Dual-track planning improves the harvest

In a column published in this space last September, I talked about how important it is to plan for a venture's harvest from the time of launch.

We saw the results of one of my academic articles published in the Journal of Business, which documented that entrepreneurs who are able to complete an IPO earn a significantly larger harvest premium (by 22 percent) than those who opt to sell their firm to an acquiring company.

In a follow-up article not yet published, two co-authors and I try to determine if there is a strategy to help decrease the sell-out discount suffered by entrepreneurs. In this new article, we explore the strategy of dual-track harvests. Dual-track harvests occur when an entrepreneur files for an initial public offering with the SEC while simultaneously advertising itself as a takeover candidate.

We test two types of dual-track strategies and compare them to traditional straight sell-outs. Private dual-tracks are firms that file for the IPO, but agree to be bought out prior to the IPO. These firms withdraw the IPO and are acquired. Public dual-tracks are firms that complete an IPO and then are taken over shortly after going public.

Our tests revealed that dual-track firms earn significantly higher harvest premiums than straight sell-outs by approximately 25 percent. We were surprised, however, that no significant difference exists between public dual-tracks and private dual-tracks. Our tests indicate that it is not necessary for an entrepreneur to complete the IPO to capture the advantage.

In additional tests, we found that larger firms, venture capital-backed firms, and firms with prestigious underwriters are more likely to take the dual-track strategy. The overall implication is that entrepreneurs may want to plan for a dual-track strategy.

Switching subjects, this article is due on what would have been my father's 78th birthday. He was born in 1929, right after the Wall Street crash. His father died four months later from an illness he contracted while serving in the Army during World War I. My father and his older sister were raised through the Depression by my widowed grandmother.

Pap started his first paper route when he was 7, and he gave all of his earnings to his mother to help the family. From that time on, he never stopped working. He dropped out of high school at age 17 and enlisted in the Marines, serving on the front lines in the Korean War. After his service, he owned a real estate company and experienced ups and downs in his professional life. By the time of his death at age 67, he was a low-paid, small-town bookkeeper.