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ION PLANNING AND STRATEGIES

FOR HARVESTING AND ENDING THE
VENTURE

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439

4N

PART

FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE

always, "$s.oo off what?" As far as she was concerned, none of, the beer. ads had a
clear message. lt seemed that they were all trying to do the same thing-outprice one
another with heavy advertising. Her response to this was a simple genius marketng
strategy in her ads: A case o 24tor $24.00. At the time, this strategy amounted to a $5

to $10 savings from what her competitors were charging. More importantly. it piovided a clear message to the customer.
This low-price strategy was successful because the company had extended serious
time and effort redesigning and restructuring its infrastructure to allow for more effective cost controls. As a result, the low prices still allowed the company enough margin
to earn a profit. This strategy made Lakeport a signif icant player in the Ontario market.
Market share of the take-home beer market, one of the company's primary targets.
giew from a 0.5 percent share to more than a 6 percent share by the end o 2004.
In 2004 Teresa took complete control of the company. With financing from VenGrowth Capital Partners and National Bank, she was able to purchase 100 percent of
the 20O-employee cornpany. Her effort in these early years was rewarded not only by
the success of the company but also by the recognition of her peers. In 2005 she was
ranked eighth in the annual list of the top 100 successful women business owners in
Canada, and she was a finalist for the Ernst & Young turnaround entrepreneur of the
year; in 2007 she was narned entrepreneur of the year by Canada's Venture Capital
and Private Equity Association. In addition to successful labels such as Brava, Steeler
Lager, and Lakeport Honey Lager, the company also kept its production lines busy by
aggressively seeking deals

to

pack products such as hard lemonade and ready-to-drink

mixes for other makers. In 2007 Lakeport had nine proprietary brands and was ranked

the third largest producer of beer in the very competitive Ontario market.
In June of 2005 Lakeport went public on the Toronto Stock Exchange. The result was
a successful IPO as investors responded favorably to the company and Teresa's leadership. The company's gross revenue after the IPO continued to grow and at the end of
the third quarter of 2005 reached $39.2 million, up 86 percent from the previous year.
Market share in the take-home market from early 2005 to the end of 2006 increased
from 9 percent to more than 12 percent. This remarkable growth created such pressure
in this market that Labatt Brewing Company Ltd. decided that the only way to compete was to tender an offer to buy Lakeport. In March 2007 Lakeport Brewing was sold

to Labatt for $201 million. At the time of the

sale Teresa held 21.6 percent ownership

of Lakeport Brewing.
consultant to Labatt until early 2008 but has now
moved on to a new endeavor. With her substantial financial reward from the sale of
the company, Teresa, in wanting to give back to the community, established the Teresa
Cascioli Charitable Foundation. As manager of this foundation, Teresa has given back to
After the sale Teresa continued

as a

the community through a number of important endeavors such as an endowed chair in

entrepreneurial leadership at McMaster University (she graduated from there in 1983),
and with a $l million donation to St. .loseph's Hospital where she was born in 1961' She
will continue to be active in these endeavors, and given her strong entrepreneurial spirit

it

is

very likely that we will find Teresa in some new venture in the near future.l

in Maryland, and communicate the plan. The owner

nggds fo meet face to face wth the people he
wants to keep and let them know that it,s do or die
this time. They can either comply with a new system
of accountability and accept compensation that is
tied to performance, sales, and operating within or
under a tght budget, or be out of a job in a matter
of weeks when the bank shuts down the whole

.:i

"shows'R Us Inc.,,, is facing

owner is in a state of denia
how desperate his financial

to provide accufate financial information to

.

The

just
iled
his lender;

and now the bank r-s on the war

owner is about tq lose the home
loan. Three decades, worth of

busi ness.

I predict that morale will improve despite the fact

that.some employees will face drastic pay cuts and
heading down the drain.
layoffs. Until now, employees in the regional offices
It dd't have to get to this point. For years the have been working without
direction, with no con_
owngrship has allowed the Shows R Us "teamt, f,jO, nection to
headquarters. and little sense that they're
managers aound the country.tg,run.lheir own. re_ part of.a larger
organization. With no performance
gional operations- These managers have not been an_ targets
in place, ambitious workers have been flail_
swerable to anyone in the chain of command, because
ing. As it is, there is zero opportunty or motivation
there rs no chain of command. Each office acts as a to work hard.
lf Shows ,R Us survives this crisis. the
separate unit, responsible for its own hiring and ex_ star performers
who remain will have a chance to
penses, and with no requirement to get out there
and
make more money by bringing in more sales because
find new clients to justify its existence. Instead they de_ their pay
will be tied strictly to productivity.
pend on a short burst of activity during the convention
The good news is that we have already bought
season and put their feet up for the rest of the year.
Shows 'R Us some extra tme with the bank, which
The result has been an egregious waste of resources.
will continue to work with the company as long as it
There are too many people on the payroll. Roles are sees that
the business is taking serious steps to imple_
duplicated, and offices that handle events in one state ment these
changes. lt won't be easy, but it sure
could just as easily cover two or three states with the beats losing
everything.*
amount of business that,s coming in.
This was fine before the recession hit, when busi_
ADVICE TO AN ENTREPRENEUR
ness was steady and there was always income from
An entrepreneur friend sees the above article and

regular clients to cover operational and budget leaks.

Today, lousy sales are unmasking a host of problems.
and it's entirely the owner.s fault.

SOLUTION: END DENTAL AND TAKE

BACK CONTROL

comes to you
'l

for advice.

hired four regional managers to run my

business and have given them a lot of flexibility
to make decisions without constantly asking me.
I recently

ls this a mistake?

2'

Now is the time for the owner to step up and lead.

The CEo needs to conduct a major overhaul of operations and install a chain of command where everv
regional department head must be answerable onlv 3.
to him. He should take a lc ok at where each office i,

How should.l communicate with these regionaf

managers.without letting them know that I am
concerned about their decision making?
lsn't the fact that these regional managers have
flexibility enough to motivate them to make
good decisions?

located on the map, where business is coming in, and

where it isn't. Decide which offices can be closed and
*Source: Reprinted from the August
which can be merged. Slash the workforce in half.
4, 2(X)9, issue of BusinessWeek
Leadership must car an emersencv meetins of
lHffi,J.:,il]::ft?flJf,[.33ffijil:1"#;*ry;T::.""
the regional office managers, fly them to headquarters clouiier
wiih samantha Marshall, www.businessweek.com/smailbiz.

ar

41

442

PA

RT

FROM FUNDING THE VENTURE TO LAUNCHING. GROWING, AND ENDING THE NEW VENTURE

This book has taken an in-depth view ofthe entire entrepreneurial process, from the idea
to a business plan and then successful funding and growth strategies. Howeve the entrepreneur should also be prepared for a number of important issues that he or she may face
in later years of the operations of the venture. Just as Teresa felt it was time to move on
when a great offer was made, the entrepreneur should always be considering the future and
possible exit strategies or scenerios that may involve ending the venture. Exit strategies
consist of three important issues: planning for succession, havesting the business, or bankruptcy which will be discussed in this chap0er.

EXIT STRATEGY
Every entrepreneur who starts a new venture should think about an exit strategy. A number
of possible exit strategies witl be discussed in the following paragraphs. Exit strategies include an initial public offering (IPO), private sale of stock, succession by a family member
or a nonfamily member, merger with another company, or liquidation of the company. The
sale of the company could be to employees (an ESOP) or to an external source (a person or
persons, or a company). The IPO, private sale of stock, and merger options are discussed
elsewhere in this book (see Chapters 12 andl4).
Each of these exit strategies has its advantages and disadvantages, which are discussed
in the following and in Chapters 12 and 14. The most important issue is that the entrepreneurs have an exit strategy or plan in place at the start-up stage, instead of waiting until it
may be too late to effectively implement a desirable option-

SUCCESSIONI OF BUSINESS
By 2015 millions of baby boomers will be retired, causing a signihcant gap in the workforce. This will be a critical issue for small businesses that are looking to ltnd successorsOne study suggests that only about 35 percent of small and mid-size businesses have a succession plan ready to be implemented. This problem can be serious when there is a sudden
need to replace a key executive or owner of a successful company.2 In the next sections we
will focus on important issues that can help the entrepreneur plan for the succession of the
business to either a family member, an employee, or an external party. Table 15.1 provides
a summary of important tips that should be considered in any succession plan.
If there is no one in the family interested in the business, it is important for the entrepreneur to either sell the business or train someone within the organization to take over. Each

of these transfer possibilities is discussed in the following sections.

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APTE R

15

SUC.CESSION PLANNTNG AND STMTEGIES FOR HARVESTING AND ENDING THE

VENruRE

43

Transfer to Famity Members

Successfully passing a business down to a family member faces tough odds- Experu estimate that half such attempts fail in the transition from first- to second-generation ownership. Only about 14 percent make it to the third generation. In addition, a 2007 survey of
1,000 family-owned businesses by the Family Finn Institute found that the leading causes

of failure were insufficient estae planning, failure to plan for the transition, and lack of
funds to pay estate taxes-3 An effective succession plan should also be communicated
clearly to all employees. This is particularly relevant to key personnel who may be affected
by the succession transition. The solution to minimize the emotional and nancial turmoil
that can often be created during a transfer to family members is a good succession plan.
An effective succession plan needs to consider the following critical factors:

'
.
.
.
.
.

The role of the owner in the transition stage: Will he or she continue to work full time?
Part time? Or will the owner retire?

Family dynamics: Are some family members unable to work together?

Income for working family members and shareholders.
The current business environment during the transition.

Treatment of loyal employees.

Thx consequences.

The transfer of a business to a family member can also create internal problems with
employees. This often results when a son or daughter is handed the responsibility of running the business without suffrcient training. A young family member's chances of success
in taking over the business are improved if he or she assumes various operational responsi-

bilities early on. It is beneficial for the family member to rotate to different areas of the
business to get a good penpective on the total operation. Other employees in these departments or areas will be able to assist in the training and get to know their future leader.
It is also helpful if the entrepreneur stays aound for a while to act as an advisor to the successor. As stated in Table 15.1, however, there should be a set date for when this transition
will end. Although having the entrepreneur act as an advisor during the trarisition stage can
be helpful to the successor in making business decisions, it is also possible that this can result
in major conflicts if the personalities involved are not compatible- In addition, employees who
have been with the hrm since start-up may resent the younger family member's assuming
control of the venture. However, if the successor works in the organization during this transition period, he or she canjustify assumption of the future role by proving his or her abilities.

Transfer to Nonfamity Members

Often, family members are not interested in assuming responsibility for the business. When
this occurs, the entrepreneur has three choices: train a key employee and retain some equity, retain control and hire a manager, or sell the business outright.
Passing the business on to an employee ensures that the successor (or principal) is familia with e business and the market. The employee's experience minimizes transitional
problems. In addition, the entrepreneur can take some time to make the transition smoother.

The key issue in passing the business on to an employee is ownership. Ifthe enhepreneur
plans to retain some ownership, the question of how much becomes an important area of

negotiation. The new principal may prefer to have control, with the original entrepreneur
remaining as a minority owner, stockholder, or consultant. The financial capacity and managerial ability of the employee witl be important factors in deciding how much ownership is
transferred. In many cases the transfer or succession of a venture can take many vears to meet

444

PART

FROM FUNOING THE VENruRE TO LAUNCHING. GROWING. AND ENDING THE NEW VENruRE

all the requirements of the parties involved Since evidence indicates that most entrepreneurs
wait until it is too late, it is important to begin the process long before there is a need to sell
or transfer the ownership of the business. The U.S. Department of Commerce indicates that
about 70 percent of successful ventures never make it to the second generation of ownership.
Ron Norelli was one of the exceptions because he realized the importance of a succession plan and hired a search fum to help him find a successor. Unfortunately, even though
he was able to hire someone who was to be groomed as his successor, the individual
decided that he did not want to take the risk. Norelli had to start the process all over again,
and this time conducted the search personally by using his network oftrusted business associa0es. After a number of candidates were evaluated and interviewed by the staff, they
settled on a suc@ssor who would, over a number of years, buy Norelli out. Norelli went
even further by promoting one of his staffto vice president with the intent that this individual would be a good candidate to succeed his successor The entie process took about five
years, and since he began the process early enough, it gave him the oppofunity to leave the
business gradually with the confidence that it would successfully continue in the future.a
If the business has been in the family for some time and the succession to a family member may become more likely in the future, the entrepreneur may hire a manager to run the
business. However, finding someone to manage the business in the same manner and with
the same expertise as the entrepreneur may be difficult. If someone is found to manage the
business, the tikely problems are compatibility with the owners and willingness of this person to manage for any length of time without a promise of equity in the business. Executive search hrms can help in the search process. It will be necessary to have a well-defined
job description to assist in identifying the right prson.
In nonfamily business situations, succession planning may take on a slightly different
approach. [n these businesses a key senior manager or group of managers may tre stepping
down or leaving the company. Since there are no family members involved, there may be a
need to consider replacements from either external or internal sources. For a partnership the
process may be clearly outlined in the partnership agreement and could simply involve a
predetermined choice. However, there could also be a need to go outside the partnership
and find a successor for the partnership. In this instance, as well as in an S corporation or
an LLC, where there may be only a small number of shareholders, the succession plan
should consider the following important issues:5

Senior management of the company must be committed to any succession plan. The
strategy must be one that everyone shares.

It is important to have well-defrned job descriptions and a clear designation of skills

The process needs to be an open one. All employees should be invited to participate so
that they will feel comfortable with the transition and thus minimize the possibility of
their leaving the company.

necessary to

fulfill any and all positions.

The last option is to sell the business outright to either an employee or an outsider. The
major considerations in this option are financial, which will likely necessitate the help of
an accountant and/or lawyer. This alternative also requires that the value of the business be

determined (see Chapter l2).

OPTIONS FOR SELLING THE BUSINESS

There are a number of alternatives available to the entrepreneur in selling the venture.
Some of these are straightforward, and others involve more complex financial strategyEach of these methods should be carefully considered and one selected, depending on the
goals of the entrepreneur.

CHAPTER

15

SU@ESSION PLANNING ANDSTRATEGIES FOR HARVESflNG AND ENDINGTHEVENruRE

M5

Direct Sale
This is probably the most common method for selling the venture. The entrepreneur may
decide to sell the business because he or she wants to move on to some new endeavor or
simply decides that it is time to retire. A sale to a larger company that can infuse muchneeded capital may also provide opportunities for the company to grow and reach larger
makets- If the entrepreneur has decided to sell the business but does not need to sell immethere ae a number of strategies that should be considered early in the process.o

diatel

'
.
.
'
.
'
.
'
.

A business can be more valuable if it is focused on a narrow, well-defined segment In

other words, a larger share in a small maket niche can be more valuable than a smaller
share in a large market.

The entrepreneur should concentrate on keeping costs under conftol and focus on
higher margins and profits.
Get all frnancial statements in order, including budgets and cash flow projections.
Prepare a management documentation of the business explaining how the business is
organized and how it operates.
Assess the condition of capital equipment. up-to-date or state-of-the-art equipment
can enhance the value of a company.

Get tax advice, since the sale of a corporation will involve different tax considerations
than those for a partnership, LLC, or S corporation.
Get nondisclosures from key employees.
Try to maintain a good management team, allowing them to have day+oday contact
with key customers to lessen the firm's dependence on owner--customer relations.
There is no substitute for advance preparation and planning.

one of the important considerations of any business sale is the type of payment the
buyer will use. Often, buyers will purchase a business using notes based on future prohts.
If the new owners fail in the business, the seller may receive no cash payment and possibly
may have to take back the company, which is struggling to survlve.
Business brokers in some instances may be helpful, since trying to actually sell a business will take time away from running it. Brokers can be discreet about a sale and may have
an established network to get the word around. Brokers earn a commission from the sale of
a business. Generall these commissions are based on a sliding scale starting at about
10 percent for the hrst $200,000. The best way to communicate the business to potential
buyers is through the business plan. A five-year comprehensive plan can provide buyers of
the business with a future perspective and accountability of the value ofthe company (see
Chapters 7 and 8).
As indicated earlier, an entrepreneur may hnd that selling out to a larger company can
provide much-needed resources to achieve important market goals. It has also become a
more cornmon exit strategy given that IPOs, the more traditional growth funding option,
have become more rare given the current economic environment.
Frederick Schilling, the founder of Dagoba Organic Chocolate, realized that selling his company to The Hershey Company would allow him to continue operations independent of the
parent company and more importantly, would allow hirn to grow Dagoba to reach more people. More and more organic-food entrepreneurs like Schilling are selling out to larger companies to take advantage of their strong distribution networks to reach broader audiences.T
unlike Schilling, who remains as CEo, the role of an entrepreneur who sells to an employee or passes the business on to a family member may vary depending on the sale agreement or contract with the new owner(s). Many buyers will want the seller to stay on for a
short time to provide a smooth transition. Under these circumstarrces, the seller (entrepreneur)

PA

RT

FROM FUNDING THE VENTURE TO LAUNCHING, GROWING. AND ENDING THE NEW VENruRE

should negotiate an employment contract that specifies time, salary, and responsibility. If the
entrepreneur is not needed in the business, it is likely that the new owner(s) will request that
the entrepreneur sign a-o agreement not to engage in the same business for a specified number
:f years. These agreements vary in scope and may require a lawyer to clarifu details.
An entrepreneur may also plan to retain a business for only a specified period of time,

ii[t#:":Trt:i+,:[i::{r:#:t1ff.liTl',ili,:r1"#:tr['trJr,5
Employee Stock Option Ptan
enploree stock

option
to
the

plan (ESOP) A twothree-year plan to sell

business to

employees

Under an employee stock option plan ( ESOP), the business is sold to employees over a period
of time. The ESOP establishes a new legal entity, called an employee stock ownership trust,
that borrows the money against future profits. The borrowed money then buys the owner's
shaes and allocates them to individual employees' retiement accounts as the loan is paid off.
Ihe ESOP has the obligation to repay the loan plus interest out of the cash flow of the business. Typically, these ESOPs are a way to reward employees and clarify the succession
process. In addition, ESOPs result in significant stock values for employees, provided that the
.'ompany continues to succeed.
Presently there are about t1,500 ESOP companies in the United States, of which
approximately 2,5A0 are wholly owned by the ESOP. ESOPs account for about 50 percent

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The ESOP has a number of advantages. First, it offers a unique incentive to employees
that can enhance their motivation to put in extra time or effort. Employees recognize that
they are working for themselves and hence will focus their efforts on innovations that con-

tribute to the long-term success of the venture. Second, it provides a mechanism to pay
back those employees who have been loyal to the venture, particularly during more difficult times. Third, it allows the transfer of the business under a carefully planned written
agreement. Finally, the company can reap the advantage of deducting the contributions to
the ESOP or any dividends paid on the stock.
ESOPs, due to a new law passed in 1996, are now possible for S corporations. However,
there are some impoftant differences in the tax treatment between the C corporation and the
S corporation because of the pass-through feature of the S corporation (see Chapter 9). Because of the new tax law, the S corporation pays no income tax on the portion ofthe stock
owned bv the ESOP.
However, in spite of its favorable attributes, the ESOP hs some disadvantages. This
type of stock option plan is usually quite complex to establish. It requires a complete valuation of the venture to establish the amount of the ESOP package. In addition, it raises issues such as taxes, payout ratios, amount of equity to be transferred per year, and the
amount actually invested by the employees. The agreement also must specify if the em-

ployees can buy or sell additional shares of stock once the plan has been completed.
Clearly, because of the complexity of this type of plan, the entrepreneur will need the advice of experts if this type of plan is selected. A simpler method may be a more direct buyout by key employees of the venture.

Management Buyout
It is conceivable that the entrepreneur only wants to sell or transfer the venture to loyal, key
employees. Since the ESOP described earlier can be rather complicated and expensive, the
entrepreneur may find that a direct sale would be simpler to accomplish.

BANKERS, AND BUSINESS ASSOCIATES

Who should be made.aware when a venture s in. and lryto turn the business around. Bankers can be
trouble?Howmuch'responsibilitydoestheentrepre-.yourfinancial bestfriendandcanrecommendwaysto
neur have to his or her employees? How much

you tell your banker? Should clients be made

should
aware

save mQney and generate more cash flow. your clients

and suppliers can also support turnaround efforts by

of your problems? These are all legitimate yet difficult helping to provide needed cash during the crisis. one
questions that an entrepreneur may struggle with example was an entrepreneur who ran out of cash to
when the business is on the verge of banki'uptcy. produce a product being sold by a large supermarket
Some may feel that their only responsibility is to chain. A meeting with the important client that retheir family and themselves. Trying to get out of the vealed the situation (brought on by a competitor,s
dilemma with the least effect on your personal repu- lawsuit that was settled) led to a simple solution. The
tation and financial well-being could in fact make supermarket appreciatedthe honestyof the entreprematters worse. Ethically and morally the entiepre- neur and agreed to prepay for all orders so that there
neur is the leader of the organization, and trying to would be sufficient cash to produce the product.
avoid responsibility will not rectifythe situation.
The entrepreneur needs to consider the past efIn fact. there is evidence tg i4{i.cate that involving forts of employees who made him or her succesful in
your employees. bankec or other business associates the first place. Thus, the best solution is participation.
can actually improve matters. Employees may take Get help rather than taking the selfish and perhaps
pay cuts or stock options to stay on with the company immoral alternative. Honesty is the best strategy.
Management buyouts usually involve a direct sale of the venture for some predetermined
price. This would be similar to selling one's house. To establish a price, the entrepreneur
would have an appraisal of all the assets and then determine the goodwill value established
from past revenue.
Sale of a venture to key employees can be for cash, or it can be financed in any number
of ways. A cash sale is unlikely if the value of the business is substantial. Financing the sale
of the venture can be accomplished through a bank, or the entrepreneur could also agree to
carry the note. This may be desirable to the entrepreneur in that the stream of income from
the sale would be spread out over a determined period of time, enhancing cash flow and
lessening the tax impact. Another method of selling the venture would be to use stock as
the method of transfer. The managers buying the business may sell nonvoting or voting
stock to other investors. These funds would then be used as a full or partial payment for the
venture. The reason that other investors would be interested in buying stock or that a bank
would lend the managers money is that the business is continuing with the same management team and with its established track record.
Other methods of transferring or selling a business are through a public offering or even
a merger

with another business. These topics are discussed in Chapter 14. Before determin-

ing the appropriate selling strategy, the entrepreneur should seek the advice of outsiders.
Every circumstance is different, and the actual decision will depend on the entrepreneur's
goals. Case histories of each of the preceding methods can also be reviewed to be able to
effectively determine which option is best for the given circumstances.

BAN KRUPTCY_AI{ OVERVI EW

Failure is not uncommon in many new ventures, especially in light of the poor global economic environment, the wars in Iraq and Afghanistan, and the continued battle against terrorism. According to the Small Business Administration, about half of all new start-ups fail

44

PART

FROM FUNDING THE VENTURETO LAUNCHING, GROWING, AND ENDING THE NEWVENTURE

in their first years. The failures are personally painful for the entrepreneur and too often

if the entrepreneur had paid more attention to certain critical

factors in the business operation. tt is important to understand the issues involved in bankruptcy since it does occur and there may even be an opportunity to use the bankruptcy options to get the company back on solid hnancial ground.
Prior to a recent tightening of the bankruptcy laws by Congress in 2005, bankruptcies
were running at about 1.6 million per year. In 2006 total hlings dropped to about 618,000,
a definite reflection of the new laws. Business frlings represented about 20,000 of this total. However, it should be noted that many of the nonbusiness frlings could be failed proprietorships, partnerships, or home businesses. Since the recent economic crisis in 2008
and 2009, total frlings have again jumped to more than l. 1 million, of which about 44,000
were business frlings. It is also important to understand that both business and nonbusiness
bankruprcy frlings are divided by chapter filings, which will be explained in more detail later.
The most common type of business bankruptcy is Chapter 7, or liquidation, which accounted for about 69 percent ofthe total in 2008- Chapter 11 bankruptcy provides an opportunity for a business to reorganize, pteparc a new business plan (acceptable to the
courts), and then, with time and achievement of new goals, to return to normal business operation. These bankruptcies represented about 19 percent of all business filings in 2008.
The remaining business bankruptcies (about 12 percent) are Chapter t3 filings, which
allow creditors to be repaid in an agreed-upon installment plan.e
Bankruptcy is a term that has been on the minds of many entrepreneurs in the past couple ofyears, as businesses face a weak economy, increased competition, and rising costs of
doing business. As stated before, bankruptcy may not always mean the end of a business
since it can offer the entrepreneur an opportunity to reorganize under Chapter ll or merge
with another company. The results of each bankruptcy filing can be quite distinct because of
the nature of the business or the uniqueness of an industry. Some of the following examples
describe the possible mix of results or experiences that can occur from a bankruptcy fltling.
Although a Chapter 11 filing is designed to allow a company to reorganize and then
emerge with its operations again, there have been some serious concerns given the new
restrictions signed into law in 2005. The Sharper Image filed for Chapter 1l bankruptcy in
February 2008. Its intent was to close 90 of its 184 stores to save signihcant operating
costs. However, because the new law has lessened the time that Chapter 1l ltrms can
remain under court control, the management of The Sharper Image felt that there was not
enough time to frnance the restocking of the remaining stores, so the company instead
chose liquidation to retain some value in the assets. Other retailers such as Wickes Furniture, Whitehall Jewelers, Levitz, and Bombay Company have had similar experiences' It is
apparent that the new time restrictions have been particularly harsh to retailers.
In 2005 JeffYarbrough hled for Chapter 13 bankruptcy after his restaurants in Dallas
failed. In wanting to share his experiences and to explain that there was no shame in bankruptcf Jeff described how he survived. Since filing for bankruptcy he worked three jobs to
provide for his family as well as pay off the debt. He is now running his own public relations hrm and also brokering commercial leases, which has allowed him to pay off the debts
from his failed restaurants. His biggest lesson and response to entrepreneurs is to avoid extensive debt at any cost.ro
In February 2004 disaster struck for 72 franchise stores when Ground Round Grill & Ba
announced that it was filing for bankruptcy. The franchise stores were owned by local proprietors under a license from the chain. The company also owned 59 restaurants. Founded in
1969, the restaurant had been a pioneer in the casual dining industry but now was faced with
debt to unsecured creditors of between $10 million and $50 million. Sell-offs of a number of
the restaurants had provided some funds, but any ability to survive the bankruptcy hit a snag
could have been prevented

CHAPTER

15

SUCCESSIONPLANNINGANDSTRATEGIESFORHARVESNNGANDENDINGTHEVENTURE

4g

when financing was delayed and the company defaulted on its loan payments.
The franchisees,
howeveg made some quick and innovative decisions and decided to
rganize themselves into
a cooperative- With this new organization they were able to
raise
int"rnul and extmal
funds to buy the brand from the bankruptcy court. As of early 2009
the cooperative operats 46
of the remaining restaurants from the original 72 that existed at the time
oi the declarcd bankruptcy. The new business model of a cooperative seems to be working
as a number of the original franchise owners have now opened new restaurants.ll
Bankrate is one of a few Internet stocks that were able to survive the dot-com
bubble
burst' After an IPo at $13 per share in May 1999, the stock reached
a low of gr per share

,o-.

in August 2002. Since that low point, the company has made a complete turnaround,
primarily due to the leadership of Elizabeth DeMarse. The company wlu slte lists comparative rate tables and fee information on 100 financial producis such as mortgages,
credit
cards, auto loans, and money markets. Most of its revenue, however, is
accumulated from
advertising on the site. Now under new leadeship, the company has reached
new proht
milestones in 2008 (reported net income of over $20 million). It has also enhanced
its product line with a network of companies such as Interest.com, Mortgage-calc.com,
Nationwide Card Services, and Savingforcollege.com. t2
Some lessons that can be learned from those who have experienced bankruptcy
are as
follows:

'
'
'

Chapter

I1 bankruptcy

Provides the opportunity

to reorganize and make
de venture

more solvent

Many entrepreneurs spend too much time and effort trying to diversify in markets
where they lack knowledge. They should focus only on known markets.
Bankruptcy protects entrepreneurs only from creditors, not from competitors.
It's difficult to separate the entrepreneur from the business. Entrepreneurs put
everything into the company, including worrying about the future of their employees.

'

Many entrepreneurs do not think their businesses are going to fail until it's too late.
They should frle early.

'

Bankruptcy is emotionally painful. Going into hiding after bankruptcy is a big

mistake. Bankruptcy needs to be shared with employees and everybody else involved.

As tbe preceding examples indicate, bankruptcy is serious business and requires

some important understanding of its applications. The Bankruptcy Act of 1978 (with
amendments
added in 1984 and 2005) was designed to ensure a fair distribution of assets
to creditors, to
protect debtors from unfair depletion of assets, and to protect debtors from
unfair demands
by creditors. The Bankruptry Act provides three alternative provisions for a f.m
ner or at a
position ofinsolvency. The three alternative positions are (l) reorganization, or
Chapter I I
bankruptcy; (2) extended rime payment. or chapter I3 bankruptiy; and (3) liquidation, or
Chapter 7 bankruptcy. All attempt to protect the troubled entrepreneur as well as provide a
reasonable way to organize payments to debtors or to end the venture.

Chnpter 13 bankruptcy
Voluntarily allows
individuals with regular
income the opportunity
to mke extended time
payments

Chapler 7 bankruptcy
Requires the venture
to liquidate, either

voluntarily or
involuntarily

CHAPTER 1 I_REORGAN IZATI ON

This is the least severe altemative to bankruptcy. In this situation the courts try to give the
venture "breathing room" to pay its debts. Usuall this situation results when a venture
has cash
flow problems, and creditors begin to pressure the f,rm with lawsuits. The entrepreneur feels

that with some time, the business can become more solvent and liquid to meet its debt requirements. However, as we have seen in the preceding example, the new time restrictions
regarding how long a Chapter 11 firm may continue under court control have made it particularly
difficult for firms in retailing to reorganize effectively. However, it is still in the best interests
ofa company that has a chance to become solvent to seek protection under this option.

450

PART

FROM FUNOING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE

A major creditor, any party who has an interest, or a group of creditors will usually present the case to the court. Then a plan for reorganization will be prepared to indicate how the
business will be turned around- The plan will divide the debt and ownership interests into
two groups: those who will be affected by the plan and those who will not. It will then specify whose interests will be affected and how payments will be made.
Once the plan is completed, it must be approved by the court. All bankruptcies are
now handled by the U.S. Bankruptcy Court, whose powers were restructured under the
Bankruptcy Amendments and Federal Judgeship Act of 1984. Approval of the plan also
requires that all creditors and owners agree to comply with the reorganization plan as
presented to the courts. The decisions made in the reorganization plan generally reflect
one or a combination of the following:13

l.

Extension. This occurs when two or more of the largest creditors agree to postpone any
claims. This acts as a stimulus for smaller creditors to also agree to the plan.

2. Substitution. If the future potential of the venture looks promising enough, it may
possible to exchange stock or something else for the existing debt.

3.

be

Composition settlenrcnt. The debt is prorated to the creditors as a settlement for any debt.

Even though only 20 to 25 percent of those frms that file for Chapter I I bankruprcy will
make it through the process, it does present an opportunity to hnd a cure for any business
problems. Some of these problems are resolvable, and without the Chapter 11 protection
even these 20 to 25 percent that file would never have the opportunity to succeed. It should
also be noted that some firms that make it through the process often hnd that they cannot
succeed and thus either must liquidate or hnd a buyer.
It is generally believed by experts that one of the primary reasons companies do not successfully come out of Chapter 1t bankruptcy is that they wait too long before frling for protection. In May 2005, HeatherAntonelli filed for Chapter 7 bankruptcy. She and her mother
JoAnn had opened a furniture wholesaling business, Eminence Style, in 1996 and had
achieved steady growth in sales, reaching $3 million in 2000. Then in 2ff)1 a buyer from
Sears ordered g2 million worth of tables. The production of this large order necessitated frnancing, which Heather secured from the SBA, the Bank of America, and friends and family. She found a manufachrer in Hungary and made the one-third deposit and budgeted the
rest of the money for the final payment. Unfortunately, the value of the dollar took a dive
and her cost increased by one-third. Only a minimal profit was made, and then the buyer at
Sears was replaced by someone who had no interest in reordering. Competitors found
cheaper manufacturing in China, and Antonelli found she could no longer compete on
price. Customers then switched to the lower-price competitors and, as sales declined, the
Bank of America demanded payment of the full amount of the debt. All during this period
Heather still felt compelled to avoid bankruptcy and get things back on track. However, after much deliberation and with advice from a business consultant, she finally decided to shut
down the company and file for Chapter 7 bankruptcy. She now agrees that she waited too
long but, on a positive note, feels she learned some important lessons that will help her to
make better decisions in the future.la
As in Heather's case, entrepreneurs have a tendency to ignore the warning signs of bankruptcy and hold on until there is an emergency, such as running out of cash. Recognizing
the signals may give an entrepreneur the opportunity to develop a strzltegy or plan.

Surviving Bankruptcy
The most obvious way to suvive bankruptcy is to avoid it altogether. However, since bankruptcy is becoming such a common occumence, it may be helpful for the entrepreneur to

Lugging a stash of fresh batteries iin,t somethinq

Aaron LeMieux wanted to do while hiking the Ap_
palachian Trail. He had no alternative back jn 1996.
but he hopes he's got one for hikers, runnrs, and
even walkers. lt's called the npower personl Energy
Generator. The 9-o2., 9-in.-long cylinder harvests ki_
netic energy from the human fride and turns it into
2.5 watts of electricity, enough for an ipod, cell phone,
or other gadgets. LeMieux invented the generator af_
ter convincing his wife that he should quit his job as a
management consultant in Cleveland. He then ,,emp_
tied out the savings account,'. netting g20,000. After

to bring in $l.S million from

government agencies
and venture capitalists. He and hs'one fufl-time and
seven part-time employees aren,t paid- The gen_

*Souce: Reprinted from the

July

2I,

2O09, issue ofBusinessWeek

have a plan should he or she hnd it necessary to declare bankruptcy. Some

suggestions
survival are listed here:

'

Bankruptcy can be used as a bargaining cbip to allow the entrepreneur to voluntarily

restructure and reorganize the venture.

'

File before the venture runs out of cash or has no incoming revenue so that expenses

'

Don't file for chapter 1l protection

'
.
'

for

not protected by bankruptcy can be paid.

unless the venture has a legitimate chance

recovery.

of

Be prepared to have creditors examine all hnancial transactions for the last 12
months,
seeking possible debtor fraud.

Maintain good records.

understand completely how the protection against creditors works and what is
necessary to keep it in place.

'
.

If there is any litigation in existence, transfer it to the bankruptry courl which may be
a more favorable forum for the entrepreneur.
Focus efforts on preparing a realistic financial reorganization plan.

an
gi
s and could increase
these suggestions
that anyone could

be neces_
ll prevent

ns out of

451

452

PART

FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE

CHAPTER 13_EXTENDED TIME PAYMENT PLANS

As of October L7,2005, the ability of an entrepreneur to file for a Chapter 7 bankruptcy is
now more diffrcult. The reforms in the Bankruptcy Code that were signed into law in April
2005 are based on the argument that a person shouldbe obligated to repay some ofhis or
her debt (Chapter 13 bankruptcy); therefore, these reforms make it more diffrcult to walk
away from all debt by filing for Chapter 7 bankruptcy. Under this new law, individuals are
required to obtain credit counseling within six months of frling and to take a means test to
ascertain if they are eligible for either Chapter 7 or Chapter 13 bankruptcy. The means test
states that individuals may not file for Chapter 7 bankruptcy if their income is at or above
the state income median.
Under Chapter 13 bankruptcy, the individual creates a frve-year repayment plan under
court supervision. In each case, a court-appointed trustee receives money from the debtor
and then is responsible for making scheduled payments to all creditors. This reform is more
favorable to creditors than the old law. The only problem is that, according to the Bankruptcy lnstitute, about two of every three Chapter 13 filers ultimately fail to meet their
planned obligations, thus resulting in a Chapter 7 filing.
The future effects of these reforms are still unknown. There ae some who argue that this
new law will stifle entrepreneurial activity. On the other hand, creditors have long been the
losers under the old law since it was so easy for individuals to file a Chapter 7 bankruptcy
and eliminate all their debt.ls

CHAPTER 7_LIQUIDATION

vohuary bankruptc
Entrepreneur's decision to

file for bankruptcy

i

ttt o lu

n ta

ty

b a

n k r u p c -,t

Petition of bankruptcy

filed by creditors without

consent of entrepreneur

The most extreme case of bankuptcy requires the entrepreneur to liquidate, either voluntarily or involuntarily, all nonexempt assets ofthe businessIf the entrepreneur files avoluntarl, bankruptcy petition under Chapter 7, it constitutes
a determination that his or her venture is bankrupt. Usually, the courts will also require a
current income and expense statement.
Table 15.2 summarizes some of the key issues and requirements under the involuntary
bankruptcy pefition. As the table indicates, an involuntary bankruptcy can be very complicated
and can take a long time to resolve. However, liquidation is in the best interests of the entrepreneurifthere is no hope ofrecovering from the situation.

Number and Claims

Requirements

of Creditors

Debts are not being paid

as they become due.

least 3

lf

12

or more creditors, at

clams

with unsecured

totaling $5,000 must

Rights and Duties

of Entrepreneur

Trustee

b9 .
.-.:
in bad,faith.

lnterim trustee appointed

lf involuntary petition

Secomes by law owner'of

Damages may
.'
recovered if creditor files

Elected by creditors.
by

cqurl

-,'

sign petition.
Custodian ppointed
within 120 days of fifing

creditor whose unscured

sign

Considered insolvnt

when fair value of all'

than debts.

Called a blance sheet

test.

claim is at least $5,000 rnust

fe]tt1on,

assets is less

lf fewer than l2 creditors,

,

the petition.

A proof of claim mst be

filed within 90 days of first
meetng of creditors.

is

,
.

dismisied by courl.<osts,
fees, or damages may be
awarded.

all property cosidgied

Must file a lst of creditors

Can set aside petitiqns;

with courts. Must file

current income and '
exoense statement.

transfei of pioperty to

nonexempt for ,:
liquidation. .

,'

creditor under certin

conditions.

CHAPTER

15

SUCCESSION PLANNING AND STMIEGIES FOR HARVESTING AND ENDINGTHE

VENruRE

453

STRATEGY DURING REORGANIZATION

Normall reorganization
takes a signihcant amou
the process by taking the

itors. communicating wi
covered.
The key to enhancing the bankruptcy process is keeping creditors abreast of how the

Bankruptry should be a last resort for the entrepreneur. Every effort should be made to
avoid it and keep the business operating.

KEEPING THE VENTURE GOING

noted in this chapter's opening prohle that not all bankruptcies have unfacascioli, CEo of Lakeport Brewing, has led the emergence of her
Chapter I I bankruptcy to its current position as a formidable player in the

s. Teresa

market.

starts
are
offailure

Any entrepreneur who

the mistakes of others. There

ing and reduce the risk

learn from,
venture go_
eam howto

avoid failure.
Table 15.3 summarizes some of the key factors that can reduce the risk of business failure. The entrepreneur should be sensitive to each of these issues regardless of the size or
type of business.

Many entrepreneurs have conhdence in their ab

be successful in their field- This confidence allows
tions by implementing new strategies and direction
cess where others may have failed. Two examples of this approach are Eli and Sheri

454

PART

FROM FUNDINGTHEVENTURETOLAUNCHING,GROWING,AND

ENDINGTHENEWVENTURE

after the sale has led to an expansion to three stores, an effective Web site, and sales in
the seven figures.16
Nathaniel Bernier was the owner of Wild Rufus Records in the seaside town of Camden,
Maine. He found that CD sales were declining rapidly not only in his store but nationally.
A local Wal-Mart added to the problem by increasing its music section. Bernier decided,
rather than try to compete in CD sales, he needed to change his strategy before he found
himself bankrupt. His solution was to focus on selling old technology-vinyl recordsbundled with pass codes allowing customers to download MP3 versions of the same song.
He believed that this offered customers the best of both worlds, a rich analog sound of vinyl
for home use and a digital version they could take anywhere. His unique strategy has resulted in an increase of sales of 100 percent over the last year.lT
Both entrepreneurs in these examples recognized the need to develop different strategies
or face failure. In the hrst case we see the need to develop a unique mix of products that
would help build a strong store image. In the second case the entrepreneur was faced with
ultimate failure unless he could frnd a unique marketing strategy to increase sales and profits. We saw in Chapter 8 of this textbook the importance of market planning to help prepare
for situations such as those described.
Good cash projections are also a serious consideration for the entrepreneur. Cash flow is
one of the major causes for an entrepreneur to have to declae bankruptcy. Thus, in preparing
cash projections, entrepreneurs should seek assistance from accountants, lawyers, or a federal
agency such as the Small Business Administration. This may prevent the situation from
reaching the point where it is too late for any hope of recovery.
Many entrepreneurs avoid gathering suffrcient information about the maket (see Cha
ter 7 of this textbook). Information is an important asset to any entrepreneur, especially
regarding future market potential and forecasting the size of the immediate attainable market. Entrepreneurs will often try to guess what is happening in the market and ignore the
changing marketplace. This could spell disaster, especially if competitors are reacting more
positively to the market changes.
In the early stages of a new venture, it is helpful for the entrepreneur to be aware of
stress points, that is, those points when the venture is changing in size, requiring new survival strategies. Early rapid rises in sales can be interpreted incorrectly so that the venture
hnds itself adding plant capacity, signing new contracts with suppliers, or increasing inventories, resulting in shrinking margins and being overleveraged. To offset this situation,
prices are increased or quality weakened, leading to lower sales. This becomes a vicious

circle that can lead to bankruptcy.

Stress points can be identifred based on the amount of sales. For example, it may be possible to recognize that sales of $1 million, $5 million, and $25 million may represent key
decision marks in terms of major capital investment and operational expenses such as hiring new key personnel. Entrepreneurs should be aware of the burden of sales levels on

capital investment and operational expenses.

WARI.{ING SIGNS OF BANKRUPTCY

Entrepreneurs should be sensitive to signals in the business and the environment that may
be early waming signs of trouble. Often, the enffepreneur is not aware of what is going on
or is not willing to accept the inevitable. Table 15.4 lists some of the key early warning
signs ofbankruptcy. Generally, they are interrelated, and one can often lead to another.
For example, when management of the hnancial affairs becomes lax, there is a tendency
to do anything to generate cash, such as reducing prices, cutting back on supplies to meet
orders, or releasing important personnel such as sales representatives. A new ofFrce

CHAPTER

15

SUCCESSIONPLANNINGANDSTRATEGIESFORHARVESTINGANDENDINGTHEVENTURE

455

furniture business catering to small or medium-sized businesses illustrates how this can
happen. Top management of the firm decided that moving merchandise was its top priority.
Sales representatives earned standard commission on each sale and were free to
reduce
y cost or break-even awareness,
s. They still received their comventure eventually lost substanWhen an entrepreneur sees any of the warning signs in Table 15.4, he or she should iman attomey. It may be possible to prevent bankruptcy
operation to improve the cash flow and profitability
are discussed later in this chapter.

STARTING OVER

failed to get patents. A fourth invention was patented but eventually wiped him out because

of lack of capital and poor sales. Howeveq Borden was persistent and convinced that his
vacuum condensation process, giving milk a long shelf life, would be successful. At 56,
Borden had his first success with condensed milk.
Over the years, other famous
failures before
finally achieving success. Rowlan
Ron Berger (of
National Video), and Thomas Edi
repreneurs who
lived through many failures.
ofentrepreneurs were discussed in
urs are likely to continue starting
they learn from their mistakes, and
ed previously, assuming that he or
take again.t8

Generally, entrepreneurs who have failed in their endeavors tend to have a better undestanding and appreciation for the need for market research, more initial capitalization, and

456

PART

FROM FUNOING THE VENTURE TO LAUNCHING, GROWING. AND ENDING THE NEW VENTURE

songer business skills. Unfortunately, not all entrepreneurs learn these skills from their
experiences; many tend to fail over and over again.
However, business failure does not have to be a stigma when it comes time to seek venture capitat. Past records will be revealed during subsequent start-ups, but the caeful entrepreneur can explain why the failure occurred and how he or she will prevent it in the future,
restoring investors' confidence. As discussed in Chapter 7, the business plan will help sell
the business concept to investors. It is in the business plan that the entrepreneur, even after
many failures, can illustrate how /js venture will be successful.

THE REALITY OF FAILURE

Unfortunately, failure does happen, but it isn't necessarily the end. Many entrepreneurs are
able to successfully turn failure into success. It is one of the important historical chaacteristics ofentrepreneurs that we have continually identihed throughout this text- Since failure can happen, there are also some important considerations that should be mentioned if

it should occur.
Fist and foremost, the enffepreneur should consult with his or her family. As difhcult

as

it is for the entrepreneur to deal with bankruptc it is even more so for spouses. Problems
occur because the spouse usually has no control over the venture's operations unless it is a
family-operated business. As a result, he or she may not even be aware of any bankuptcy
threats. Thus, the hrst thing the entrepreneur should do is sit down with his or her spouse
and explain what is happening. This discussion will also help alleviate some of the stress of
dealing with bankruptcy.
Second, the entrepreneur should seek outside assistance from professionals, friends,
and business associates. Although not all of these people may be sympathetic, it is

usually not difhcult to find individuals among these groups who will be supportive. Professional support is also available from the Small Business Administration (SBA),
universities, the Senior Corps of Retired Executives (SCORE), and small-business development centers.
Third, it is important to not try to hang on to a venture that will continually dain resources if the end is inevitable. tt is better to consider the time spent trying to save a dying
business as an opportunity cost. The time spent could be more effectively and profitably
used to either start over or do something else. If a turnaround is considered possible (see
the following discussion), it is wise to set a time frame and, if it is not accomplished in that
time frame, to simply end the venture.

BUSINESS TURNAROUNDS
We have discussed a number of turnaround examples throughout this chapteq such as the
opening profile on Lakeport Brewing, Bankrate, and Wild Rufus Records. All were faced

with declining sales and earnings that either resulted in bankruptcy or threatened bankruptcy. What we have learned from successful examples of tumarounds is summarized and
discussed in the next few paragraphs.re
Dwing a business's life cycle it is likely that an entrepreneur will face adversity, perhaps
because of external factors (the economy; competition; changes in consumer needs; technology; or unpredictable acts such as war, terrorism, or weather); or the adversity may be
self-inflicted (that is, due to poor management). The severity of the adversity can result in
bankruptcy or in a need to refocus the business and strive for a turnaround. The process of
turnaround can take many directions, but there are some basic principles and support that
can be considered to help the entrepreneur.

CHAPTER

15

SUCCESSION PLANNING AND STRATEGIES FOR HARVESTING

ANO ENDING THE

VENruRE

457

IN REVIEW

SUMMARY
This chapter of the textbook deals with exit strategies that the
entrepreneur
consider. These decisions can involve finding a successor to the venture,

will need to
selling the business either totally or partially, or ending the venture because
of bankruptcy. All of these
likely scenarios are real and common among small businesses. Thus, to Le prepared
the
entrepreneur should understand each of these issues and be prepared with an
exit plan
before it is too late. one of the venture-ending decisions that an entrepreneur
may face

458

PART

FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE

is succession of the business- lf the business is family owned, the entrepreneur would
likely seek a family'member to succeed. Other options. if no family member is available
or interested, includetransferring some or all of the business to an employee or outsider
or hiring an external person to manage the business. Direct sale of the business, employee stock option plans. and management buyouts are alternatives for the entrepre-

neur in selling the venture. These are all exit strategy options for the entrepreneur and
need to be planned for,early so that crises are minimized.
.Even though thq intent of all entrepreneurs is to establish a business for a long
time, many problems'can cause these plans to fail. Since about one-half of all new ventures fail in their first four years of business, it is important for the entrepreneur to understand the options fqr either ending or salvaging a venture.
'Bankruptcy offersthree optons for the entrepreneur. Under Chapter 1 1 ofthe Bankf uptcy Act of 1 978 (arnended in 1984 and again in 2005), the venture will be reorganized
under a plan approved by the courts. With this plan the entrepreneur strives to revitalize the financial condition of the venture and return to the market with new firategies.
Chapte'13 of the Bankruptcy Act provides for an extended time payment ptan to
cover outstanding debts. The 2005 amendment to the Bankruptcy Act has made this
particular choice more likely first option-and an option that must be exhausted before the entrepreneur is allowed to file for Chapter 7 liquidation. The courts feel that
individuals should be required to pay back sorne of their debt, and therefore this
amendment makes it more difficult to file for Chapter 7 liquidation. lf the individual is
unable to make extended payments, then liquidation, either voluntarily or involuntarily, is the final-option.
Keeping the business going is the primary intent of all entrepreneurs. Avoiding excessive optimism. preparing good marketing plans, making good cash projections,
keeping familiar with the market, and being sensitive to stress points in the business
can help keep the business operating.
Entrepreneurs can also be sensitive to key warning signs of potential problems. Lax
management of finances, discounting to generate cash. loss of key personnel, lack of
raw materials, nonpayment of payroll taxes, demands of suppliers to be paid in cash,
and increased customer complaints about service and product quality are some of the
key warning signs that a firm is headed for bankruptcy. lf the business does fail, however, the entrepreneur should always consider starting over. Failure can be a learning
process, as evidenced by the many famous inventors who succeeded after many failures-

RESEARCH TASKS
l.

Find three accounts by entrepreneurs in which they describe their experience with
poorly performing firms and the process of going through bankruptcy. In what ways
were their experiences similar? In what ways were they different? Did emotions play
a role? Did the entrepreneurs learn from the experience?
2 Interview a member of a family business and gain a deeper understanding of the
issues surrounding the management of such a business. especially those related to
successton.

Write an account of the emotions that you felt when someone or something
close to you was lost forever (you will not be required to present this to the class).
How did these emotions impact your ability to perform other tasks? How did
you overcome these negative emotions? To what extent do you believe that
entrepreneurs go through a similar process when their businesses fal?

CHAPTER

15

SUCCESSION PLANNING AND STRATEGIES FOR

HARVESTING AND ENDNG THE

VENruRE 459

CLASS DISCUSSION
1. lf your family

fi}a

had
a

would

succession to the next

srnooth, or would there be the
would be a,,fai,,way to set up

generation (you

potential for conf

succession?

4. The following role-prays require you to think and act

being described in each situation.

SELECTED

as

if you were the person

EADINGS
; and Douglas W. Naffziger. (May 2003). A Compari_
Succession planners and Nonplanners. Journal of
57, no. 3, pp. 85_92.
wned businesses that had a business succession plan
a plan. Survey results indicate that a success ion'plan
tax planning, and the ownership structure.

Davis- James. (May 2003). Staking your Life on a Betting

Future. Accountancy, vor. 13.1,
1317. pp.54-56.

no.

Z
Hoffman, John. (Summer 200g). pranning Earry
Event. Family Business, pp.32-37.

ef the factors that need to be con_

ur"ut.

The article includes a discus_

nagement presentations, and due

wiil Maximize Return from a Liquidity

460

PART

VENN'RE
FROM FUNDING THE VENTURE TO LAUNCHING. GROWING, AND ENDING THE NEW

strategic buvan event, the

and a trusted
be met in the
sale negotiations.
PlanJackson, Kirk. (July 2005). case Study of a Succession Plan. Journal of Financial
39427,
no.
18,
vol.
ning,
PP.
a cse
This article relates the experiences of the author in succession planning' /t rs
led to decistudy of the author's faity business and how various conflict situations
succession of the business.
(Aprlt 2009). contrasting strategic Response to Economic Recession in
scott.
Latham,
start-Up versus Eitablished Software Firms. Journa! of Smatl Eusiness Management'

sions

for

vol. 47, no. 2, PP. 180-20'l .

tend to pursue cost-cutting strategies.

Maddy,Monique.(2000).DreamDeferred:TheStoryofaHigh-TechEntrepreneurina
Low-Tech World. Haruard Buslness Review vol.78, no' 3, pp' 56-69'
Monique Maddy discusses the important /essons that the falure of her start-up'
Adesemi, taughT her about starting a business in an emerging-market country
phillips, Edward A. (winter 2006). Bankruptcy Law: changes in Protection Make Planni

of the new
portance of
this plan is
discussed.

5urvival:
Shepherd. Dean A.; Evan J. Douglas; and Mark Shanley' (2000)' NewVenture
Ventur'
Business
of
Journal
fgnrance, External Shocks, andhisk Reduction Strategies.
ing, vol.1 5, no. 5-6.
new venture failure' The theoretical model
The authors deve
on the degree of novelty (ignorance)rtdent
argues that rsk s
market' novelty to the technology of
the
to
with
a
associated
production, and novelty (experience) to management'
Business SuccesShepherd, Dean A.; and Andrew Zackarakis. (2000)' structuring Family

Theory &
sion: An Analysis of the Future Leader's Decision Making. Entrepreneurship:

prior to the

succession.

stricter regulations.

CHAPTER

I5

SUCCESSION PLANNING AND SIRATEGIES FOR HAruESTING

AND ENDING THE

VENruRE 461

END NOTES

3. Family Firm Institute, www.ffi.org.

4. c. Dannhauser, "will My Beloved survive

Me?', gusinessweek Frontier(January

21, 1 999), www.businessweek.com.
5. M. Kindley, "Grooming your Successor," Network World (July 22, 20A2), p, 7.
6. clyde E- wtt, "plan Ahead. stay Ahead," Materiar Handring'Management
(January 2006), pp. 33-35.
7. Shelby Scarbrough, ,,Sell without Selling Out,,' Entrepreneur (June 200g),
pp. 't9-21.
8. The ESOP Association, www.esopassociation.org.
9. See American Bankruptcy Institute's web site, www.abiworrd.org; and
www. uscourts. goviba n kru ptcystats.
10. Jeffrey Yarbrough, "Back from the Brink," FSB: Fortune smail Business
(October 2008). p.94.
l f . carlye Adler. "The Grand Rebou nd," FSB: Fortune Small Business (February
2005). pp. 56-60; and www.groundround.com.
12. www.bankrate.com.
13.

David Twomey and Marianne Jennings, Anderson's Business Law and Legar

Environment, Standard,20th ed. (Mason, OH: West Legal Studies, 200g),

pp.752-73.
14. Nadine Heintz. "Anatomy of a Business Decision: A case study,., /nc.
(December 2005), pp. 59-60.

15. Lawrence 5. clark, Randall Hanson, and James K. smith, ,,Bankruptcy

Reform
fs Here." Journal of Accountancy 2OO, no. 5, (November 2005), pp.
S1_SS.
16. Nichole L. Torres, "Underdog Days,,' Entrepreneur(npril ZOO),'p.
S.
17. Jonathan Blum, "New spin on yinyr," FSB: Fortune smail Businss (March
2009),

p.28.

18- L. M. Lament. "what Entrepreneurs Learn from Experience,,, Journat

of smalt
Eusrness Management (1972), p.36.
19. See W. P. Schuppe, "Leading a Turnaround,,' The Secured Lender (January
2003), pp- 8-r4; and w. H. Fetterman. "The Team Approach to Tuinarounds,,,
Journal of Private Equity (Summer 2003), pp. 9_lO.