Communicate after the sale

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 Key Terms and Concepts

• buy/sell agreements • initial public offering

• delayed entry strategy (IPO)
• early entry strategy • liquidity event
• employee stock ownership • management succession
plans (ESOPs) • managerial successor
• entrepreneurial successor • nepotism
• exit strategy • Oakland Scavenger
• forcing events Company
• harvest strategy

© 2009 South-Western, a part of Cengage Learning. All rights reserved. 15–25