978-1259912191 Chapter 13 Lecture Notes Part 2

Unlock access to all the studying documents.

View Full Document

Chapter Thirteen: Exit/Harvest/Turnaround

A. Preparing the business for sale

i. Selling a business is a process.

ii. Ensure that the business looks good in order to obtain the highest

premium

iii. A leadership change must be considered

iv. Workers have had specific job tasks with very little cross-training

1. The business owner’s job duties included personal contacts

related to the marketing and sales functions

a. The personal contact person is difficult to replace

b. The existing owner of the business should establish a

new contact individual to existing clients

c. This requires significant investment in the future

without obvious payoffs in the present.

v. The existing owner examines operations to assure that the

procedures of the business are codified and simplified for easy

transfer to the new owner

1. Operational procedures should be in writing

2. Accounting operations should be kept in an accurate and

acceptable order that appeals to a buyer

3. Contract with a CPA to establish legitimacy of the business

a. Audit the previous year’s financial statements

b. Standardize the statement’s format

c. Develop procedures for all accounting activities

d. Provide an audit report and opinion of the accounts in

the financial records

4. An accurate value of the business as it continues to grow

and develop should be established and maintained by the

existing owner

5. The valuation of the business owner compared with the

professional advisors should be compared

a. This increases the ability to negotiate

6. All informal practices of the organization should be recorded

a. Develop efficient policies and procedures and ensure

that they are in writing. Develop a procedure manual

to include

i. The appropriate time to order essential

supplies

ii. The opening and closing times and procedures

iii. Customer relation policies and procedures

iv. Payment practices

v. Human resource benefits and policies

IM 13-1

written consent of McGraw-Hill Education.

Chapter Thirteen: Exit/Harvest/Turnaround

7. Plan the type of sale that will maximize the returns of the

business

a. The specific business type mandates the exit strategy

of the business

B. Actually seeking to sell the business

i. There are choices available to the small business owner

1. First option is the common choice to sell the business intact

to a third party with the aid of a broker, lawyer, etc.

2. Second option is to sell the business to a competitor or a

larger business interested in your location, market position,

product, etc.

3. Third option is to divest portions of the business that will

maximize the value of the business

a. It is not uncommon for the total value of the firm to be

higher if the business splits into separate entities

4. Fourth option is an initial public offering (IPO) which is rarely

used but most idealized by the business press

a. The initial public offering (IPO) is the initial listing of a

firm as a public entity in the public equities market

5. The business for sale is promoted in a variety of ways

a. Hire a business broker who will market the business

for a percentage of the sale price

b. Contact competitors or businesses that have

expressed an interest in the business

c. Inform accountants and attorneys that you are

interested in selling the business. They have many

contacts and may be aware of individuals seeking to

buy a business

d. Contact suppliers and clients to advise them that you

want to sell the business

C. Negotiation strategies

i. Negotiating the sale of a business is the art of trying to reach an

agreed price between a willing buyer and a willing seller

ii. A sale is based on the needs and wants of both parties

iii. A buyer could have other business entities in the community and

the acquisition of the additional firm would enhance the buyer’s

other business entities

iv. A buyer could be interested only if receiving a bargain from the

seller or is able to pay less

v. Negotiating to sell the business is a process that the small business

person must actively engage in

IM 13-2

written consent of McGraw-Hill Education.

Chapter Thirteen: Exit/Harvest/Turnaround

vi. A business owner can implement the process of selling the

business

1. Use a professional mediator for anything but the most basic

level of discussions

a. You can consider your attorney as a mediator

2. Know the buyer

3. Retain your own advisors

4. Realize that there are many options available to sell the

business

a. Sell the company as a whole or break up the business

b. Exit goal is to maximize the value of the business

5. Get cash for the firm

a. A buyer may want to combine your firm with their firm

to create a new business

i. The seller is offered a portion of cash and a

portion of stock in the new business venture

ii. The seller is dependent on the buyer’s success

and the seller’s liquidity is often reduced

6. Look to the details.

a. Check to see if there is a noncompete

agreement

i. It would cause you not to be able to

compete in the same industry as the new

business owners or other stipulations

from the buyers

2. Turnaround and Business in Decline (text pages 259 through 261)



Learning Objective 13-3: Discuss the concept of turnaround and business in

decline

A. Turnaround

i. This is the effort to reverse the decline in a business

ii. It is difficult to turn around a small business once it starts to

decline

iii. A small business owner has very little excess resources

iv. Retrench

1. Retrenchment efforts focus on the firm’s gaining control of its

cash flow quickly, regardless of the impact to the long-term

objectives

IM 13-3

written consent of McGraw-Hill Education.

Chapter Thirteen: Exit/Harvest/Turnaround

a. Bring in accounts receivable sooner

b. Delay the payment of accounts payable

c. Renegotiate with suppliers so that supplies do not

have to be paid for in cash

d. Reduce staff

e. Work with employees to cut costs

2. The primary causes of a decline are operational issues or

problems in the strategy of the organization

a. Operational issues relate to a lack of sales or an

inefficient production method

b. Strategic issues result from poor positioning choices

i. The business diversifies into unrelated domains

ii. The business is not being successfully

managed

3. The initial focus should not be on the easiest problems in the

business because they are usually only the symptoms of a

problem

a. Select the one key reason why the business is

suffering

b. Evaluate the problem to determine if it is a strategic

problem or an operational issue

c. Dedicate the firm’s resources to solving this problem

immediately

4. Operating problems are resolved with operating solutions

a. Operational issues include an increase in marketing

or marketing effectiveness in order to sell additional

products

b. If the problem is production inefficiency, the focus

should be oriented to reengineering, simplifying, and

measuring

5. Strategic issues are resolved by eliminating long-term

ineffective strategic choices

v. Large businesses that are established replace their management

team in a turnaround situation

1. The management team is set in its ways and does not see

the problems

2. Management teams are unable to develop creative solutions

to solve their problems

3. Small businesses owners must question themselves and

others

IM 13-4

written consent of McGraw-Hill Education.

Chapter Thirteen: Exit/Harvest/Turnaround

a. An effective board of advisors assists the small

business owner to resolve strategic and operational

issues

3. Implications and Issues Involved in Closing ae Business (text pages 261 through

262)



Learning Objective 13-4: Recognize the implications and issues involved in

closing a business.

A. Bankruptcy

i. Small business owners consider bankruptcy as an alternative to

turnaround efforts

ii. Bankruptcy alternatives have long and drawn out processes and

procedures that impact the business owner directly

iii. There are several types of bankruptcy available to the small

business owner

1. Chapter 11 Bankruptcy

a. Allows he legal reorganization of the business

b. The firm receives immediate protection against

lawsuits or other forms of collection

c. The business has 90 days to submit a reorganization

plan

d. Reorganization plan stipulates how the business will

pay off the past-due debt payments and plans to stay

current with its other debts

e. The banker and creditors refer to this plan as a

“workout”

i. Bankers and creditors meet with the business

owner and make arrangements for the

payments

ii. Creditors can offer settlement options

1. Creditors accept less than the total

amount owed

2. The firm will pay the full payment at a

later date when it’s in a better financial

position

3. If the creditor does not work with the

business owner, the business may

liquidate and the creditors will only get a

fraction of the amount that is due

IM 13-5

written consent of McGraw-Hill Education.

Chapter Thirteen: Exit/Harvest/Turnaround

a. The reduction in the amount of

the money paid is frequently

called a haircut

2. Fast-track version of the Chapter 11 is available if the total

debts are less than $2 million

a. Creditors have less control

b. The firm must show in its fast-track plan how back

taxes will be brought current over a five-year period

c. The firm must show how the creditors who have

pledged collateral behind the debt will be brought

current

d. Unsecured creditors do not have collateral pledged

behind their debt

i. Unsecured creditors are usually paid last

ii. Unsecured creditors are not mentioned in the

fast-track plan

e. During the reorganization process leases, contracts,

and union agreements can be terminated

f. The bankruptcy judge has the power to force creditors

to accept the reorganization plan even if the creditors

are unwilling to accept it

3. Chapter 7 Bankruptcy

a. The business closes operations

b. The assets in the business are sold

i. Physical assets

1. Equipment

2. Signs

3. Furniture

4. Fixtures

5. Other physical assets

6. Valuable intangibles

a. Corporate name

b. Patents

ii. The business can be cleared out by a liquidator

or auctioneer

c. Chapter 13 bankruptcy

i. Intended for sole proprietorships with limited

debts and assets

ii. The effect is similar to a Chapter 11 bankruptcy

iii. The assets are smaller so the process is

simple

IM 13-6

written consent of McGraw-Hill Education.

Chapter Thirteen: Exit/Harvest/Turnaround

1. Quicker approval time

2. No creditor committee is required

iv. Subchapter S, Subchapter C, or LLC firms provide limited liability to

the business owner

1. The business owner who personally guarantees loans risks

the limited liability nature of a corporation and exposes the

owner to the loss of personal assets

v. New small business owners are encouraged to plan exit strategies

in the event that the business fails

4. For Review (text page 262)

Key Terms

Asset valuation: A method of business valuation that simply totals all of the hard

assets of the organization and adds in a goodwill value. (LO 13-2)

Capitalization of earnings valuation: A method of valuation achieved by taking the

earnings (net profit) of the organization; subtracting or adding any unusual items that

the lender/investor feels are not customary, normal, or usual items; and dividing that

figure by a capitalization rate. (LO 13-2)

Initial public offering (IPO): The initial listing of a firm as a public entity in the public

equities market. (LO 13-2)

Market estimation: 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. (LO 13-2)

Perquisites: Benefits paid for by the company. Examples include vacations, vehicles,

loans, gifts, financial contributions to retirement plans, etc. (LO 13-2)

Price/earnings (P/E) ratio: A value derived from public companies that divides the

current earnings per share into the price per share. (LO 13-2)Opening Vignette –

“Evernote” – p. 245Student responses will vary.

IM 13-7

written consent of McGraw-Hill Education.

Chapter Thirteen: Exit/Harvest/Turnaround

Exercise 1 – p. 254

Student responses will vary.

Ethical Challenge – p. 256

1. The entrepreneur should present a truthful representation of the business.

2. Ethical requirements are usually more stringent than legal requirements.

3. The business owner should start preparing the business for sale at the time it opens.

Exercise 2 – p. 261

1. Chris should seek outside advice. He should give these outside advisors all of the

details and financials of the business. Since they are not involved in the business, they

should be able to present an unbiased opinion on what the next steps should be.

2. The greatest barrier is lack of cash to continue the business plus the inability to make

painful changes

IM 13-8

written consent of McGraw-Hill Education.