Chapter 15: Exit Strategies

Question 1

Succession planning

Answer 1

Start early
estimate firm’s value
evaluate potential successors on their merit/skills/motivation (could be fam or not, ex key employee)
transition period
set a date for completion of transition
senior management committed to plan
well-defined job descriptions
open process - invite employees to participate

Question 2

Selling the business options

Answer 2

Direct sale,
if have time before sell can use strategies such as:
- develop small market niche
- keep costs under control and focus on higher profit margins
- get financial statements in order
- prepare management documentation
- assess equipment,
- tax advice,
- get nondisclosures from key employees

Question 3

Employee stock option plan (ESOP)

Answer 3

The business is sold to employees over a set period of time. Complex to establish, but offers unique incentive, mechanism to pay back loyal employees

Question 4

Management buyout

Answer 4

Direct sale to employees simpler than ESOP, usually direct sale for predetermined price

Question 5

Surviving bankruptcy

Answer 5

Restructure
file before running out of cash
be prepared for financial transactions to be examined

Question 6

Liquidation

Answer 6

Most extreme form of bankruptcy, requires liquidation of all assets voluntarily or not

Question 7

Major bankruptcy causes

Answer 7

Not having cash flow,
future market forecasting is essential,
be aware that market conditions change and be prepared to modify business strategy

Question 8

Warning signs of bankruptcy

Answer 8

Management of finances becomes lax
Customers given large discounts
Contracts accepted below standard amount
Key personnel leave company
Payroll taxes not paid
Suppliers demand payment in cash
Increase in customer complaints