Investors Payday

08 Jun Investors Payday

As a female Certified Public Accountant located in Weaverville, NC, situated in the greater Asheville, NC market, it is very common for me to interface with start-up companies. During this blog, I focus on the types of harvesting methods that are used to extract money from your business. These concepts are laid out in the book “Winning Angels the 7 fundamentals of early stage investing” written by David Amis and Howard Stevenson. In this blog, I will review he seven types of harvesting methods. Harvesting is the endgame of early-stage investments. It is at this point that the angel investor can determine if the investment bore fruit. As Kenny Roger’s sang in The Gambler, “You got to know when to hold’em, know when to fold’em know when to walk away and know when to run.”

Five Positive Harvesting Methods

1) Walking Harvest: In this format the company distributes cash directly to investors on a regular basis. This form of harvesting has none of the distractions that come with selling a business.

2) Partial Sale: A portion of the company is sold to an outside investor through a cash or buy-out agreement. This allows the investor to exit an otherwise non-liquid investment. This usually occurs when an investor wishes to exit a moderately successful company.

3) Initial Public Offering (IPO). An IPO is not the end of the road for business; it is a financing event that occurs along the way. You wait to do this until the company has created the most value it can up until this wave of capital investment.

4) Financial Sale: The buyers are typically purchasing the business based on its current and expected cash flow. A financial buyer usually buys the entire company with cash. In this situation, the managers are not always guaranteed future employment.

5) Strategic Sale: This method is considered the best and most likely plan for a successful company. The buyer is typically an industry player that will pay value beyond what the cash flow dictates.

Two Negative Harvesting Methods:

Chapter 11 Bankruptcy: The goal of Chapter 11 bankruptcy is to save to company from closing its doors. The company is allowed to reorganize, and the investors typically lose most of their upside. Corporation, who have filed Chapter 11, includes General Motors, United Airlines, Lehman Brothers, and K-Mart. Most cases of Chapter 11 never hit the news. According to this NOLO article, studies indicate that 10-15% of Chapter 11 cases result in successful reorganization.

Chapter 7 Bankruptcy: This form of bankruptcy leads to company closure. The Company is liquidated and investors, depending on the line they typically get pennies on the dollar for their investment and in some cases receive no payout. Secured creditors, such as banks, are paid first (sometimes with the return of the secured property), then the general creditors are paid. Stockholders are last in line to be paid. According to this link, here are some examples of corporations that have filed Chapter 7 include Napster, Steak and Ale, Steve & Barry’s, Goody’s and Circuit City.

Other Blog Posts of interest:

Which Type of Start-Up are you?

Negotiation with an investor

Three ways to structure your new business

Methods Investors Use to Evaluate Companies

Funding for Small Businesses

Small Business Retirement Plan Options

Women in Business

New Business Start-up Tips from a CPA