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Succession Planning and Strategies for Harvesting and Ending the Venture

This chapter of the textbook deals with exit strategies that the entrepreneur will need to consider. These decisions can involve finding a successor to the venture, selling the business either totally or partially, or ending the venture because of bankruptcy. All of these likely scenerios are real and common among small businesses. Thus, to be 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 is succession of the business. If 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, include transferring 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 entrepreneur 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 the 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 for either ending or salvaging a venture.

Bankruptcy offers three options for the entrepreneur. Under Chapter 11 of the Bankruptcy Act of 1978 (amended 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 strategies.

Chapter 13 of the Bankruptcy Act provides for an extended time payment plan to cover outstanding debts. The 2005 amendment to the Bankruptcy Act has made this particular choice a 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 some of their debt, and therefore this amendment makes it more difficult to file for Chapter 7 liquidation. If 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. If 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.

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