Managing

Managing Growing
Growing
Firms
Firms and
and Exit
Exit
Strategies
Strategies
 Looking
LookingAhead
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
Distinctive Features
Features of
of
Small
Small Firm
Firm Management
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
Prevalent Management
Management Weaknesses
Weaknesses in
in
Small
Small Firms
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
Constraints on
on Management
Management in
in
Small
Small Firms
Firms
• Constraints include:
 Small bank accounts
 Limited staff such as office assistants
 Lack of funds for promotional sales brochures,
research, etc.
 Firm
Firm Growth
Growth and
and Management
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.
 Organizational
Organizational Stages
Stages of
of
Small
Small Business
Business Growth
Growth

Stage 1 Stage 2 Stage 3 Stage 4

One-Person Player-Coach Intermediate Formal
Operation Supervision Organization

Figure 14-1
 Managing
Managing Versus
Versus Doing
Doing
STAGE 1 STAGE 2 STAGE 3 STAGE 4
One-Person Player-Coach Intermediate Formal
Operation Supervision Organization

Time spent managing Time spent doing

 Characteristics
Characteristics of
of Founders
Founders and
and
Professional
Professional Managers
Managers

• Professional Manager
 A manager who uses systematic, analytical
methods of management.
• Founders as Managers
 Are not always good organizational members.
 Have difficulty fitting into conventional roles.
 Have a different orientation from that of
professional managers.
 Founders
Founders versus
versus Professional
Professional Managers
Managers

Founders Professional Managers

• Innovative • Administrative
• Intuitive • Analytical
• Action-oriented • Planning-oriented
• Long term focus • Short term focus
• Bold • Cautious
 The
The Nature
Nature of
of Managerial
Managerial Work
Work

Planning
Planning Leading
Leading

Managerial
Managerial
Work
Work

Controlling
Controlling Organizing
Organizing
 Planning
PlanningActivities
Activities

• The Benefits of Formal Planning

 Improved productivity
 Better focus on goal attainment
 Increased credibility with stakeholders
• Planning Time
 “Tyranny of the urgent”
 Planning requires discipline
 Planning should not be postponed
 Planning
PlanningActivities:
Activities: Types
Types of
of Plans
Plans

Type of Plan Purpose

Long-range plan A firm’s overall plan for the future
(strategic plan)
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 An established method of conducting a
procedures business activity
 Goal
Goal Setting
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 expectations
2. Measurable: select goals that have concrete indicators
3. Acceptable: the goals must be acceptable to those
responsible for their attainment
4. Realistic: the goals should be a stretch to achieve, but
attainable
5. Time-framed: a deadline should be indicated
 Employee
Employee Participation
Participation and
and
Effective
Effective Communication
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
Establishing aa Chain
Chain of
of Command
Command --
Creating
Creating Organizational
Organizational Structure
Structure
• Structure of the Firm
 Structure evolves as the firm evolves
 Growth creates the need for structural change
• Chain of Command
 The official, vertical channel of communication in an
organization
 Unity 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
Line and
and Staff
Staff Organizations
Organizations

• Line organization
 A 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
Line Organization
Organization

President

Sales Production Financial/Office

Manager Manager Manager

Salespeople Plant Employees Office Employees

Figure 14-3
 Line-and-Staff
Line-and-Staff Organization
Organization

President

Assistant to Human Resources

the President Manager

Sales Production Financial/Office

Manager Manager Manager

Salespeople Plant Employees Office Employees Figure 14-4

 Delegating
DelegatingAuthority
Authority

• Delegating Authority
 Granting to a subordinate the right to act or make
decisions
 Benefits of delegation
• Frees up superior to perform more important tasks
• Develops subordinate’s skills
• Improves two-way communications
 Deciding
Deciding how
how many
many to
to supervise:
supervise:
Determining
Determining the
the Optimum
Optimum Span
Span of
of Control
Control
Fewer Subordinates
Complex work
Inexperienced workers
Superior with limited ability

Greater Number of Subordinates

Simple work
Very experienced workers
Superior with much ability

More Subordinates
Moderately difficult work
Moderately experienced workers
Superior with moderate ability
 Establishing
Establishing Standards
Standards in
in the
the
Stages
Stages of
of the
the Control
Control Process
Process
Planning
Planningand
and
Goal
GoalSetting
Setting

Establishing
Establishing
standards
standards

Measuring
Measuring
Performance
Performance

Taking
Taking
Corrective
Corrective
Action
Action
 Stages
Stages of
of the
the Control
Control Process
Process

Preventive Control Concurrent Control Corrective Control

Input Stage Process Stage Output Stage

Examples: Examples: Examples:

Inspection of raw
materials Inspection of
Quality control of completed product
Careful selection of work in process
employees Comparison of actual
Check of adherence expense with budgeted
to safety procedures expense

Figure 14-
5
 Time
Time Management
Management

• The Problem of Time Pressure

 Many owner-managers work 60-80 hours per week.
 Effect of overwork is inefficient work performance .
• Time Savers for Busy Managers
 Effective 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
Hours per
perWeek
Week Worked
Worked by
by
New
New Business
Business Owners
Owners

Figure 14-6
Data developed and provided by the NFIB Foundation and sponsored by American Express Travel-Related Services Company
 Outside
Outside Management
ManagementAssistance
Assistance

Business
Incubators

Other Business Counselling

and Professional Assistance to
Services Small Enterprise
(CASE)
Outside
Management Canadian Youth
Entrepreneurial
Networks Assistance Business
Foundation (CYBF)

Management Industry Canada

Consultants Industrial Research
Assistance Program
(IRAP)
 Low-Cost Space
Services
ServicesProvided
Provided
by
byBusiness
Business Credibility

Incubators
Incubators
to
toNew
NewFirms
Firms Management Counsel

Links to Accounting, Legal,

Other Professional Services

Business Incubator Access to Financial Resources

Entrepreneurial Education

Photocopying, Receptionist,
Photocopying, Receptionist,
Word-Processing Servicesand

Computer Services

Practical Business Expertise Figure 14-7

 The
The Importance
Importance of
of the
the Harvest
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
 Methods
Methods of
of Harvesting
Harvesting

Exit Options

Selling the Releasing Going Using

Firm Cash Flows Public Private Equity

Liquidation
Strategic Financial Employee
Acquisition Acquisition: Acquisition
LBO or MBO
 Exiting:
Exiting: Selling
Selling the
the Firm
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
 Exiting:
Exiting: Selling
Selling the
the Firm
Firm

• Strategic Acquisition
 A 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
 Exiting:
Exiting: Selling
Selling the
the Firm
Firm

• 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
 Exiting:
Exiting: Selling
Selling the
the Firm
Firm

• Management Buyout (MBO)

 A leveraged buyout that includes the firm’s top
management to significant shareholders in the
acquired firm.
 Employee
Employee Ownership
Ownership Plan
Plan

• Employee Ownership
 A 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
Releasing the
the Firm’s
Firm’s Cash
Cash Flows
Flows

• Exiting by Withdrawing Firm’s Cash

 Advantages:
• Retain control of firm while harvesting investment.
• No need to seek a buyer or incur expenses associated
with sale of business
 Disadvantages
• Loss of development potential and opportunities
• Tax disadvantages of cash withdrawal
• Requires patience to siphon off cash slowly
 Going
Going Public
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 development
Source: Lisa D. Stein, vice-president, Salomon Smith Barney.
 Using
Using Private
Private Equity
Equity

• Private Equity (Capital)

 Money provided by venture capitalists or private
investors.
• Factors in the Transfer of Family-Owned
Firms
 Liquidity for exiting family members
 Continued financing for company growth
 Maintenance of family control of the firm
 Liquidation
Liquidation

• 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
Firm Valuation
Valuation and
and the
the Exit
Exit

• The Actual Value

 Opportunity cost of funds
• The rate of return that could be earned on another
investment of similar risk
• Harvest Value/Market Comparable Valuation
 Establishing the value of a privately held
company based on the value of a similar or
comparable publicly traded company.
 Developing
Developing an
an Effective
Effective Exit
Exit Strategy
Strategy

• Understand What You Want

 Motives 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”