The last section of our book is focused on Harvesting of deals. There are five positive and 2 negative types of harvesting detailed in this section. The authors indicate that the best impact an angel can have in the harvesting of a deal is to facilitate the interaction between potential buyers, bankers, and others that could provide an exit event for the angel and the entrepreneur.
- Walking Harvest- is used when the multiple of cash flows is so low that the owners would rather just take the cash out as it is earned, or when the controlling investors decide they would rather have a positive cash flow stream and continue to own the business for other reasons.
- Partial Sale- normally occurs when the investor wants to exit a moderately successful company that does not have good exit prospects. The investor can sell their shares to the management team, or sell to one of the investment companies that buy minority positions in small companies.
- Initial Public Offering- IPO’s allow the management team to continue to run the company while also providing liquidity to investors and creating a major new channel for raising capital.
- Financial Sale- Financial buyers are typically purchasing the company based on its current and expected cash flows, and are not typically industry pros and they will have their own opinions about the quality of the management team.
- Strategic Sale- the buyer is typically an industry player that will pay value beyond what the cash flows might suggest. Marketing, operational, financial, and other kinds of synergies means that the buyer will reap more benefit from the purchase than almost any other kind of buyer.
The best and most likely harvest method for a successful company is the Strategic Sale because the best returns generally come from this type of sale.
There are also two types of negative harvesting methods.
- Chapter 11- this is a reorganization bankruptcy where all equity holders are washed out significantly or reduced in their ownership share. This saves the company from Chapter 7 and gives it another chance to make it work.
- Chapter 7- this is where everything is lost, and only the lawyers and a few debtors get paid at the end of the day.
David Amis and Howard H. Stevenson. Winning Angels: The Seven Fundamentals of Early-Stage Investing. Financial Times Prentice Hall, 2001.