copyright ©2012 pearson education, inc. publishing as prentice hall20-1 management succession and...

Copyright ©2012 Pearson Education, Inc. publishing as Prentice HallCopyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 20-20-11

Management Succession and Risk

Management Strategies in the Family Business

Chapter 20 Family Business Management Chapter 20 Family Business Management StrategiesStrategies

Chapter 20 Family Business Management StrategiesChapter 20 Family Business Management StrategiesCopyright Copyright ©©2012 Pearson Education, Inc. publishing as Prentice Hall 2012 Pearson Education, Inc. publishing as Prentice Hall 20-20-22

Family BusinessesFamily BusinessesA 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!

Most business founders intend to pass Most business founders intend to pass their companies on to their childrentheir companies on to their children

But... But... 47% had no written plan to describe what 47% had no written plan to describe what

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

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

Source: Kin in the Game, Price WaterhouseCoopers, Family Business Survey, 2010-2011, p. 2.

0102030405060708090

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

EastWestNorth

Status of Management Succession Plans in Small Businesses

Chapter 20 Family Business Management Strategies Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 20-5


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 support networkStrong family support network

Source: Thomas L. Kalaris, “Family Business: In Safe Hands?” Barclays Wealth Insights, 2009, p. 10.

Advantages of the Family Business Model

0102030405060708090


EastWestNorth


Source: Thomas L. Kalaris, “Family Business: In Safe Hands?” Barclays Wealth Insights, 2009, p. 11.

Disadvantages of the Family Business Model

0102030405060708090


EastWestNorth



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)

Source: "A Statistical Profile of Employee Ownership," National Center for Employee Ownership, 2010.

0102030405060708090


EastWestNorth

Employee Stock Ownership Plans



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 as pass leadership to the next just as runners in a relay race pass a runners in a relay race pass a baton baton

Management Management SuccessionSuccession

Stages in Management Succession



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 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

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 successorStep 4. Promote an environment of Step 4. Promote an environment of

trust trust and respect and respectStep 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



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


Source: Based on data from the Equal Employment Opportunity Commission.

0102030405060708090


EastWestNorth

Number of Employment Charges filed with EEOC



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’ businesswant small companies’ business

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

Conduct a periodic insurance Conduct a periodic insurance auditaudit Compile employment policies Compile employment policies into a handbook for employees into a handbook for employees


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 use Create a safety manual and use

itit Create a safety teamCreate a safety team


All rights reserved. No part of this publication may All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, electronic, mechanical, photocopying, recording, or otherwise, without the prior written or otherwise, without the prior written permission of the publisher. Printed in the United permission of the publisher. Printed in the United States of America.States of America.

Copyright ©2012 Pearson Education, Copyright ©2012 Pearson Education, Inc. Publishing as Prentice HallInc. Publishing as Prentice Hall

copyright ©2012 pearson education, inc. publishing as prentice hall20-1 management succession and...

Documents