From the September 1997 issue of Entrepreneur

It wasn't like most of the business plans Jack Ferner reviews. Instead of investing more money to boost sales of a well-established but slow-growing product line, it outlined a plan to shrink investment, keep sales static and milk the market for profits as long as inventory lasted.

"The idea was to collapse advertising costs and other discretionary expenses, treat [the product line] as a cash cow and liquidate the investment to focus on a product line they thought was more promising," explains Ferner, a management professor at Wake Forest University in Winston-Salem, North Carolina. Using this kind of strategy to harvest the profits of a business or product doesn't come naturally to most entrepreneurs. But experts say a harvest strategy that allows you to redeploy assets to better opportunities is an important part of an entrepreneurial toolkit.

"People invest time, talent and money building value in a venture," says Mark Rice, director of the Center for Technological Entrepreneurship at Rensselaer Polytechnic Institute in Troy, New York. "The time comes when it is appropriate or necessary for them to get a return on their investment."

Reaping Profits

A harvest strategy is any plan for getting the value out of a company, a product or a business. Most often, it refers to the outright sale of a company or division. But there is another harvest strategy that is safer, less drastic and allows an entrepreneur to retain ownership of his or her company. It calls for sharply cutting investments in assets, labor and other costs of a slow-moving product line or business. Its objective is to produce higher profits to fund expansion in other areas.

Harvesting in this way is recommended as a basic competitive strategy by C.K. Prahalad, an international business professor at the University of Michigan in Ann Arbor, and strategic management expert Gary Hamel. Prahalad and Hamel are credited with first applying the human resources concept of core competencies--the inherent strengths, skills and knowledge that give a company its competitive advantage--to corporations.

Done correctly, gradual harvesting offers a number of benefits. First, it's less final than an outright sale. Should the strategy not appear to be working, it's easier for the entrepreneur to change plans than to repurchase a company once it's sold. Second, harvesting can produce higher returns than cashing out through a sale. Ferner tells of one harvest strategy that had a return on investment of more than 30 percent--far above what the entrepreneur could have expected from selling the whole firm.

Of course, the best time to harvest is when you need the money most and when you can get the best price for what you're selling, says Rice. A product or service is ripest when its current sales are good but its growth prospects are poor.

"For a fast-growth firm, the optimal time is typically just before the growth rate begins to fall off," says Rice. One example might be a name-brand product with a currently strong following but a future threatened by low-cost competitors.

A slowdown in growth is the most common reason to plan a harvest, but there are any number of reasons why an entrepreneur might want to gradually get out of a once-promising business. Labor problems, regulatory changes, shifting consumer tastes, higher interest rates or any major alteration in one of the business's underpinnings may suggest that harvest time is nearing.

If no better opportunity presents itself, the harvester may be wiser to stick with a profitable though slow-growing business. But even a product with prospects for strong continued growth may be harvested if the entrepreneur spies an unusually promising opening elsewhere. Craig Skevington's 120-employee factory-management software company, for instance, was still growing when he got the itch to harvest. "I saw a bigger opportunity in health care," explains the Clifton Park, New York, entrepreneur, who now sells health-care management software.

Once you've identified a product you want to harvest, it's time to find a way to cut investment without hurting profits. Top candidates for cuts are the costs associated with expanding production or entering new markets. Next, go for cutbacks in advertising, promotion, market research, new product development, and perhaps customer service and employee training.

If the process appears too uncertain or risky, consider other ways to harvest. Licensing, for instance, can allow a company with valuable technologies, trademarks or brand identities to hand off much of the burden of investing in a business, without losing the profit stream or letting the business languish.

"If you license [the product], you don't have to do any manufacturing or marketing; you just collect royalty checks," says Ferner. "That could go on for some time as long as the technology has value and remains proprietary."

Overcoming Obstacles

One of the reasons harvesting isn't done more often is that many people just don't like the idea. A lot of entrepreneurs are basically opportunity seekers, says Ferner, so they aren't usually interested in doing that kind of thing.

Gradual harvesting may also be more difficult than selling the company outright. First, it requires patience. A business sale may be completed fairly quickly, leaving the entrepreneur with a lump sum to invest elsewhere. In comparison, gradual harvesting can drag on for years, and though the payoff may be bigger, it's likely to consist of small amounts collected infrequently, says Ferner. If the new opportunity is in a much different area, it may be more efficient to build a new organization rather than redirect the existing one. "When you're small and focused, repositioning is tough," warns Skevington.

Simultaneously getting into one business while getting out of another is no cinch, either. "For most entrepreneurs, conducting the harvest in a timely way that doesn't damage the ongoing business is a huge challenge," says Rice.

The pressure is even higher in the case of an opportunity that may only exist for a short time. In fast-moving industries, the entrepreneur may not have the luxury of gradually entering a new market. That's what Skevington learned when planning how to pursue his new opportunity. After evaluating gradual harvesting vs. selling his company, he opted for the quick route. And, says the founder and CEO of the new 23-employee Flow Management Technologies, "We're much further along than if I had stayed with the existing company and tried to slowly move into this market."

Though it's not for everyone, gradual harvesting does have its season. "You don't see it used very much because it's not the great entrepreneurial dream," says Ferner. "But it's really a neat way to go."

Mark Henricks is an Austin, Texas, writer specializing in business topics.

Contact Sources

Flow Management Technologies Inc., (518) 373-2005, craigskev@flowmgt.com