Chapter 13—Planning for the Harvest
TRUE/FALSE
1. Harvesting is the method entrepreneurs and investors use to grow their firms.
2. Many entrepreneurs successfully grow their firms, but fail to develop an effective exit plan.
3. Investors in a startup company are mainly interested in the new firm’s growth and are not particularly
interested in an exit plan.
4. The harvesting process encompasses more than just selling and leaving a business.
5. The sale of a firm is solely about determining the value of a company.
6. A financial buyer of a small business is most interested in the firm as a stand-alone, cash-generating
business.
7. A strategic buyer is most interested in the stand-alone, cash-generating potential of a business.
8. More recently, the bust-up leveraged buyout was replaced with the build-up leveraged buyout.
9. The build-up leveraged buyout is typically used in industries that are dominated by large firms.
10. A management buyout can contribute significantly to a firm’s operating performance.
11. The boost to employee motivation and effort that results from an ESOP will vary significantly from
firm to firm.
12. ESOPs may require educating the buyer about the company’s operations for continued company
growth.
13. For value-creating firms, owners who decide to harvest by withdrawing cash flows should accelerate
the process as much as possible for a company with growth needs.
14. One of the drawbacks of harvesting by withdrawing cash flows slowly is that the owner must seek out
a buyer for the eventual sale of the business.
15. For the entrepreneur who is simply tired of the day-to–day operations of the business, slowly
withdrawing cash flows over time may require too much patience.
16. In most cases of IPOs, the equity capital raised is used for growth as opposed to an immediate exit
strategy of the original entrepreneur.
17. With a private equity placement, the firm’s equity is sold in public equity markets, but the transaction
is handled by a private investment banker.
18. A private placement sale can be more flexible in structure to meet an entrepreneur’s needs even though
the entrepreneur can not sell stock immediately.
19. Opportunity cost of funds is the rate of return that an investor can earn on another investment of
similar risk.
20. Owing to the formulas that guide practice, business valuation has become an exact science.
21. Harvesting owners can be paid in cash or in stock of the acquiring firm, with stock generally being
preferred over cash.
22. Entrepreneurs who accept stock in payment for the sale of their businesses are usually pleased with the
results because they escape a significant tax burden.
23. Entrepreneurs frequently do not appreciate the difficulty of selling or exiting a business.
24. While investors always think ahead about how to exit an enterprise, the entrepreneur should focus on
daily operational strategies more than the exit strategy.
25. The opportunity to exit a business is triggered by an interested seller.
26. Entrepreneurs should think very carefully about their motives for exiting a business and what they plan
to do after the harvest.
27. Entrepreneurs often do not make good employees at their former company.
28. Many entrepreneurs, grateful for their past success, feel the need to give something back to society
after selling their company.
29. The harvesting of a business should cause the entrepreneur to ask for advice from the experts who
helped build the company.
MULTIPLE CHOICE
1. Millard has worked for the past five years to build his business but as retirement nears, he is thinking it
is time for the harvest. Harvesting refers to
a.
starting a business.
b.
managing the growth of a business.
c.
exiting a business.
d.
diversifying a business.
2. As Millard considers exiting or harvesting, he is concerned with:
a.
merely selling and leaving a business.
b.
the creation of future options.
c.
the establishment of a benchmark for firm risk.
d.
capturing future profitability.
3. The availability of a company’s exit options is an important determinant of the appeal of the firm to
a.
suppliers.
b.
investors.
c.
employees.
d.
management.
4. One of the big financial questions associated with selling a business is:
a.
To whom should I sell the business?
b.
How much should I ask for the business?
c.
Should I offer the business to my employees?
d.
Would it be better to liquidate the assets?
5. Jack is a professional who assists in the buying and selling of businesses. Jack is:
a.
a stock broker.
b.
an investment broker.
c.
a real estate broker.
d.
a business broker.
6. Strategic buyers evaluate acquisition candidates according to the
a.
stand-along, cash-generating potential of a target business.
b.
synergies they think the target business will create.
c.
potential of the target business to preserve employment.
d.
quality of the business strategy of the target firm.
7. Dennis, the owner of a hardware store, has agreed to sell his business to another local hardware store
owner. This transaction would likely be described as a sale to a _____ buyer.
a.
competing
b.
employee
c.
financial
d.
strategic
8. As a financial buyer, Ted is likely to evaluate acquisition candidates according to their:
a.
stand-alone, cash generating potential of a target business.
b.
synergies they think the target business will create.
c.
potential of the target business to preserve employment.
d.
level of debt the target business has accumulated.
9. A potential buyer for Teresa’s business has mentioned a leveraged buyout, which involves a high level
of _____ financing.
a.
debt
b.
equity
c.
strategic
d.
unsecured
10. In earlier years, leveraged buyouts became synonymous with the ____ LBO.
a.
bust-up
b.
build-up
c.
owner-financed
d.
publicly-funded
11. A build-up leveraged buyout involves
a.
developing the business to make it an attractive takeover target.
b.
acquiring businesses that occupy a higher level in the market channel.
c.
a longer time horizon than a bust-up leveraged buyout.
d.
constructing a larger enterprise to be taken public via an IPO.
12. Marvin is planning to sell his company to his management team. Marvin will be financing part of the
purchase. This type of arrangement is a form of:
a.
ESOP
b.
IPO
c.
PPO
d.
LBO
13. An employee stock ownership plan represents
a.
a good way for a business founder to build his/her position in the company.
b.
an opportunity for employees to acquire an ownership interest in their company.
c.
a harvest method of choice.
d.
an effort to ease investor concerns.
14. Steve wants to sell his business but the bank will not lend the buyer enough money. Between
personal savings and the bank loan, the buyer has about 80% of the asking price. Which of the
following options would be best for Steve in this situation?
a.
Look for a different buyer.
b.
Lower the asking price.
c.
Retain a 20% ownership in the business and a seat on the advisory board.
d.
Offer to finance the remaining 20%, accepting payments over the next few years.
15. Matt owns a car dealership that is very profitable. Since he plans to retire in 5-10 years, Matt has
decided to retain ownership for now, but without continuing to grow the business. This change would
also allow him to invest for retirement some of the cash that the business is now generating. Which
harvesting method does this example illustrate?
a.
A delayed sellout
b.
A strategy to release the firm’s free cash flows to the owners
c.
Offering stock to the public through an IPO
d.
Issuing a private placement of stock
16. The mere fact that a firm is earning high rates of return on the firm’s asset indicates that
a.
the firm is worth more as a going concern than as a dead one.
b.
downsizing is likely to be an economically sound option for the business.
c.
it is time to start growing the business again.
d.
it might be wise to further limit the cash flows returned to investors.
17. Paul is approaching retirement and has decided to siphon off funds form his company rather than sell
it. From his perspective, the advantage of systematically withdrawing cash from the firm is:
a.
retaining control
b.
preserving cash for later reinvestment
c.
greater latitude in seeking out a buyer for the firm
d.
increasing long-term returns from the business
18. Nettie’s Knits, Inc. paid taxes on its net income then distributed part of the earnings as dividends to
investors. These investors paid tax on the dividends they received. This practice is know as:
a.
initial public offering.
b.
double taxation.
c.
twice taxation.
d.
harvesting taxation.
19. Pat, owner of Pat’s Welding, LLC, would like to let someone else run the day to day operations while
he continues to draw an income from the business. Because the business is an LLC, Pat will not have
to be concerned about:
a.
a reduction in the value of the company.
b.
seller financing.
c.
paying a brokerage fee.
d.
double taxation on his income.
20. Harvey has reached the point in his business when he needs a large amount of capital to expand, more
than he can borrow. This might be a good time for him to consider selling stock to the public in a(n):
a.
ESOP
b.
IPO
c.
MBO
d.
LBO
21. An IPO occurs when a company offers its stock to
a.
investment practitioner organizations.
b.
family.
c.
intrastate private investors.
d.
the general public.
22. Going public can be beneficial to a firm by helping it
a.
create a liquid currency to fund future acquisitions.
b.
avoid becoming a takeover target in the future.
c.
erect a shield against the fluctuations of the stock market.
d.
offer better compensation packages to attract superior management talent.
23. Having publicly traded stock can be beneficial to owners in that a public market offers
a.
greater liquidity.
b.
protection against an unwanted harvest.
c.
insight into how to improve the performance of the firm.
d.
a justification for refusing requests for ESOP options.
24. Charles and Nancy have decided to sell their family business and would like to transfer ownership to
the next generation. Which harvesting form would be best?
a.
cash flow distribution
b.
initial public offering
c.
private placement
d.
selling to a strategic buyer
25. Valerie is beginning to think of harvesting her company. Which question should be asked first?
a.
Why does she want to harvest?
b.
What is the value of her firm?
c.
Does the firm have a leadership succession plan in the event that the firm sells?
d.
What will be the method of payment?
26. Eleanor has money to invest and is considering buying a company. When comparing her alternatives,
her opportunity cost on a any investment is the:
a.
projected future value of the investment.
b.
present value of that investment.
c.
value of the assets used for capital for that investment.
d.
rate of return that she could earn on a similar investment.
27. Two years ago, Harold inherited $30,000 and decided to open a coffee shop in his hometown instead
of buying stock in Ford Motor Company. The rate of return he could have earned on his investment in
Ford stock represents his
a.
lost profit.
b.
opportunity cost of funds.
c.
investment opportunity.
d.
potential profit.
28. Which statement best characterizes business valuation?
a.
Valuation is almost a perfect science.
b.
Since there are so many intangibles, valuation is mostly an art.
c.
The buyer determines the value of a business.
d.
Negotiation skills play an important part in valuation.
29. The value of a business is determined by
a.
what the owner believes the business is worth.
b.
what a valuation formula determines its worth is to the owner.
c.
what a valuation formula determines its worth is to the buyer.
d.
what a buyer with the cash is prepared to pay.
30. Jill is purchasing a web design company that has patented a new form of technology. Which purchase
would be best for her in relation to the web design company’s liabilities?
a.
Buy the firm’s assets.
b.
Buy the firm’s stock.
c.
Merge the company with her present company.
d.
Any of the above three would be acceptable.
31. Vasily is selling his business. As a harvesting owner we would expect him to prefer _____ over
_____.
a.
cash, stock
b.
debt, equity
c.
equity, debt
d.
stock, cash
32. In a harvest situation, the exiting owners are usually paid in cash or
a.
tangible assets.
b.
imputed goodwill.
c.
favorable publicity.
d.
stock.
33. The effects of the harvesting process include
a.
a reduction in time and energy.
b.
an increased managerial focus.
c.
an increase in momentum.
d.
poor performance.
34. Uncertainties accompanying an impending sale of a business often
a.
lead to lower employee morale.
b.
attract the attention of the Securities and Exchange Commission.
c.
cause the deal to fall through.
d.
increase costs from added legal services.
35. Which group is always concerned about how to exit a business?
a.
Investors
b.
Entrepreneurs
c.
Employees of the firm
d.
Investment bankers
36. When is the right time to begin thinking about an exit strategy?
a.
When the owner wants to retire
b.
When a willing buyer expresses an interest
c.
When declining health forces the owner to leave active management
d.
When the money is first invested in the business
37. After harvesting, many entrepreneurs experience conflicts that are _____ in nature.
a.
financial
b.
practical
c.
emotional
d.
tactical
38. Evangeline has sold her small boutique to a large retail chain but has agreed to stay on and manage the
store. Evangeline should expect:
a.
freedom from responsibility.
b.
a feeling of elation with her new wealth.
c.
greater independence.
d.
culture conflict.
39. Arthur’s company is doing well but he has grown a bit tired of the daily grind. The idea of selling is
appealing to him. What would you recommend Arthur do next?
a.
Ask his advisory board for their opinions.
b.
Ask a business broker what his business is worth.
c.
Go public.
d.
Get advice from someone who has sold a business.
40. Post-harvest entrepreneurs may become disillusioned when they realize their sense of identity
a.
was associated with the quest for wealth.
b.
derived from interactions with employees.
c.
was intertwined with their business.
d.
does not return after joining in social or charitable work.
41. Before he executes his exit strategy, Arthur should:
a.
understand why he wants out.
b.
make sure his heirs approve his exit strategy.
c.
find a hobby to occupy his time.
d.
plan his budget based on the sudden inflow of cash.
MATCHING
Match the term with its definition.
a.
Build-up LBO
g.
Initial public offering
b.
Business broker
h.
Leveraged buyout
c.
Bust-up LBO
i.
Management buyout
d.
Double taxation
j.
Opportunity cost of funds
e.
Employee Stock Ownership Plan
k.
Private equity recapitalization
f.
Harvesting
l.
Seller financing
1. Taxation of income that occurs twice—first as corporate earnings and then as stockholder dividends
2. An infusion of equity from private investors that allows an entrepreneur to cash out a portion of his
investment while possibly continuing to operate the business
3. 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
4. The rate of return that could be earned on another investment of similar risk
5. The process used by entrepreneurs and investors to reap the value of a business when they leave it
6. A leveraged buyout involving the purchase of a company with the intent of selling off its assets
7. Financing in which the seller accepts a note from the buyer in lieu of cash in partial payment for a
business
8. A leveraged buyout in which the firm’s top managers become significant shareholders in the acquired
firm
9. A professional who assists in the buying and selling of a business
10. The first sale of shares of a company’s stock to the public
11. A method by which a firm is sold either in part or in total to its employees
ESSAY
1. Todd and Linda have decided to create a harvest plan for their home remodeling business. They
recognize selling the company will affect them since they won’t be going to work every day but have
asked you for advice on what to expect as to the impact and how to best proceed. What will you say
to them?
2. List and describe three types of LBO sales to financial buyers.
3. List and briefly explain the four basic harvest strategies for the small business.
4. List the three basic types of acquisitions and identify the purpose of each type.
5. Name four benefits of using an IPO as a harvesting method..
6. Monica developed a business chain called Sun Rayz throughout the Midwest that offers only UV bed
indoor tanning services. Solar POWer, an east coast United States indoor tanning chain, also offers
UV beds and other sunless tanning options and has made an offer to purchase Sun Rayz. Explain this
type of harvest transaction and what motivations Solar POWer may have for purchasing Sun Rayz.
7. John is developing a harvest plan and figuring the value of his art gallery. What two issues are of
importance?
8. What are professional and personal issues an entrepreneur may face in the period of time from when
the harvest is announced and it is completed?
9. Ellen is a dentist and has decided to develop a harvest plan. She wants her efforts to be successful and
effective. Discuss suggestions for crafting an effective exit strategy.