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Chapter 14 HARVESTING THE BUSINESS VENTURE INVESTMENT FOCUS This chapter in our entrepreneurial finance text focuses on how a successful entrepreneur can harvest or exit the venture. LEARNING OBJECTIVES 1. Plan an exit strategy 2. Understand the meaning of systematic liquidation 3. Describe outright sales of the venture to various potential buyers 4. Discuss the terms “leveraged buyouts” and “management buyouts” 5. Describe the process of going public 6. Identify what investment banking involves CHAPTER OUTLINE 14.1 VENTURE OPERATING AND FINANCIAL DECISIONS REVISITED 14.2 PLANNING AN EXIT STRATEGY 14.3 VALUING THE EQUITY OR VALUING THE ENTERPRISE 14.4 SYSTEMATIC LIQUIDATION 14.5 OUTRIGHT SALE A. Family Members B. Managers C. Employees D. Outside Buyers 14.6 GOING PUBLIC A. Investment Banking B. Some Additional Definitions C. Other Costs in Issuing Securities D. Post-IPO Trading E. Contemplating and Preparing for the IPO Process SUMMARY DISCUSSION QUESTIONS AND ANSWERS 1. What is the meaning of harvesting a venture? Harvesting a venture refers to the process of exiting a privately-held business venture to unlock the owners’ investment value. 223
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Chapter 14: Harvesting the Business Venture Investment 2. What evidence exists as to whether entrepreneurs think about and/or develop exit strategies? Holmberg documented that over ½ of entrepreneurs have developed, or at least though about exit strategies, at the start of their ventures. 3. What is a systematic liquidation of a venture? What are some of the advantages and disadvantages of a systematic liquidation? A systematic liquidation of a venture is the process of liquidating the firm by distributing the cash flows of the firm to the owners. This usually happens when the firm is in the mature stage and their free cash flow exceeds the amount need to maintain sustainable growth. Potential advantages include: (1) the entrepreneur and other owners maintain control throughout the harvest period, (2) the harvesting of the investment value can be spread out over a number of years, and (3) the time, effort, and cost of finding a buyer for the venture can be avoided. Potential disadvantages include: (1) the treatment and taxation of liquidation proceeds as ordinary income (rather than capital gains), (2) the commitment of the entrepreneur’s wealth, abilities, and focus to a dying venture, rather than other venture pursuits that might be more lucrative, and (3) acceleration of the rate of decline in the going concern value as other industry participants respond to the reduction in investment. 4. Describe an outright sale of a venture. What are the four categories of possible buyers? An outright sale of a venture occurs when it is sold to others. The four categories of outside buyers in an outright sale are family members, managers, employees, or external buyers. 5.
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