A Harvest Goal

Having a harvest goal and crafting a strategy to achieve it are cer­tainly what separate successful entrepreneurs from the rest of the pack. Indeed, we have found that small business owners who have a well-planned harvest option tend to be more successful because they are driven by specific goals. Many entrepreneurs seek only to create a job and a living for themselves. But it is quite another thing to grow a business that creates a living for many others, including employees and investors, by creating value—value that can result in a capital gain.

Setting a harvest goal achieves many purposes, not the least of which is helping an entrepreneur get after-tax cash out of an enterprise and enhancing substantially his or her net worth. Such a goal also can cre­ate high standards and a serious commitment to excellence over the course of developing the business. It can provide, in addition, a moti­vating force and a strategic focus that does not sacrifice customers, employees, and value-added products and services just to maximize quarterly earnings.

There are other good reasons as well. Building a business, whether it is small or large, is hard work. Indeed, it maybe easier to run a growing business. Growing businesses attract better talent and smarter money, because teams and investors believe there is an endgame that will benefit them and not just the owner. The workload is shared and the stress is spread across a broader base.

Also, within the process of harvest, the seeds of renewal and rein­vestment are sown. Harvest brings in new management with new ideas that may help the company achieve the next level of success. The cash that the entrepreneur and other team members receive provides fuel for new ventures and philanthropy. Likewise, investors use their proceeds to make new investments in different companies. Such a recycling of entrepreneurial talent and capital is at the very heart of our system of private responsibility for economic renewal and individual initiative. Entrepreneurial companies organize and manage for the long haul in ways to perpetuate the opportunity creation and recognition process and thereby to ensure the process of economic regeneration, innova­tion, and renewal.

Thus, a harvest goal is not just that of selling and leaving the com­pany. Rather, it is a long-term goal to add real value to a business.

Crafting a Harvest Strategy: Timing Is Vital

Consistently, entrepreneurs avoid thinking about harvest issues. Only 15 percent of them have a formal written strategy for harvest in their business plans, and just 5 percent have a formal harvest plan written after the business plan.4 But companies that consider growth have a greater propensity to think about and achieve a successful harvest.5 The companies that do not plan growth avoid harvest plans: when a com­pany is first launched, then struggles for survival, and finally begins its ascent, usually the furthest thing from its founder's mind is selling out. Selling is often viewed by the entrepreneur as the equivalent to com­plete abandonment of his or her very own "baby."

Thus, time and again, a founder does not consider selling out until terror, in the form of the possibility of losing the whole company, is experienced. Usually, this possibility comes unexpectedly: new tech­nology threatens to leapfrog the current product line, a large competi­tor suddenly appears in a small market, or a major account is lost. A sense of panic then grips the founders and shareholders of the closely held firm, and the company is suddenly for sale—for sale at the wrong time, for the wrong reasons, and thus for the wrong price. Selling at the right time, willingly, involves discovering a strategic window, one of the many strategic windows that entrepreneurs must look for.

Many entrepreneurs find that a harvest strategy is a nonissue until something begins to sprout, and again there is a vast distance between expanding the existing revenue stream of an ongoing business and launching from ground zero. Most entrepreneurs agree that securing customers and generating continuing sales revenue are much harder and take much longer than even they could have imagined. Further, the ease with which those revenue estimates can be cast and manipulated on a spreadsheet belies the time and effort necessary to turn those projec­tions into cash.

At some point, with a higher potential venture, it becomes possible to realize the harvest. In terms of the strategic window, it is wiser to sell when it is opening than when it is closing. Bernard Baruch's wis­dom is as good as it gets on this matter. He has said, "I made all my money by selling too early." If the window is missed, disaster can strike.

A window of opportunity is not unlike an economic cycle. We've seen many booms and busts. Following a change in federal tax law in 1986 and the stock-market crash of 1987, there was a major softening of the real estate market in 1988. This very same pattern happened again in 2000-2002 after the dot-com bubble burst. The NASDAQ began to crash from its high of over 5,000 and had not even reached 2,000 by fall of 2003. California's Silicon Valley was particularly hard hit by the rapid downturn. Technology and Internet entrepreneurs who had exercised their stock options when their company's stock was soar­ing in the range of $80 to $100, or even $150, per share, on the hope that such escalation would continue for a long time, faced a rude awak­ening. As the stock plummeted to single-digit prices, they still faced a huge capital gain tax on the difference between the cost of their options and the price at which their stock was acquired. In one community of over two thousand homes with the lowest price around $ 1 million, only three or four were on the market in January 2001. By the middle of 2 001, nearly sixty such homes were up for sale. Nationwide in 2 001, the sale of homes priced above $ 1 million dropped 2 5 percent.

Shaping a harvest strategy is an enormously complicated and difficult area. Thus, work cannot begin too early. In 2001 and 2002, many major companies declared bankruptcy in the wake of the dot-com and stock-market crash, including luminaries such an Enron, Kmart, and Global Crossing, and dozens of lesser-known telecommunications and networking-related companies. This is one history lesson that seems to repeat itself. While building a company is the ultimate goal, failure to pre­serve the harvest option—and utilize it when it is available—can be deadly.

In shaping a harvest strategy, some guidelines and cautions can help:

• Patience. As has been shown, several years are required to build most successful companies; therefore, patience can be invaluable. A harvest strategy is more sensible if it allows for a time frame of at least three to five years and as many as seven to ten.

Mental toughness. It takes a textured understanding of your industry and company to recognize the difference between a short-term problem and a real downturn. Don't panic as a result of pre­cipitate events. Selling under duress is usually the worst of all worlds.

Realistic valuation. If impatience is the enemy of an attractive har­vest, then greed is its executioner. For example, an excellent, small firm in New England, which was nearly eighty years old and run by the third generation of a line of successful family leaders, had attracted a number of prospective buyers and obtained a bona fide offer for over $25 million. The owners, however, convinced them­selves that this "great little company" was worth considerably more, and they held out. Before long, there were no buyers, and market cir­cumstances changed unfavorably. In addition, interest rates skyrock­eted. Soon thereafter, the company collapsed financially, ending up in bankruptcy.

Outside advice. It is difficult but worthwhile to find an advisor who can help craft a harvest strategy while the business is growing and, at the same time, maintain objectivity about its value and have the patience and skill to maximize it. A major problem seems to be that people who sell businesses, such as investment bankers or business brokers, are performing the same economic role and function as real estate brokers; in essence, their incentive is their commissions dur­ing a quite short time frame, usually a matter of months. However, an advisor who works with a lead entrepreneur for as much as five years or more can help shape and implement a strategy for the whole business so that it is positioned to spot and respond to harvest oppor­tunities when they appear.

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