Presentation by:Iman M. Ahmed IbrahimReem Abdel Hameed Tambal

Course instructor: Dr. Widad Ali Abdelrahman 04/08/23 1

Ahfad University of WomenMBA-Batch (5)

Exit strategies in Small Business

• Exiting/harvesting : is the process used by entrepreneurs and investors to reap the value of a business when they get out of it. Longenecker,J.G.et.al.(2003),p.347.

• From a small business point of view, a viable exit strategy is a plan that allows the owners or investors in a small business to walk away with what they want to walk away with. Ward, S. (n.d.)

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What is an Exit strategy

When do entrepreneurs exit their business

• When a business is declining i.e. Bankruptcy, rendered obsolete, etc.

• Other reasons (Four D’s for exiting the business):

• Death: entrepreneurs just think about it when it is requested by the insurance agencies.

• Disability: it creates financial strains that will adversely affect the business.

• Divorce: it can ruin both parties (financially, etc).

• Departure: in case of partnership.04/08/23 3

• To seize the full value of a business; reduce risk and create future options;

• To appeal to investors;• To easily transfer ownership to the next

generations;• To be prepared for change in life style.

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Source: Longenecker,J.G…….et.al;(2003),p.349

• Motivation• Challenge

Source: Longenecker,J.G…….et.al;(2003),p.349 6

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“a purchase in which the value of the business is based on both the firm stand-alone characteristics and the synergies that the buyer think can be created”. Longenecker,J.G…….et.al;(2003),p.349

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The critical issue here is the strategic fit between the business to be exited and a potential buyer:

The buyer : synergiesThe entrepreneur: value

If the buyer is a current rival and the acquisition would provide sustainable competitive advantage the buyer may be willing to pay a premium for the seller.

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“A purchase in which the value of the business is based on the stand-alone cash generating potential of firm being acquired” Longenecker,J.G…….et.a;(2003),p.350

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The buyer is interested in a value that stimulates future sales growth and reduced costs.The entrepreneur : business source of value is its cash generating potentials.

The buyer will often make change in the business operations, pressures on personnel resulting in layoffs that the current owner might find intolerable.

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Employee stock ownership plan ESOP: “a method by which a firm is sold either in part or in total to its employees”, Longenecker,J.G, et.al;(2003),p.350

A buyer is interested in preserving employment. ESOP provide them a way to acquire ownership interest in the business.Owner: provide a way to cash out.

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It is the orderly withdrawal of the owners’ investment in the form of cash flows: selling firm assets and ceasing operations.

Disadvantage:Reducing reinvestment when the business is at growth result in lost value creation and inability to sustain competitive advantage;

Advantages:Owners can retain control of their business while they harvest investment;They don’t have to seek out a buyer or incur sales expenses.

• It is the first sale of shares of a company stock to the public, Longenecker,J..et.a;(2003),p.352.

• Reasons for going public:• To raise capital to repay outstanding debt;• To support future growth;• To find future acquisitions;• To create a liquid market for the company stock;• To broaden the company’s shareholder base;• To create ongoing interest in the company and its

continued development.04/08/23 13

• Private equity is money provided by venture capitalists or private investors, Longenecker,J.G.et.al;(2003),p 354.

• Difficulties facing family businesses:Trying to meet owners’ need for cash and the

firm need for growth capital, while retaining control; Transferring ownership to next generation; Capital and liquidity needs and properties.

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Business Valuation & Methods of Payment:• Business Valuation: - Although, “Business valuation is part science

and part art, so there is no precise formula for determining the price of a private company”. (Longenecker, J.G. et.al.(2003), p.356)

- Valuation is very important in different stages of the business lifecycle (i.e. introduction stage, growth stage, mature stage, and decline stage).

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Methods for valuation:

1. Return on Investment (RoI): common methods for valuation the business.2. Market Comparable Valuation: compare the firm with other firms in the same

business / industry.

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Methods for valuation (cont.):3. Based on the firm earnings: The method can be summarized as follow: Firm Value = EBITDA * Valuation Multiple (Equity value = Firm Value – Long term debt) Valuation Multiple: is determined through assumptions

about Riskiness; Expected Future Growth in Earnings; and Competitive Conditions.

This method is very much relying on the experience and judgment of the person doing the valuation.

not commonly used!

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Method of payment:

Two methods: cash or in stock. Cash is preferred over stock world widely.

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Developing an effective exit strategy:

The entrepreneurs should consider the following points:

1. Management for the exit: It means planning for it, since the start-up

(it should be in the Business Plan) of the business. In addition, to planning for their next business before exiting the already existing one.

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Developing an effective exit strategy: In order to achieve this successfully,

entrepreneurs should:- Have clear and separate accounting process

(separate from his/her personal life).- Effective Board of directors to offer valuable

business advices (they should be convinced about the importance of having exit strategy).

- To have record of accomplishment (it helps in conducting the process of business valuation).

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Developing an effective exit strategy:

2. Expect Conflict – emotional & cultural: For these reasons: Entrepreneurs are not good

employees (obsessed by autonomy); cultural conflict between new management and old employees. Nature and degree of conflict varies.

3. Get good advice:• Professional consultants,• Other entrepreneurs who exited their

businesses before,04/08/23 21

Checklist for some points that should be considered for developing an effective exit strategy:Legal incorporation of the business, to

recognize yourself and your business as separate entities.

Annual valuation of the business.Develop an employee benefit plan (in the

case of partnership when they died, injured, and retired).

Plan for who retains company ownership and who should be paid off.(in case of partnership)

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What’s Next?

Most of the entrepreneurs exiting their businesses to start-up new ventures for the reason that they are “purpose-driven people” and whatever they do it, they do it with passion, and seeking high level of achievement (above average!)

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References:1. Anonymous (n.d.). Exit Strategies, Chapter 14. Available at<

http://www.ohiobar.org/General%20Resources/pub/legalbasics/LB%20Chapter%2014.pdf>

[Accessed 29th February 2012]2. Longenecker,J.G., et al., (2003). Small Business Management, An

Entrepreneurial Emphasis. 12th ed. Ohio: South – Western, a division of Thomson Learning.

3. Nicola, A., Buy-sellapharmacy.com, (n.d.). Developing an effective business strategy. Available at

<http://www.buy-sellapharmacy.com/attachments/article/51/article%20-%20developing%20an%20effective%20exit%20strategy.pdf>

[Accessed 29th February 2012]

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