Chapter 14 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. PowerPoint...

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.


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.


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


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.


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.


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


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


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.


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


The Nature of Managerial WorkThe Nature of Managerial Work

ControllingControllingControllingControlling

PlanningPlanningPlanningPlanning LeadingLeadingLeadingLeading

OrganizingOrganizingOrganizingOrganizing

ManagerialManagerialWorkWork

ManagerialManagerialWorkWork


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


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


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


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


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.


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


Line Organization Line Organization

President

SalesManager

ProductionManager

Financial/OfficeManager

Salespeople Plant Employees Office Employees

Figure 14-3


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


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


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


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


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


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


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


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


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


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


FinancialAcquisition:LBO or MBO

UsingPrivate Equity

Selling theFirm

GoingPublic

Exit Options

ReleasingCash Flows

EmployeeAcquisition

StrategicAcquisition

Methods of Harvesting Methods of Harvesting

Liquidation


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



• 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



• 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



• Management Buyout (MBO) A leveraged buyout that includes the firm’s top

management to significant shareholders in the acquired firm.


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.


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


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.


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


Illustration of Private Equity PlacementIllustration of Private Equity Placement

Figure 14-8


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.


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.


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”


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?

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