copyright © 2015 pearson education, inc. publishing as prentice hall 22-1

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall22-2

Chapter 22

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

Nearly 90% of all U.S. companies are family ownedGenerate 64% of the nation's GDPAccount for 63% of all employment and 78% of all job

creationPay 65% of all wages

Globally, family-owned businesses account for 70 to 90% of the world GDP

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Benefits of Family BusinessLong-term focusFaster decision makingAn entrepreneurial mindsetStrong commitment to their employeesLocal philanthropy

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The Dark Side of Family BusinessThe stumbling block for most family companies is

management succession70% of first-generation businesses fail to survive

into the second generationOf those that do, only 13% make it to the third

generation, and just 3% survive to the fourth generation

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

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The World’s Oldest Family Businesses


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

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

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

wanted to happen to their businesses when they leave

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

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Characteristics of Successful Family BusinessesShared valuesShared powerTraditionA sense of stewardshipA willingness to learn and adaptBehaving like familiesStrong family support network

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The Legacy Model for Sustaining a Successful Family Business


Plans for Passing on the Family Business


1. Selling to OutsidersStraight sale

2. Selling to InsidersCash plus a noteLeveraged buyouts (LBOs)Employee stock ownership plans (ESOPs)

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Employee Stock Ownership Plans


1. Selling to OutsidersStraight sale

2. Selling to InsidersCash plus a noteLeveraged buyouts (LBOs)Employee stock ownership plans (ESOPs)

3. Transferring to the next generation of family members

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By 2040, $10.4 trillion in wealth will be transferred from one generation to the next, much of it funneled through family businesses

For a smooth transition from one generation to the next, family businesses need a succession planAlthough 95% of small business owners

acknowledge the need for a succession plan, only one in eight actually has a written plan in place for leadership continuity

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Stages in Management Succession


Skills a successor needs:Financial abilitiesTechnical knowledgeNegotiating abilityLeadership qualitiesCommunication skillsJuggling skillsIntegrityCommitment to the business

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Families that are most committed to seeing their businesses survive from one generation to the next Believe that owning the business helps achieve

their families’ mission Are proud of the values on which their businesses

are built Believe that the business is contributing to society

and making it a better place to live Rely on management succession plans to assure

the continuity of the company

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Creating a succession plan:Step 1: Select the successor

Average tenure of a business founder: 25 yearsBut don’t postpone naming a successor! Make merit, skill, and ability the central focus Don’t assume that the successor must always come

from within the family Make it clear that children are not required to join

the family business Give family members the opportunity to work

outside the family business first

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Step 2: Create a survival kit for the successorInclude all of the company’s critical

documentsBrief the successor on the contents

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Step 3: Groom the successor A founder must be:

Patient Willing to accept mistakes Skillful at using mistakes to teach A cheerleader An effective communicator Capable of establishing reasonable

expectations Able to articulate the keys to the successor’s

performance

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Step 4: Promote an environment of trust and respect Empower the successor gradually Make the final transfer of power smooth

and coordinated Avoid meddling retiree syndrome!

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Step 5: Cope with the financial realities of estate and gift taxes Minimize the impact of estate and gift taxes

on family members and the business Only 41% of business owners have

created a comprehensive estate plan

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Changes in the Estate and Gift Taxes


Buy-Sell AgreementBuy-sell agreement: a contract that co-owners often

rely on to ensure the continuity of a businessLifetime giftingSetting up a trust

Trust: a contract between a grantor (the founder) and a trustee (generally a bank officer or an attorney) in which the grantor gives to the trustee legal title to assets which the trustee agrees to hold for the beneficiaries

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TrustsRevocable trustIrrevocable trust

Bypass trustIrrevocable life insurance trustIrrevocable asset trustGrantor retained annuity trust (GRAT)Estate freezeFamily limited partnership

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Risk management takes a proactive approach to dealing with riskInsurance does not solve all risk problemsDealing with risk successfully requires

1. Risk avoidance2. Risk reduction3. Risk anticipation4. Risk transfer

Captive insurance

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Insurance: the transfer of risk from one entity (an individual, a group, or a business) to an insurance company

Decide how to allocate risk management dollarsRate primary risks based on:

SeverityProbabilityCost

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The Risk Management Pyramid


Types of InsuranceBuy a basic business owner’s policy Add additional coverage as needed

Four major categories:1. Property and casualty2. Extra expense coverage3. Business interruption4. Machinery and equipment

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Property and casualty insurance Covers tangible assets Buy a replacement cost policy Specific types include:

Property Surety Marine and inland marine Liability Business interruption Motor vehicle

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Life and disability insurance Life: protects families and business

against loss of income, security, or personal services that results from an individual’s untimely death

Disability: protects an individual in the event of unexpected and often very expensive disabilities

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Health insurance and workers’ compensation 56.8% of private sector employees get their

health insurance from their employers Patient Protection and Affordable Health Care

Act

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Health insurance and workers’ compensation 56.8% of private sector employees get their

health insurance from their employers Patient Protection and Affordable Health Care

Act Companies with 50 full-time equivalent

workers who work at least 30 hours a week must provide “minimum essential” and “affordable” health care coverage

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Percentage of Companies Offering Health Benefits by Company Size


Average Annual Health Insurance Premiums for Family Coverage


Most Important Factors in Retaining Employees by Age-Group


Employers face four basic health care options:1. Traditional indemnity plans2. Managed care plans

HMOsPPOs

3. Health Savings Accounts (HSAs)4. Self-insurance

Stop-loss insuranceWorkers’ compensation

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Most Dangerous Jobs in the U.S.: Number of Fatal Work Injuries per 100,000 FTE Workers


Liability insuranceProtects a business against losses resulting from

accidents or injuries people suffer on the company’s property and from its products or services and from damage the company causes to others’ property Professional liability insurance (errors and

omissions coverage) Employment practice liability (EPL) insurance Cyber liability insurance

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Number of Employment Charges Filed with EEOC


Pursue a loss-control programIncrease your policies' deductiblesWork with a qualified professional insurance broker or

agentFind a broker or agent who understands your needs Find insurance companies that want small companies’

businessUtilize the resources of your insurance company Conduct a periodic insurance auditCompile employment policies into a handbook for

employees

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Increase employees’ insurance contributions or deductibles

Switch to HMOs, POSs, or PPOsJoin an insurance poolKeep employees informedConduct a yearly utilization reviewMake sure your company’s health plan fits the needs of

your employees Create a wellness program for employeesConduct a safety auditCreate a safety manual and use itCreate a safety team

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