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Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
PowerPoint Presentation by PowerPoint Presentation by
Thomas MThomas MccKaig, Ryerson UniversityKaig, Ryerson University
Managing Growing Firms and Exit Strategies
1414
14-2Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Looking AheadLooking 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.
14-3Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Distinctive Features ofSmall Firm Management
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.
14-4Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Prevalent Management Weaknesses in Small Firms
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
14-5Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Constraints on Management in Small Firms
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.
14-6Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Firm Growth and ManagementFirm Growth and Management
Growth Stage Entrepreneur’s Workload
Stage 1. One-Person Operation Doing all of the work. Making contact with customers.
Stage 2. Player-Coach Continuing to do some of the basic work, although learning to hire and supervise.
Stage 3. Intermediate Supervision Rising above hands-on management; working through intermediate managers.
Stage 4. Formal Organization Using plans and budgets; following policies and procedures.
14-7Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Stage 3IntermediateSupervision
Stage 4FormalOrganization
Stage 2Player-Coach
Stage 1One-PersonOperation
Organizational Stages of Small Business Growth
Organizational Stages of Small Business Growth
Figure 14-1
14-8Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Managing Versus DoingManaging Versus Doing
STAGE 1 STAGE 2 STAGE 3 STAGE 4One-PersonOperation
Player-Coach IntermediateSupervision
FormalOrganization
Time spent managing Time spent doing
Figure 14-2
14-9Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Characteristics of Founders and Professional Managers
Characteristics of Founders and Professional Managers
• Professional ManagerA manager who uses systematic, analytical
methods of management.
• Founders as ManagersAre not always good organizational members.Have difficulty fitting into conventional roles.Have a different orientation from that of
professional managers.
14-10Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Founders versus Professional ManagersFounders versus Professional Managers
• Innovative• Intuitive• Action-oriented• Long term focus• Bold
• Administrative• Analytical• Planning-oriented• Short term focus• Cautious
Founders Professional Managers
Table 14-1
14-11Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
The Nature of Managerial WorkThe Nature of Managerial Work
ControllingControllingControllingControlling
PlanningPlanningPlanningPlanning LeadingLeadingLeadingLeading
OrganizingOrganizingOrganizingOrganizing
ManagerialManagerialWorkWork
ManagerialManagerialWorkWork
14-12Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Planning ActivitiesPlanning Activities
• The Benefits of Formal Planning Improved productivityBetter focus on goal attainment Increased credibility with stakeholders
• Planning Time “Tyranny of the urgent”Planning requires disciplinePlanning should not be postponed
14-13Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Planning Activities: Types of PlansPlanning Activities: Types of Plans
Type of Plan Purpose
Long-range plan (strategic plan)
A firm’s overall plan for the future
Short-range plan A plan that governs a firm’s operations for one year or less
Budget A document that expresses future plans in monetary terms
Business policies Basic statements that provide guidance for managerial decision making
Procedures Specific work methods to be followed in business activities
Standard operating procedures
An established method of conducting a business activity
14-14Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Goal SettingGoal Setting
• Goal Setting is a key aspect of planning process• Goals can be established using the S.M.A.R.T.
criterion:1. Specific: clearly state expectations2. Measurable: select goals that have concrete
indicators3. Acceptable: the goals must be acceptable to those
responsible for their attainment4. Realistic: the goals should be a stretch to achieve,
but attainable5. Time-framed: a deadline should be indicated
14-15Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Employee Participation and Effective Communication
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
14-16Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Establishing a Chain of Command - Creating Organizational Structure
Establishing a Chain of Command - Creating Organizational Structure
• Structure of the FirmStructure evolves as the firm evolvesGrowth creates the need for structural change
• Chain of CommandThe official, vertical channel of communication in an
organizationUnity 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.
14-17Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Line and Staff OrganizationsLine and Staff Organizations
• Line organizationA 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
14-18Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Line Organization Line Organization
President
SalesManager
ProductionManager
Financial/OfficeManager
Salespeople Plant Employees Office Employees
Figure 14-3
14-19Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Line-and-Staff OrganizationLine-and-Staff Organization
President
Human ResourcesManager
SalesManager
ProductionManager
Financial/OfficeManager
Salespeople Plant Employees Office Employees
Assistant tothe President
Figure 14-4
14-20Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Delegating AuthorityDelegating Authority
• Delegating AuthorityGranting to a subordinate the right to act or make
decisionsBenefits of delegation
• Frees up superior to perform more important tasks
• Develops subordinate’s skills
• Improves two-way communications
14-21Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Deciding how many to supervise: Determining the Optimum Span of Control
Deciding how many to supervise: Determining the Optimum Span of Control
Greater Number of SubordinatesSimple workVery experienced workersSuperior with much ability
Fewer SubordinatesComplex workInexperienced workersSuperior with limited ability
More SubordinatesModerately difficult workModerately experienced workersSuperior with moderate ability
14-22Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Measuring Measuring PerformancePerformance
Measuring Measuring PerformancePerformance
Establishing Standards in the Stages of the Control Process
Establishing Standards in the Stages of the Control Process
Establishing Establishing standardsstandards
Establishing Establishing standardsstandards
Planning and Planning and Goal SettingGoal Setting
Planning and Planning and Goal SettingGoal Setting
Taking Taking Corrective Corrective
ActionAction
Taking Taking Corrective Corrective
ActionAction
14-23Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Preventive Control Concurrent Control Corrective Control
Input Stage Process Stage Output Stage
Examples: Examples: Examples:
Quality control ofwork in process
Check of adherenceto safety procedures
Inspection ofcompleted product
Comparison of actualexpense with budgeted
expense
Inspection of rawmaterials
Careful selection ofemployees
Stages of the Control ProcessStages of the Control Process
Figure 14-5
14-24Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Time ManagementTime Management
• The Problem of Time PressureMany owner-managers work 60-80 hours per week.Effect of overwork is inefficient work performance.
• Time Savers for Busy ManagersEffective 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
14-25Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Hours per Week Worked by New Business Owners
Hours per Week Worked by New Business Owners
Figure 14-6Data developed and provided by the NFIB Foundation and sponsored by American Express Travel-Related Services Company
14-26Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Outside Management AssistanceOutside Management Assistance
Outside Outside Management Management AssistanceAssistance
Counselling Counselling Assistance to Assistance to
Small Enterprise Small Enterprise (CASE)(CASE)
Canadian Youth Canadian Youth Business Business
Foundation (CYBF)Foundation (CYBF)
Industry CanadaIndustry CanadaIndustrial Research Industrial Research Assistance Program Assistance Program
(IRAP)(IRAP)
Management Management ConsultantsConsultants
Entrepreneurial Entrepreneurial NetworksNetworks
Other Business Other Business and Professional and Professional
ServicesServices
Business Business IncubatorsIncubators
14-27Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Business Incubator
Photocopying, Receptionist, and
Links to Accounting, Legal,Other Professional Services
Photocopying, Receptionist,Word-Processing Services
Low-Cost Space
Credibility
Management Counsel
Access to Financial Resources
Entrepreneurial Education
Computer Services
Practical Business Expertise
Services Provided by Business Incubators
to New Firms
Services Provided by Business Incubators
to New Firms
Figure 14-7
14-28Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
The Importance of the HarvestThe 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
14-29Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
FinancialAcquisition:LBO or MBO
UsingPrivate Equity
Selling theFirm
GoingPublic
Exit Options
ReleasingCash Flows
EmployeeAcquisition
StrategicAcquisition
Methods of Harvesting Methods of Harvesting
Liquidation
14-30Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Exiting: Selling the FirmExiting: 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
14-31Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Exiting: Selling the FirmExiting: Selling the Firm
• Strategic AcquisitionA 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
14-32Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Exiting: Selling the FirmExiting: 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
14-33Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Exiting: Selling the FirmExiting: Selling the Firm
• Management Buyout (MBO) A leveraged buyout that includes the firm’s top
management to significant shareholders in the acquired firm.
14-34Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Employee Ownership PlanEmployee Ownership Plan
• Employee OwnershipA 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.
14-35Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Releasing the Firm’s Cash Flows Releasing the Firm’s Cash Flows
• Exiting by Withdrawing Firm’s CashAdvantages:
• Retain control of firm while harvesting investment.• No need to seek a buyer or incur expenses associated
with sale of businessDisadvantages
• Loss of development potential and opportunities• Tax disadvantages of cash withdrawal• Requires patience to siphon off cash slowly
14-36Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Going PublicGoing 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 developmentSource: Lisa D. Stein, vice-president, Salomon Smith Barney.
14-37Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Using Private EquityUsing Private Equity
• Private Equity (Capital)Money provided by venture capitalists or private
investors.
• Factors in the Transfer of Family-Owned FirmsLiquidity for exiting family membersContinued financing for company growthMaintenance of family control of the firm
14-38Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Illustration of Private Equity PlacementIllustration of Private Equity Placement
Figure 14-8
14-39Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
LiquidationLiquidation
• 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.
14-40Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Firm Valuation and the ExitFirm Valuation and the Exit
• The Actual ValueOpportunity cost of funds
• The rate of return that could be earned on another investment of similar risk
• Harvest Value/Market Comparable ValuationEstablishing the value of a privately held
company based on the value of a similar or comparable publicly traded company.
14-41Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Developing an Effective Exit StrategyDeveloping an Effective Exit Strategy
• Understand What You WantMotives 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”
14-42Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited.
Life After the HarvestLife After the Harvest
Two key questions must be asked by the exiting entrepreneur.
1.Will I experience serious regrets over the decision to harvest my investment in a company?
2.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?