Business and the entrepreneurship process include many different phases and stages. Each stage presents opportunities and challenges. One stage that nearly every entrepreneur looks forward to is the stage when they can enjoy the financial benefits of their efforts. This stage is known as harvesting. Let’s take a look at what harvesting is and the different types of harvesting strategies.
What is Harvesting and Why is it Important?
Harvesting in entrepreneurship refers to the process of extracting value from a business after it has been established and grown. This concept is similar to reaping the rewards of all the hard work and investment that employees have put into the business.
It typically involves the entrepreneur realizing the value of their business. The primary aim of harvesting is to convert the business’s growth and success into tangible financial gains, providing a return on investment for the business owner and any investors.
The importance of harvesting in the entrepreneurial process cannot be overstated. It represents the culmination of an entrepreneur’s hard work and dedication, serving as a tangible measure of the business’s success. Harvesting provides financial rewards to the entrepreneur and investors. Without this step, many entrepreneurs and investors struggle to see the business as a financial success.
However, harvesting can also benefit others besides the entrepreneurs and investors involved. It can also inject capital back into the market. For example, the IPO harvesting method (we will discuss this later) helps foster further economic growth as it opens up the opportunity for the public to benefit financially from the business’s success.
This phase of entrepreneurship is crucial for motivating entrepreneurs. Many set this phase as a goal and a rewarding endpoint for their venture.
Types of Harvesting
1. Selling the Business
This method involves the complete transfer of ownership from the entrepreneur to another entity. Selling a business can be particularly beneficial when the market conditions are favorable, or when the entrepreneur is looking to retire or move on to new ventures. While for many venture capitalists and angel investors selling as a harvesting strategy is ideal, for many entrepreneurs the concept isn’t always the goal.
For many entrepreneurs, selling their business is an often emotional life event. Many founders think of their businesses as the product of their passions and skills. Some entrepreneurs can experience joy and relief after a sale. Others may experience a feeling of fear, regret, or loss. Although parting with a business is often part of the entrepreneurial process, many entrepreneurs struggle with the decision to enter this stage.
The process usually requires careful valuation of the business, negotiation with potential buyers, and an understanding of the legal and financial implications. It’s not just about getting the best price; it’s also about finding the right buyer who can continue to grow the business. This approach often results in a significant one-time financial gain for the entrepreneur, offering a clear and definitive exit strategy.
2. Initial Public Offering (IPO)
An IPO represents a transformative stage for a business. This is where a startup or business goes from being privately owned to a publicly owned company. This process involves selling a portion of the business to the public in the form of shares. There are many benefits of an IPO for a business or startup.
For one, it can provide substantial capital to the company. Businesses also get an increase in their public profile as now people who use the product or service can buy shares to add to their investment portfolio. Even though an IPO allows the public to own shares in a previously privately held company, this harvesting method still allows original investors and founders to retain partial ownership and control.
However, an IPO is a complex and costly process, requiring adherence to strict regulatory standards, transparency, and accountability to shareholders. The success of an IPO depends heavily on market conditions, the business’s financial performance, and investor interest.
During the early and mid 2010’s the IPO market was booming. However, by 2022 the market for IPOs had cooled. In 2021, the average deal size was $176 million. In 2022, however, that number had dropped to about $18 million.
3. Mergers and Acquisitions (M&A)
Mergers and acquisitions involve combining with or being bought by another company. This method can be advantageous for entrepreneurs looking to expand their business’s reach, diversify their portfolio, or access new markets and technologies. In a merger, two companies typically agree to go forward as a single new entity.
In an acquisition, a larger company absorbs a smaller one. These processes can be complex, involving negotiations over valuation, terms, and the future role of the founder. M&A can provide significant financial returns and may also offer strategic advantages like enhanced market position or access to new customer bases.
4. Management Buyouts (MBO)
The management buyout strategy is when the company’s existing management team purchases the majority of the business. This type of harvesting is often used as a succession planning tool. You’ll often see this with family-owned businesses. This strategy allows the business to continue operating under the management of individuals who are familiar with and invested in its success. That way, many of the processes and policies remain the same. This will hopefully prevent employees and customers from parting ways with the business.
MBOs are typically financed through a combination of personal savings, loans, and sometimes external funding. This approach is beneficial for entrepreneurs who wish to see their business legacy preserved. It also motivates the management team to perform well, given their vested interest in the company’s success.
5. Dividends and Profit Sharing
For businesses that aim to continue operations rather than seeking an outright sale or IPO, distributing profits in the form of dividends or through profit-sharing plans can be a viable harvesting strategy. This approach allows the entrepreneur to extract financial value from the business on an ongoing basis.
The difference in this case is that the founders and key people still retain ownership and control. This makes it more attractive to entrepreneurs who want to still be heavily involved in the business to help execute the founder’s vision for it.
Dividends provide a regular income stream to the shareholders, which can be particularly appealing for businesses with steady profits.
Profit sharing, on the other hand, can serve as a motivational tool for employees. It helps align their interests with the success of the business. This method reinforces long-term commitment and can contribute to the business’s overall stability and growth.
From the ideation stage to harvesting, entrepreneurship can be an exciting journey. While there are businesses that do not make it to the harvesting phase, those that do can take pride in their efforts. Entrepreneurs and business leaders need to research and evaluate which harvesting strategy is best for themselves, their business, its employees, and customers.