Harvesting the business requires a strategy, planning, and patience on the part of the entrepreneur. In harvesting the entrepreneur seeks to maximize the free cash flow after taxes the he/she receives from the business. Retained earnings and profits from the firm are paid out to the owner in the form of dividends and salary, instead of reinvesting in firm growth and business developments (HBS, Harvest Time, 2006). This strategy is used by many entrepreneurs seeking to maintain their lifestyle while withdrawing from actively running their business.
In the initial stages of the firm’s life cycle the majority of profits from the firm are reinvested into the firm, to help it grow. As the firm matures and the industry in which it operates matures, the opportunity to grow becomes more limited, leading to increased free cash flows (Petty, 2002). By extracting that cash flow an entrepreneur may retain control of the business while minimizing his required input and maximizing his returns. These returns allow the entrepreneur a lifestyle which may not otherwise be possible. However, the entrepreneur may take out capital that will be needed later, undermining the firm’s ability to maintain its competitive advantages and, additionally, the return may be subject to heavy taxes (Robbins, 2009).
The harvesting strategy is particularly suited for firms that are mature and operate in mature or declining industries. Used in these situations harvesting allows a gradual withdrawal from the market while using existing momentum to maximize cash flows. Such a strategy may also be favorable if the entrepreneur wishes to reinvent the business or undertake a new venture using funding from the prior venture.