Managing Growing Firms and Exit Strategies

Managing Growing Firms and Exit Strategies 14 PowerPoint Presentation by Thomas McKaig, Ryerson University

Looking Ahead After studying this chapter, you should be able to: 1. Discuss the evolving features of small firm management. 2. Identify the various kinds of plans and approaches to planning. 3. Describe the nature and kinds of small business organization. 4. Discuss the ways in which control is exercised. 5. Describe the problem of time pressure and suggest solutions. 6. Explain the various types of outside management assistance. 7. Explain the importance of having an exit strategy. 8. Describe harvesting options and effective harvesting strategies. 9. Discuss issues in preparing for life after the harvest.

Distinctive Features ofSmall Firm Management • Professional Manager • A manager who uses systematic, analytical methods of management. • Organizations, even small ones, do not function on their own – they need to be managed. A small business will not run well without proper direction and coordination of its activities. • The management process enables production workers, salespeople, and others to collaborate effectively in servicing customers.

Prevalent Management Weaknesses in Small Firms • Although large firms can be subjected to all of the following management pitfalls, these seem more prevalent within small firms. • Many think of small firms as being unprofitable and struggling from day to day for survival frequently due to poor management

Constraints on Management in Small Firms • Constraints include: • Small bank accounts • Limited staff such as office assistants • Lack of funds for promotional sales brochures, research, etc.

Firm Growth and Management

Stage 3 Stage 1 Stage 4 Stage 2 Intermediate One-Person Formal Player-Coach Supervision Operation Organization Organizational Stages of Small Business Growth Figure 14-1

Managing Versus Doing STAGE 1 STAGE 2 STAGE 3 STAGE 4 One-PersonOperation Player-Coach IntermediateSupervision FormalOrganization Time spent managing Time spent doing Figure 14-2

Characteristics of Founders and Professional Managers • Professional Manager • A manager who uses systematic, analytical methods of management. • Founders as Managers • Are not always good organizational members. • Have difficulty fitting into conventional roles. • Have a different orientation from that of professional managers.

Innovative Intuitive Action-oriented Long term focus Bold Administrative Analytical Planning-oriented Short term focus Cautious Founders versus Professional Managers Professional Managers Founders Table 14-1

The Nature of Managerial Work Planning Leading ManagerialWork Controlling Organizing

Planning Activities • The Benefits of Formal Planning • Improved productivity • Better focus on goal attainment • Increased credibility with stakeholders • Planning Time • “Tyranny of the urgent” • Planning requires discipline • Planning should not be postponed

Planning Activities: Types of Plans

Goal Setting • Goal Setting is a key aspect of planning process • Goals can be established using the S.M.A.R.T. criterion: • Specific: clearly state expectations • Measurable: select goals that have concrete indicators • Acceptable: the goals must be acceptable to those responsible for their attainment • Realistic: the goals should be a stretch to achieve, but attainable • Time-framed: a deadline should be indicated

Employee Participation and Effective Communication • Employee Participation • Employees are an excellent planning resource • Stimulating Two-Way Communication • Conduct periodic performance review sessions to get employee feedback • Use bulletin boards to keep employees informed about developments affecting the • Make suggestion boxes available to solicit employees’ ideas • Hold staff meetings to discuss current issues and problems

Establishing a Chain of Command - Creating Organizational Structure • Structure of the Firm • Structure evolves as the firm evolves • Growth creates the need for structural change • Chain of Command • The official, vertical channel of communication in an organization • Unity of Command • A situation in which each employee’s instructions come directly from only one immediate supervisor. • Entrepreneurs’ personal relationships with employees creates problems in complying with the chain and the unity of command in their firms.

Line and Staff Organizations • Line organization • A simple organization in which each person reports to one supervisor. • Line and staff organization • An organizational structure that includes staff specialists who assist management. • Line activities • Activities contributing directly to the primary objectives of the firm. • Staff activities • Activities that support line activities

President Sales Financial/Office Production Manager Manager Manager Salespeople Plant Employees Office Employees Line Organization Figure 14-3

President Assistant to Human Resources the President Manager Sales Financial/Office Production Manager Manager Manager Salespeople Plant Employees Office Employees Line-and-Staff Organization Figure 14-4

Delegating Authority • Delegating Authority • Granting to a subordinate the right to act or make decisions • Benefits of delegation • Frees up superior to perform more important tasks • Develops subordinate’s skills • Improves two-way communications

Deciding how many to supervise: Determining the Optimum Span of Control Fewer Subordinates Complex work Inexperienced workers Superior with limited ability Greater Number of Subordinates Simple work Very experienced workers Superior with much ability More Subordinates Moderately difficult work Moderately experienced workers Superior with moderate ability

Establishing Standards in the Stages of the Control Process Planning and Goal Setting Establishing standards Measuring Performance Taking Corrective Action

Preventive Control Concurrent Control Corrective Control Process Stage Input Stage Output Stage Examples: Examples: Examples: Inspection of raw materials Inspection of completed product Quality control of Careful selection of work in process employees Comparison of actual expense with budgeted Check of adherence expense to safety procedures Stages of the Control Process Figure 14-5

Time Management • The Problem of Time Pressure • Many owner-managers work 60-80 hours per week. • Effect of overwork is inefficient work performance. • Time Savers for Busy Managers • Effective use of time (time management) • Analyze how time is normally spent • Eliminate practices that waste time • Carefully plan available time • Use a daily planner to prioritize activities • Don’t avoid unpleasant or difficult tasks • Limit conference and meeting times

Hours per Week Worked by New Business Owners Figure 14-6 Data developed and provided by the NFIB Foundation and sponsored by American Express Travel-Related Services Company

Outside Management Assistance Business Incubators Other Business and Professional Services Counselling Assistance to Small Enterprise (CASE) Outside Management Assistance Entrepreneurial Networks Canadian Youth Business Foundation (CYBF) Management Consultants Industry Canada Industrial Research Assistance Program (IRAP)

Low-Cost Space Credibility Management Counsel Links to Accounting, Legal, Other Professional Services Business Incubator Access to Financial Resources Entrepreneurial Education Photocopying, Receptionist, Photocopying, Receptionist, and Word-Processing Services Computer Services Practical Business Expertise Services Provided by Business Incubatorsto New Firms Figure 14-7

The Importance of the Harvest • Harvesting (or exiting) • The process used by entrepreneurs and investors to reap the value of a business when they get out of it. • The process involves: • Capturing value (cash value) • Reducing risk • Creating future options

Methods of Harvesting Exit Options Selling the Releasing Going Using Firm Cash Flows Public Private Equity Liquidation Financial Employee Strategic Acquisition: Acquisition Acquisition LBO or MBO

Exiting: Selling the Firm • Buyers’ reasons for purchasing a firm: • Strategic acquisition • Synergies to be gained in combination with other assets • Financial acquisition • Profitability of the firm as a stand-alone business • Employee acquisition • Preservation of employment for current employees …continued

Exiting: Selling the Firm • Strategic Acquisition • A purchase in which the value of the business is based on both the firm’s stand-alone characteristics and synergies that the buyer thinks can be created by the strategic fit of the firm and a potential buyer. + $$$$$$$$ = + $$ $$ …continued

Exiting: Selling the Firm • Financial Acquisition • A purchase in which the value of the business is based on the stand-alone cash generating potential of the firm being acquired. • Leveraged Buyout (LBO) • A purchase heavily financed with debt, when the potential cash flow of the target company is expected to be sufficient to meet debt repayments. • Bust-up LBO—purchasing with the intention of selling off assets • Build-up LBO—purchasing similar firms to make one larger company …continued

Exiting: Selling the Firm • Management Buyout (MBO) • A leveraged buyout that includes the firm’s top management to significant shareholders in the acquired firm.

Employee Ownership Plan • Employee Ownership • A method by which a firm is sold either in part or in total to its employees. • Frequently is the exit method of last resort. • Motivates the employee-owners to perform.

Releasing the Firm’s Cash Flows • Exiting by Withdrawing Firm’s Cash • Advantages: • Retain control of firm while harvesting investment. • No need to seek a buyer or incur expenses associated with sale of business • Disadvantages • Loss of development potential and opportunities • Tax disadvantages of cash withdrawal • Requires patience to siphon off cash slowly

Going Public • Initial Public Offering (IPO) • The first sale of shares of a company’s stock to the public in order to: • raise capital to repay outstanding debt • strengthen the balance sheet to support growth • create a source of capital that can be selectively accessed to fund continuing growth • create a liquid currency to fund future acquisitions • create a liquid market for the company’s stock • broaden the shareholder base • create ongoing interest in the company and its continued development Source: Lisa D. Stein, vice-president, Salomon Smith Barney.

Using Private Equity • Private Equity (Capital) • Money provided by venture capitalists or private investors. • Factors in the Transfer of Family-Owned Firms • Liquidity for exiting family members • Continued financing for company growth • Maintenance of family control of the firm

Illustration of Private Equity Placement Figure 14-8

Liquidation • Founder manager would not typically choose to liquidate as the harvest value will be less. • Some businesses such as one person consulting firms cannot operate without the owner and therefore have limited value to potential buyers. • Other firms may not be attractive due to the deterioration of their customer base, leveraged financial positions, or aging and unproductive equipment.

Firm Valuation and the Exit • The Actual Value • Opportunity cost of funds • The rate of return that could be earned on another investment of similar risk • Harvest Value/Market Comparable Valuation • Establishing the value of a privately held company based on the value of a similar or comparable publicly traded company.

Developing an Effective Exit Strategy • Understand What You Want • Motives for exiting • Money • Independence • Health of the company • Your management team • An heir apparent taking over • Personal identity and the business itself • Avoid “seller’s remorse”

Life After the Harvest Two key questions must be asked by the exiting entrepreneur. • Will I experience serious regrets over the decision to harvest my investment in a company? • What will become my passion after I have become more than contended with the “easy life” where I have the option to play golf every day if I choose or to travel to my heart’s content?

Managing Growing Firms and Exit Strategies