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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
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
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
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
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
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
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
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
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
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
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
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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
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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
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written consent of McGraw-Hill Education.
