Term
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Definition
| The process entrepreneurs and investors use to exit a business and realise their investment |
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Term
| What are the four exit strategies? |
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Definition
1. Sale to a strategic or corporate investor
2. Management buy-out
3. Strategic alliance and merger
4. Initial public offering |
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Term
| What are the three main elements to consider when planning an exit? |
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Definition
1. Strategic elements linked to the business environment
2. Entrepreneur's Personal Aspirations
3. Business Financial Situation |
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Term
| Explain the Strategic elements linked to the business environment needed when planning an exit |
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Definition
- The business must have a good stream of successful products that are well established in the market
- Must be able to show the the business has a track record that there is some potential for growth once the entrepreneur has pulled out of the business
- Management |
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Term
| Explain the Entrepreneur's Personal Aspirations needed when planning an exit |
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Definition
- The decision to harvest cannot effectively be separated from the entrepreneur's personal goals and objectives.
- Without an understanding of what is important in life, the entrepreneur is apt to make a bad decision when it comes to harvesting a firm
- The entrepreneurs current financial situation is important
- The view of other stakeholders, such as outside investors and employees, also needs to be considered |
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Term
| Explain the Business Financial Situations needed when planning an exit |
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Definition
- Has to consider the Financial Markets
- Financial Structure of the company e.g. It might be difficult to list a business that has a high debt-to-equity ratio, in which case it may be preferable to sell to to a corporate investor who can restructure the balance sheet
- Exit strategies offer different financing options for business in need of extra funds for pursuing growth. |
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Term
| Explain the importance of TIMING when to exit |
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Definition
Timing is important and entrepreneurs must be sensitive to the opening and closing of a window opportunity. Timmons and Spinelli suggested the following guidelines and cautions:
- Patience
- Vision
- Realistic valuation
- Outside advice |
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Term
| What are the three broad categories of Sale types (harvesting)? |
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Definition
1. Financial Sales
2. Strategic Sales
3. Management or employee buy-outs |
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Term
| Explain what Financial Buyers/Sales include |
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Definition
- A financial buyer may be a competitor in the industry or a business wishing to achieve 'vertical integration' and diversification by absorbing another business into its core business
- Buyers look mainly to a firm's stand alone cash-generating potential as the source of value, often this value relates to stimulating future sales growth, reducing costs or both
- Financial buyers are in business to make deals so they may overlook some weaknesses which has important implications for the seller, because new owners will often make changes to the firm's operations or break up the firm and sell the pieces |
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Term
| Explain what Financial Buyers/Sales include |
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Definition
- Strategic buyers, unlike financial buyers, expect the acquired business to fit in with their other holdings
- Strategic buyers seek to buy a number of businesses and then cobble them together to eliminate redundant and excess costs, and derive economies of scale wherever possible to decrease expenses and increase profitability. |
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Term
| What does the harvest strategy 'Management Buy-Out (MBO) mean? |
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Definition
| The purchase of a controlling interest in a business by its management in order to take over assets and operations. |
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Term
| Explain what a Management Buy-Out (MBO) includes |
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Definition
- The MBO usually entails high levels of debt (leverage) and, therefore, the new owner-managers must stay clearly focused on the operating performance if they are to meet debt payments and use assets effectively
- If the business has both assets and good cash flow, the financing can be arranged via banks or other financial institutions
- Even if assets are thin, a healthy cash flow that can service the debt to fund the purchase price may convince lenders to support an MBO |
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Term
| Explain what the framework of Strategic Alliance includes |
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Definition
| - The investor can induce some economies of scale by pooling common resources or by collaborating in an allied area where the firm need some expertise |
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Term
| What factors are considered essential when conducting an MBO? |
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Definition
1) The ability to borrow significant sums against the business's assets
2) The ability to retain or attract a strong management team
3) The potential for the participants (including management's) investment to increase substantially in value. The ability of a business to support significant leverage depends on whether it can service the principal (and interest) payment obligations that accompany that leverage |
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Term
| What are three factors that are considered essential to conducting a successful MBO? |
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Definition
1. The ability to borrow signigicant cups against the business's assets
2. The ability to retain or attract a strong management team
3. The potential for the participants' (including management's) investment to increase substantially in value |
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Term
| What is a Strategic Alliance? |
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Definition
| An ongoing relationship between two businesses, which combine efforts for a specific purpose. The two allies remain legally independent, although a substantial part of their activities depends on the alliance (economic interdependence) |
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Term
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Definition
| If the strategic alliance takes place between competitors, it can often lead to a merger. In this case, a new legal entity is formed, as the two entities become one through a purchase acquisition or a pooling of interests. |
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Term
| What is an Initial Public Offering? (IPO) |
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Definition
| Through the IPO, shares are offered for sale on a public stock exchange. |
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Term
| What are some advantages of IPOs? |
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Definition
- The merits of going public versus being acquired rest largely on the contention that IPOs provide higher valuations, and therefore better returns, than can be expected from a straight sale.
- Negotiability of its securities, the potential use of future issues of its shares to acquire other businesses and an increase in the stature of the business. |
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Term
| What are some disadvantages of IPOs? |
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Definition
- Loss of privacy as numerous reports are required by government agencies
- Establishes the need for the board of directors to approve certain types of decisions, imposing additional restrictions on management.
- There is a significant cost associated with going public. Not only is there the cost of the IPO itself, but there are also ongoing costs associated with the provision of information required by regulators |
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