9.1 Flashcards
Definition of entrepreneurial exit
Entrepreneurial exit as the process by which the founders of privately held firms leave the firm they helped to create; thereby removing themselves, in varying degree, from the primary ownership and decision-making.
- process of leaving by the founders
- removing themselves in varying degree
- losing primary ownership & devision making
Types of exit strategies
1-3
1 Harvest = maximal profit
- substantial value to entrepreneur
2 Stewardship = profit + something else
- pro-social, pro-organizational
- founders have influence over future
- long-term viability of firm
3 Cessation = totally different
- founders disband a venture
- activity ends (fulfill purpose)
Process of Choosing the exit strategy
1-3
1 Transaction:
- which exit strategy do I prefer?
- Which is feasible?
2 Target
- Which buyer/successor?
- which of them are interested/capable?
3 Timing
- which timeline do i aspire?
- which timeline is realistic?
Four dimensions of exit success
1-4
- Personal financial benefits
- Personal reputation
- Employees benefits
- Firm mission persistence
Examples of Exits
1-3
1 Dodgeball
- bought from google
- lack of firm mission persistence, failed and shut down in 2007
- founder of dodgeball founded new enterprise and was hugely successful (personal financial benefits + personal reputation)
2 triphunter
- bought from brands4friends
- no enough unique visitors before being acquired, lack of financial success
- founders had personal success in their subsequent jobs (personal reputation)
3 tumblr
- bought from yahoo
earliest employees made about 6,2 mill. each
- shortly after the exit same core employees (with 6,2mill) left the company
- lack of non-financial employee benefits
Optimization for exit strategy in 5 areas
1 Business economics
2 Legal
3 Corporate organization
4 Technology
5 Stakeholder alignment
Optimization for exit strategy in 5 areas
1 Business economics
1-3
1 business case
goal: indicate viability of business and growth potential
- business case and cash-flows clearly structured and understandable
- assumptions validated
- attractive growth/expansion perspective
2 plan numbers vs. actual comparison
goal: reliability of plan and vision to buyer
- plan numbers not under-fulfilled during exit
- sustainable trajection
3 tax optimization
goal: improve profit -> improve valuation
- usage of optimal tax structure
Optimization for exit strategy in 5 areas
2 Legal optimization
1-3
1 legal structure
goal: easy transaction process
- clear legal structure and ownership stakes
- reduce unnecessary legal constructs
2 internal/external contracts
goal: avoid hidden traps and reduce buyer risk
- active contract management
- replace provisional contract with professional contracts
- oral agreements -> written contracts
3 patents/property rights
goal: stabilize assets
- register patents/trademarks
- buy licenses tights from holder
Optimization for exit strategy in 5 areas
3 Corporate Organization
1-3
1 business processes
goal: professionalisier company and prepare scale-up
- introduce clear hierarchy
- unified processes
- clear documentation
2 reporting/control structure
goal: build acquirers trust in reported KPIs
- establish appropriate KPIs
- international standards (IFRS)
3 employee/mangement structure
goal: smooth transition
- incentivize key personal to remain with company after exit
- introduction of 2nd management level
Optimization for exit strategy in 5 areas
4 Technological
1-3
1 IT development documentation
goal: transferability of projects
- well documented projects
2 knowledge management systems
goal: avoid slack and prepare integration
- establish standards
3 unified IT Infrastructure
goal: professionalization and preparation for scale up
- reduce complexity in IZ landscape
- check for correct licenses
Optimization for exit strategy in 5 areas
5 Stakeholder Alignment
1-3
1 exit conditions and timing
goal: smooth exit and prevent surprises
- ensure valuation/deal terms with all stakeholders
- outline requirements for exit process
- ensure buy-in
Eigenschaften of valuations
1-4
1 specify price of venture
2 hard quantitive facts („sales history“)
3 soft factors („assumed market development“)
4 vary over time (dynamic nature of business and competition)
Application of valuations
1-3
Use cases
1-2
- if investment/divestment considered
- determines allocation of shares
- all shareholders have to agree
Use cases:
1 investment rounds (old investors keep shares)
2 sales (old investors sell shares)
Valuation Approaches
1-4
1 asset based
- balance sheet
- methods: book value, liquidation value
2 market based
- external comparibles
- revenue, EBIT, users, clicks, employees
- method: multiples
3 cashflow based
- discounted future cashflows (DCF)
4 cashflow & market based
- combination DCF and multiple approach
- method: First Chicago Method
the revenue multiple
- find similar companies (industry, age, size, market)
- figure out valuation (market capitalization) + revenue
- calculate revenue multiple = value / revenue
