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Chapter Thirteen: Exit/Harvest/Turnaround
Table of Contents
Brief Chapter Outline.................................................................................................. 2
Chapter Outline and Lecture notes.............................................................................3
Key Terms................................................................................................................. 16
Suggested Text
Responses……………………………………………………………………………...17
Class Activities and Sample Assignments.................................................................20
Discussion Questions for Online/Hybrid classes.......................................................21
Lecture Links............................................................................................................ 24
Lecture Link 13.1: Valuing the Business.............................................................24
Lecture Link 13.2: Evaluate the Loan Request...................................................25
Lecture Link 13.3: Angels on the Directory for Entrepreneurs...........................26
Bonus Internet Exercises..........................................................................................27
Bonus Internet Exercise 13.1: Give Me 5...........................................................27
Bonus Internet Exercise 13.2: Initial Public offering (IPO)..................................28
Bonus Internet Exercise 13.3: Business Valuation Tools.....................................29
Critical Thinking Exercises........................................................................................30
Critical Thinking Exercise 13.1: De.ning Valuation Techniques.........................30
Critical Thinking Exercise 13.2: Selling the Business.........................................32
Critical Thinking Exercise 13.3: Closing the Business.........................................34
Bonus Cases............................................................................................................. 37
Bonus Case 13.1: Reputation and the Small Business Owner............................37
Bonus Case 13.2: Designs Exchanged for Sales and Pro.ts...............................38
Bonus Case 13.3: Industry Indicators and Business Opportunities.....................39
Endnotes.................................................................................................................. 41
Brief Chapter Outline
I. Learning Objectives (text page 244)
.
IM 13-1
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Thirteen: Exit/Harvest/Turnaround
Explain the need for developing an exit or harvest plan and ideal timing for
that plan.
Outline the steps for selling a business.
Discuss the concept of turnaround and business in decline
Recognize the implications and issue involved in closing a business.
II. Exit/Harvest (text page 246 through 248)
Learning Objective 13-1: Explain the need for developing an exit or harvest plan
and ideal timing for the plan.
III. Steps for Selling a Business (text page 248 through 259)
Learning Objective 13-2: Outline the steps for selling a business.
IV. Turnaround and Business in Decline (text page 259 through 261)
Learning Objective 13-3: Discuss the concept of turnaround and business in
decline
V. Closing the Business (text page 261 and 262)
Learning Objective 13-4: Recognize the implications and issues involved in
closing a business.
VI. For Review (text page 262)
Chapter Outline and Lecture notes
1. Learning Objectives (text page 234)
Explain the need for developing an exit or harvest plan and ideal timing for that
plan.
Outline the steps for selling a business.
Discuss the concept of turnaround and business in decline
Recognize the implications and issues involved in closing a business.
2. Need for Developing an Exit or Harvest Plan and Ideal Timing for That Plan (text
pages 246 through 248)
Learning Objective 13-1: Explain the need for developing an exit or harvest plan
and ideal timing for that plan
A. Why consider exit/harvest now?
IM 13-2
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Thirteen: Exit/Harvest/Turnaround
i. Developing a practical exit plan within the business plan may help
validate the business idea
1. Provides peace of mind to the family and investors
ii. Develop an accurate valuation of the business as the firm begins to
have cash flow.
1. Provides insight for the founders as to the amount of future
capital and labor that they should invest in the effort
2. The business obtains loans (either direct or working capital)
by demonstrating the value of the firm to potential creditors
3. Convinces outside equity investors of the potential long-term
returns associated with the harvesting of the business
4. The owners can field potential offers to buy out the business
a. This is common in the life of a small business
5. Benchmarks the growth of the firm by establishing a true
starting point
B. Why consider exit or harvest later?
i. Laying some of the initial groundwork will help the small business
person if he later decides to exit the business
ii. Recap of Chapter Two
1. The small business entrepreneur must determine what the
business is to accomplish
2. The new small business owner might decide to exit a
successful business if the business owner does not enjoy
the work
3. The business might take too much time and personal
commitment to be enjoyable
4. The business owner might want to pursue other
opportunities that arise
5. Though the business is strong now, it might not have the
same potential in the future
3. Steps for Selling a Business (text pages 248 through 259)
Learning Objective 13-2: Outline the steps for selling a business
A. Valuation
i. There are a series of steps that occur when a business owner
decides to sell or harvest the business
ii. There are several standard valuation models and rules of thumb for
established, publically traded businesses to consider when they
determine the value of the business
IM 13-3
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Thirteen: Exit/Harvest/Turnaround
1. The value of the business today is valued at established
market capitalization
2. Wall Street standards reveal that market value capitalized
today already accounts for future earnings and all future
prospects of the business
3. Market capitalization is the floor from which all negotiations
start
4. Calculating the premium that is offered above the market
capitalization is considered more of an art than a science
5. The amount of cash that is to be paid versus the amount of
stock transferred is negotiable
6. Any future investment in the newly combined organization is
negotiated
7. Another important factor to consider is what will happen to
the executives of the acquired
8. The valuation techniques for an established publically traded
business is different than the considerations for the valuation
and acquisition of a privately held venture
iii. All new businesses are private firms that do not report their
earnings to the public
iv. Small businesses often adjust their earnings with the payment of
large year-end bonuses in order to limit the profit and taxes
associated with the business
v. Small businesses may have creative company perquisites, often
called perks
1. Perquisites are benefits that are paid for by the company
a. Examples include vacations, vehicles, loans, gifts,
financial contributions to retirement plans, etc.
2. Perks reduce the tax owed by the business
3. The business pays less taxes
4. The firm appears to be worth less than it actually is
vi. The value of a business is the amount of money that a willing seller
and a willing buyer agree upon for the sale of the business
vii. There are unique systems used for the valuation of a private
business
1. Discounted future net cash flow (text page 249)
a. This is the most widely accepted method of valuation
b. Discounts the estimated future net cash flows of the
business
IM 13-4
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Thirteen: Exit/Harvest/Turnaround
c. The cash flow method of valuation of a business
requires that the net cash flow of the business be
projected for some period of time into the future
d. Estimating the cash flow five years into the future and
then adding a salvage value for the firm is a good
ballpark floor valuation for a small business
e. Investors, lenders, equity investors, and founders
recognize that cash flow is an estimate based on a
set of assumptions
f. An addition to the business plan there is a complete
set of assumptions used by the founders
i. Discounting the cash flow (page 249)
1. Values are discounted by a rate that not
only represents the return expected by
an investor, but also accounts for the
riskiness of the venture
2. Discount rates range from rates as low
as ten percent to very high rates of 90
percent
3. The rule of thumb is to use 30 percent
as the discount factor
a. The calculation considers an
annualized rate of return and a
reasonable factor of risk
b. The discount rate remains the
same and the factor increases as
you move into the future
c. To calculate a discounted future
net cash flow take the net cash
flow figure generated for each
year and discount that cash flow
back in today’s dollars. The
discount rate remains the same,
while the factor increases as you
move farther away from today.
Thus, in year 2 the discount rate
is squared (1.e* 1.3), in year 3 it
is cubed (1.3*1.3*1.3). etc.
IM 13-5
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written consent of McGraw-Hill Education.
Chapter Thirteen: Exit/Harvest/Turnaround
d. Illustration of the Present Value of
the Net Cash Flow. See Figure
13.1 on page 250
2. Price/earnings valuation (page 251)
a. Price/earnings (P/E) ratio
i. This is a value derived from public companies
that divide the current earnings per share into
the price per share
ii. This ratio is used to estimate the value of a
business
iii. This system uses the industry in which the
start-up operates
iv. It is done by locating the P/E ratio for public
companies in the same industry
v. To calculate the price/earnings ratio, take the
average and multiply it by the net cash flow for
year 5 and discount it back as a potential sales
price in year 6 of the venture
1. Use 1+ the discount rate raised to the 6th
power
2. Illustration on page 251
3. Asset-based valuation (page 252)
a. This is a method of business valuation that simply
totals all of the hard assets of the organization and
adds in a goodwill value
b. Asset valuation involves accounting for all of the hard
assets of the organization
i. Buildings owned by the business
ii. Equipment owned by the business
iii. Furniture
iv. Cash
v. Marketable securities held in the name of the
company
vi. In most cases the value of signed and
executable contracts
vii. The value of all the assets of the organization
is totaled
1. Calculate the value of the business
a. Take the total assets and add the
acquisition (goodwill) value
IM 13-6
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Thirteen: Exit/Harvest/Turnaround
b. The acquisition or goodwill value
is determined by examining
similar companies that have been
acquired or by looking at the
percentage premium being
offered in general on all new
public acquisitions
c. A businesses that has poor
performance does not have any
goodwill value
d. Asset valuation is the lowest
business valuation number that
you calculate, unless you are an
asset-intensive business
e. Review page 253 for an
illustration of asset valuation
4. Capitalization of earnings valuation (page 253)
a. This is a method of valuation achieved by taking the
earnings (net profit), of the organization; subtracting
or adding any unusual items that the lender or
investor feels are not customary, normal, or usual
items; and dividing that figure by a capitalization rate
i. To calculate, take the net profit, or earnings,
and subtract or add any unusual items that the
lender/investor feels are not customary,
normal, or unusual items; and divide that
figure by the capitalization rate
ii. The capitalization rate is determined by the
nature of the business, including longevity,
business risk, consistency of earning, quality
of management, and general economic
conditions
iii. Review page 253 for an illustration of the
capitalization of earnings valuation
iv. Lenders and investors adjust the (net profit)
earnings figure to account for the individual
actions of the founders
v. Potential buyers readjust the net profit to
account for these nuances of a new business
IM 13-7
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Thirteen: Exit/Harvest/Turnaround
and then apply a capitalization rate to this
figure
1. The capitalization rate is a combination
of the buyers’ risk propensity and the
current situation in the business
acquisition marketplace
2. Illustration is on page 254.
5. Market estimation valuation (page 255)
a. This is a method of business valuation that involves
taking the earnings of the business and multiplying
that figure by the market premium of companies in its
industry
b. This is the simplest valuation method
c. The market estimation valuation is calculated by
taking the earnings (projected earnings) of the
business and multiplying that figure by the market
premium of companies in its industry
d. Popular method of calculation is to take the EBITDA
(earnings before interest, taxes, depreciation, and
amortization) and rework that figure based on an
analysis of the cash flow statement and multiplying
the remaining figure by a market multiple.
e. An examination of the NASDAQ OR NYSE lists a
group of companies in virtually every industry
classification
f. Analyzing business in your industry yields an
estimated market premium that can be used to
calculate the value of the business
g. Lenders and investors adjust the earnings of the
organization to reflect a balanced view of these
figures
h. Review page 254 for an illustration of the market
estimation valuation technique
6. Valuation Overview (page 254)
a. These are the variations in the potential valuation of
the business analysis
b. Companies have unique features that provide it with a
competitive advantage in their business or industry
IM 13-8
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written consent of McGraw-Hill Education.
