Harvest Time How to reap maximum benefits from a slow-growing product.

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

"The idea was to collapse advertising costs and otherdiscretionary expenses, treat [the product line] as a cash cow andliquidate the investment to focus on a product line they thoughtwas more promising," explains Ferner, a management professorat Wake Forest University in Winston-Salem, North Carolina. Usingthis kind of strategy to harvest the profits of a business orproduct doesn't come naturally to most entrepreneurs. Butexperts say a harvest strategy that allows you to redeploy assetsto better opportunities is an important part of an entrepreneurialtoolkit.

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

Reaping Profits

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

Harvesting in this way is recommended as a basic competitivestrategy by C.K. Prahalad, an international business professor atthe University of Michigan in Ann Arbor, and strategic managementexpert Gary Hamel. Prahalad and Hamel are credited with firstapplying the human resources concept of core competencies--theinherent strengths, skills and knowledge that give a company itscompetitive advantage--to corporations.

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

Of course, the best time to harvest is when you need the moneymost and when you can get the best price for what you'reselling, says Rice. A product or service is ripest when its currentsales are good but its growth prospects are poor.

"For a fast-growth firm, the optimal time is typically justbefore the growth rate begins to fall off," says Rice. Oneexample might be a name-brand product with a currently strongfollowing but a future threatened by low-cost competitors.

A slowdown in growth is the most common reason to plan aharvest, but there are any number of reasons why an entrepreneurmight want to gradually get out of a once-promising business. Laborproblems, regulatory changes, shifting consumer tastes, higherinterest rates or any major alteration in one of the business'sunderpinnings may suggest that harvest time is nearing.

If no better opportunity presents itself, the harvester may bewiser to stick with a profitable though slow-growing business. Buteven a product with prospects for strong continued growth may beharvested if the entrepreneur spies an unusually promising openingelsewhere. Craig Skevington's 120-employee factory-managementsoftware company, for instance, was still growing when he got theitch to harvest. "I saw a bigger opportunity in healthcare," explains the Clifton Park, New York, entrepreneur, whonow 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 hurtingprofits. Top candidates for cuts are the costs associated withexpanding production or entering new markets. Next, go for cutbacksin advertising, promotion, market research, new productdevelopment, and perhaps customer service and employeetraining.

If the process appears too uncertain or risky, consider otherways to harvest. Licensing, for instance, can allow a company withvaluable technologies, trademarks or brand identities to hand offmuch of the burden of investing in a business, without losing theprofit stream or letting the business languish.

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

Overcoming Obstacles

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

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

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

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

Though it's not for everyone, gradual harvesting does haveits season. "You don't see it used very much becauseit'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 inbusiness topics.

Contact Sources

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