copyright ©2009 pearson education, inc. publishing as prentice hall 1 management succession and...

Copyright ©2009 Pearson Education, Inc. Publishing as Prentice HallCopyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 11

Management Succession and Risk

Management Strategies in the Family Business

Chapter 20 Family Business Management Chapter 20 Family Business Management StrategiesStrategies

Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall 2009 Pearson Education, Inc. Publishing as Prentice Hall 22Chapter 20 Family Business Management StrategiesChapter 20 Family Business Management Strategies

Family BusinessesFamily Businesses

A vital part of the U.S. economy:A vital part of the U.S. economy: Nearly 90% of all U.S. businesses are Nearly 90% of all U.S. businesses are

family-ownedfamily-owned Generate 64% of the nation's GDPGenerate 64% of the nation's GDP Account for 62% of all employment Account for 62% of all employment

and 78% of all job creationand 78% of all job creation Pay 65% of all wagesPay 65% of all wages Average annual sales = $36.5 millionAverage annual sales = $36.5 million


The Dark Side of The Dark Side of Family BusinessesFamily Businesses

Management succession!Management succession! 70% of first-generation businesses fail 70% of first-generation businesses fail

to survive into the second generationto survive into the second generation Of those that do, only 12% make it to Of those that do, only 12% make it to

the third generation, and just 3% the third generation, and just 3% survive to the fourth generation survive to the fourth generation

Result: Average life expectancy of a Result: Average life expectancy of a family business is 24 years family business is 24 years


Management Management SuccessionSuccessionWhy are the odds of succession so low? Why are the odds of succession so low? No management succession plan!No management succession plan!

80% of all business founders intend to 80% of all business founders intend to pass their companies on to their pass their companies on to their childrenchildren

But . . . But . . . 82% had no written plan to describe what 82% had no written plan to describe what

they wanted to happen to their businesses they wanted to happen to their businesses when they leavewhen they leave

19% had not engaged in any kind of estate 19% had not engaged in any kind of estate planning other than creating a will planning other than creating a will

52.0%

30.3%

7.9%

4.6% 5.2%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Per

cen

t o

f B

usi

nes

s O

wn

ers

Nonexistent Starting to think about it In the process ofdeveloping a plan

90 percent complete 100 percent complete

Plan Status

Status of Management Succession Plans in Small Businesses

Source: Entrepreneur, BMC Associates, and The Monitor Group's Business Transition Planning Survey Report.


Qualities Essential to a Qualities Essential to a Successful Family Successful Family BusinessBusiness Shared valuesShared values Shared powerShared power TraditionTradition A willingness to learnA willingness to learn Behaving like familiesBehaving like families Strong family tiesStrong family ties


Exit StrategiesExit Strategies

Selling to OutsidersSelling to Outsiders Straight saleStraight sale

Selling to InsidersSelling to Insiders Cash plus a noteCash plus a note Leveraged buyouts (LBOs)Leveraged buyouts (LBOs) Employee stock ownership plans Employee stock ownership plans

(ESOPs)(ESOPs)

Employee Stock Ownership Plans

-

2,000

4,000

6,000

8,000

10,000

12,000

1975 1980 1990 1993 1996 1999 2000 2001 2002 2003 2004 2005 2006

Nu

mb

er o

f E

SO

Ps

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

Nu

mb

er

of

Em

plo

ye

es

Co

ve

red

Number of ESOPs Number of Employees Covered

Source: "A Statistical Profile of Employee Ownership," National Center for Employee Ownership, 2007.


Management Management SuccessionSuccession

Between 2001 and 2017, $12 trillion Between 2001 and 2017, $12 trillion in wealth will be transferred from in wealth will be transferred from one generation to the next, much of one generation to the next, much of it through family businesses it through family businesses

The businesses with the greatest The businesses with the greatest chance of surviving to the next chance of surviving to the next generation are those with generation are those with management succession plansmanagement succession plans


For a smooth transition from one For a smooth transition from one generation to the next, family generation to the next, family businesses need a succession businesses need a succession planplan

A plan allows one generation to A plan allows one generation to pass leadership to the next just pass leadership to the next just as runners in a relay race pass a as runners in a relay race pass a baton baton

Management Management SuccessionSuccession

Stages in Management Stages in Management SuccessionSuccession

Chapter 20 Family Business Management Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 11


Skills a Successor Skills a Successor NeedsNeeds Financial abilitiesFinancial abilities Technical knowledgeTechnical knowledge Negotiating abilityNegotiating ability Leadership qualitiesLeadership qualities Communication skillsCommunication skills Juggling skillsJuggling skills IntegrityIntegrity Commitment to the businessCommitment to the business


Families Whose Businesses Families Whose Businesses Survive to the Next Survive to the Next Generation…Generation… Believe that owning the business helps Believe that owning the business helps

achieve their families’ missionachieve their families’ mission Are proud of the values on which their Are proud of the values on which their

businesses are builtbusinesses are built Believe that the business is contributing Believe that the business is contributing

to society and making it a better place to society and making it a better place to liveto live

Rely on management succession plans Rely on management succession plans to assure the continuity of the company to assure the continuity of the company


Developing a Developing a Management Succession Management Succession PlanPlanStep 1. Select the successorStep 1. Select the successor

Average tenure of a business Average tenure of a business founder: 25 years (same for the last founder: 25 years (same for the last decade)decade)


Selecting a SuccessorSelecting a Successor

Make it clear that children are not Make it clear that children are not required to join the family businessrequired to join the family business

Do not assume that the successor Do not assume that the successor must always come from within the must always come from within the familyfamily

Give family members the Give family members the opportunity to work outside the opportunity to work outside the family business firstfamily business first


Selecting a SuccessorSelecting a Successor

Don’t procrastinate! Don’t procrastinate! Raymond Institute/MassMutual Raymond Institute/MassMutual

Study: 55% of family business Study: 55% of family business owners age 61 or older have not yet owners age 61 or older have not yet designated a successor! designated a successor!

Make the choice based on skill, Make the choice based on skill, ability, and merit rather than on ability, and merit rather than on gender or birth order gender or birth order


Step 1. Select the successorStep 1. Select the successor

Step 2. Create a survival kit for the Step 2. Create a survival kit for the successor successor

Step 3. Groom the successorStep 3. Groom the successor

Developing a Developing a Management Succession Management Succession PlanPlan


Grooming the Grooming the SuccessorSuccessor

A founder must be:A founder must be: PatientPatient Willing to accept mistakesWilling to accept mistakes Skillful at using mistakes to teachSkillful at using mistakes to teach An effective communicatorAn effective communicator Capable of establishing reasonable Capable of establishing reasonable

expectationsexpectations Able to articulate the keys to the Able to articulate the keys to the

successor’s performancesuccessor’s performance


Step 1. Select the successorStep 1. Select the successorStep 2. Create a survival kit for the Step 2. Create a survival kit for the

successor successorStep 3. Groom the successorStep 3. Groom the successor

Step 4. Promote an environment of Step 4. Promote an environment of trust trust and respect and respect

Step 5. Cope with the financial Step 5. Cope with the financial realities realities of estate and gift of estate and gift taxestaxes

Developing a Developing a Management Succession Management Succession PlanPlan


Tools to Minimize Estate Tools to Minimize Estate and Gift Taxesand Gift Taxes

Buy/sell agreementBuy/sell agreement Lifetime giftingLifetime gifting TrustsTrusts

Bypass trustBypass trust Irrevocable life insurance trustIrrevocable life insurance trust Irrevocable asset trustIrrevocable asset trust Grantor retained annuity trust (GRAT)Grantor retained annuity trust (GRAT)

Estate FreezeEstate Freeze Family limited partnershipFamily limited partnership


Risk Management Risk Management StrategiesStrategies

Risk avoidanceRisk avoidance Risk reductionRisk reduction Risk anticipationRisk anticipation Risk transferRisk transfer

The Risk PyramidThe Risk Pyramid

Event Severity of event Probability of event Loss from event_____ A-D A-D A-D

AAA

AABABA

BAAAAC

ABBACA

BABBBA

CAAAAD

ABCACB

ADABAC

BBBBCA

CABCBADAA

ABDACC

ADB

High severityHigh severityHigh probabilityHigh probabilityHigh lossHigh loss

== High RiskHigh Risk

Low severityLow severityLow probabilityLow probabilityLow lossLow loss

== Low RiskLow Risk

Chapter 20 Family Business Management Strategies Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 22


Major Types of Major Types of InsuranceInsurance

Property and casualtyProperty and casualty Extra expense Extra expense

coveragecoverage Business interruptionBusiness interruption Machinery and Machinery and

equipmentequipment

Start with a basic business owner’s Start with a basic business owner’s policy (BOP); then consider adding policy (BOP); then consider adding property and casualty insurance:property and casualty insurance:

AutoAuto Electronic data Electronic data

processing processing (EDP)(EDP)

SuretySurety MarineMarine CrimeCrime


Start with a basic business owner’s Start with a basic business owner’s policy (BOP); then, consider adding life policy (BOP); then, consider adding life and disability insurance:and disability insurance:


LifeLife DisabilityDisability Business overhead Business overhead

insuranceinsurance



Traditional indemnity plansTraditional indemnity plans Managed care plansManaged care plans

• HMOsHMOs• PPOsPPOs

Health Savings Accounts Health Savings Accounts (HSAs)(HSAs)

Self-insuranceSelf-insurance Workers’ CompensationWorkers’ Compensation

Start with a basic business owner’s policy Start with a basic business owner’s policy (BOP); then consider adding health (BOP); then consider adding health insurance and workers’ compensationinsurance and workers’ compensation


Start with a basic business owner’s Start with a basic business owner’s policy (BOP); then, consider adding policy (BOP); then, consider adding liability insurance:liability insurance:Professional liability (“errors and Professional liability (“errors and omissions” coverage)omissions” coverage) Employment practices liability Employment practices liability


$-

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

$8,000,000

$9,000,000

$ V

erd

icts

Products liability Medical malpractice Employmentpractices

Premises liability Vehicularnegligence

All liabilities

Type of Case

Jury Verdicts in Liability Cases

1999

2005

Source: Insurance Information Institute, http://www.iii.org/media/facts/statsbyissue/litigiousness


Controlling Insurance Controlling Insurance CostsCosts

Pursue a loss-control Pursue a loss-control programprogram

Increase your policies' Increase your policies' deductiblesdeductibles

Work with a qualified Work with a qualified professional insurance professional insurance broker or agentbroker or agent

Find a broker or agent who Find a broker or agent who understands your needs understands your needs


Controlling Insurance Controlling Insurance CostsCosts

Find insurance companies that Find insurance companies that want small companies’ want small companies’ businessbusiness

Utilize the resources of your Utilize the resources of your insurance company insurance company

Conduct a periodic insurance Conduct a periodic insurance

auditaudit


Controlling Health Controlling Health Insurance CostsInsurance Costs

Increase employees’ Increase employees’ insurance contributions or insurance contributions or deductiblesdeductibles

Switch to HMOs or PPOsSwitch to HMOs or PPOs Join an insurance poolJoin an insurance pool Conduct a yearly utilization Conduct a yearly utilization

reviewreview


Controlling Controlling Insurance CostsInsurance Costs

Make sure your company’s Make sure your company’s health plan fits the needs of health plan fits the needs of your employees your employees

Create a wellness program for Create a wellness program for employeesemployees

Conduct a safety auditConduct a safety audit Create a safety manual and Create a safety manual and

use ituse it Create a safety teamCreate a safety team


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Copyright ©2009 Pearson Education, Copyright ©2009 Pearson Education, Inc. Publishing as Prentice HallInc. Publishing as Prentice Hall

copyright ©2009 pearson education, inc. publishing as prentice hall 1 management succession and...

Documents

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