Chapter 14

1. ENTREPRENEURIAL FINANCE Chapter 14 HARVESTING THE BUSINESS VENTURE INVESTMENT

2. Chapter 14 :Learning Objectives • Plan an exit strategy • Understand the meaning of systematic liquidation • Describe outright sales of the venture to various potential buyers • Discuss the terms “leveraged buyouts” and “management buyouts” • Describe the process of going public • Identify what investment banking involves

3. Planning an Exit Strategy • Evidence suggest that over one-half of entrepreneurs either develop formal exit strategies or at least have thought about harvest strategies at the outset of the venture • Having a harvest plan in place makes it easier to take advantage of windows of opportunity to exit

4. Harvesting • Harvesting: process of exiting the privately held business venture to unlock the owners’ investment value • Methods of harvesting • Systematic distribution of assets directly to the owners • Outright sale of the venture to others • Two-step public equity registration/sale

5. Methods of Exiting a Privately Held Venture新创私有制企业退出方式 • Systematic Liquidation: venture liquidated by distributing the venture’s cash flows to the owners • However, other than when the venture is operating in a declining industry, it is difficult to think of cases where the advantages of liquidation outweigh the disadvantages

6. Systematic Liquidation 清算 • Advantages:清算的优势 • Entrepreneur maintains control throughout the harvest period • Harvesting of the venture can be spread out over several years • Time, effort, and costs of finding a buyer for the venture can be avoided

7. Systematic Liquidation • Disadvantages:清算的不足之处 • Liquidation proceeds are treated as ordinary income (rather than capital gains) • Difficulty for the entrepreneur to maintain focus on a dying venture • The value of the venture may decline more rapidly when competitors respond to the venture’s lack of investment

8. Methods of Exiting a Privately Held Venture新创私有制企业退出方式 • Outright Sale – venture sold to others including:直接出售 - 出售给其他企业包括： • family members • managers • employees • outside (external) buyers

9. Outright Sale to Management销售给管理层 • Leveraged Buyout (LBO):杠杆收购 purchase price of a firm is financed largely with debt financial capital 收购公司的资金主要来源于债务资本 • Management Buyout (MBO):管理层收购 special type of LBO where the firm’s top management continues to run the firm and has substantial equity position in the reorganized firm由公司高层管理者进行的收购和继续管理公司并持有公司大部分股权。

10. Outright Sale to Employees销售给公司雇员 • Process can use a leveraged Employee Stock Ownership Plan (ESOP) • The ESOP uses proceeds from the sale of debt to purchase venture equity • Employees gain an ownership stake in the private venture • ESOP strategy was made possible by an act of Congress

11. Sale to Outside Buyers销售给外部买家 • Control Premium:获得控制权 amount typically applied to the base valuation to reflect the value of controlling the venture rather than just being a minority shareholder • Illiquidity Discount:非流动性折扣 amount typically applied to the base valuation to compensate for the difficulties in reselling private equity

12. Going Public: 公开上市Initial Public Offering (IPO)首次公开募股 • Initial Public Offering (IPO): a venture’s first offering of SEC-registered securities to the public • Primary Offering: sale of new securities • Secondary Offering: sale of used securities

13. Going Public: 公开上市Role of Investment Banking 投资银行的作用 • Investment Banking:投资银行 an intermediary assisting in the creation, sale, and distribution of financial assets协助 销售和分配金融资产 的中介金融机构 • Due to their extensive network of possible buyers for the securities (through affiliated brokerage and client services), investment bankers are considered to be the experts in predicting the value of newly issued securities

14. Going Public: Role of Investment Banking • Underwriting Spread:承销收益 difference between what the investment bank gets from selling securities to public investors and what they pay to the issuing firm • Red Herring Disclaimer: obligatory disclaimer disavowing any intent to act as an offer to sell, or solicit an offer to buy, securities • Due Diligence: process of ascertaining, to the extent possible, an issuing firm’s financial condition and investment intent

15. Going Public: Role of Investment Banking • Firm Commitment: type of agreement with investment bank involving the investment bank’s underwritten purchase and resale of securities • Best Efforts: type of agreement with investment bank employing only marketing and distribution efforts • IPO Underpricing: syndicate’s offering price when it is less than the market price immediately following the offering

16. NYSE Listing Requirements上市要求 • At least 2,000 holders of at least100 shares • At least 1,100,000 share outstanding, held by public • At least $60 million in market value • At least $2.5 million before tax profits in last 2 years & $2 million in each of previous 2 years

17. Aftermarket Security Trading • Market Order: order to be executed as soon as possible at the prevailing market price • Limit Order: order that can be executed only at a specified price or better • Stop Order: order that converts to a market order once a certain price is achieved

18. Contemplating & Preparing for the IPO Process • For the officers of a publicly traded corporation, there is minimal personal privacy. They are public figures and their lives are subject to scrutiny in a way that most entrepreneurs have never imagined or desired. • Entrepreneurs in a public company will quickly find out what they can and cannot say about the company

19. Preparing for The IPO首次公开募股 • Typical Steps to Follow • Organization meeting and due diligence • Drafting and attendant activities • Initial 30-day SEC review • Pre-marketing • Marketing • Pricing and closing