Part VI – Contemporary Challenges in Entrepreneurship Chapter 18 – Acquisition and Valuation of Business Ventures Chapter 19 – Management Succession and Continuity: A Family Business Perspective Chapter 20 – Women and Minority Entrepreneurship Chapter 21 – Total Quality Management: The Continuous Improvement Challenge for Entrepreneurs Copyright (c) 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Chapter 19 – Management Succession and Continuity: A Family Business Perspective

Family–Owned Business Research has shown that approximately 92 percent of all U.S. business ventures are under the strategic control of a family and are intended to remain in the family.

Advantages and Disadvantages of Family Controlled Firms Advantages Long-term orientationLong-term orientation Greater independence of actionGreater independence of action Family culture as a source of prideFamily culture as a source of pride Greater resilience in hard timesGreater resilience in hard times Less bureaucratic and impersonalLess bureaucratic and impersonal Financial benefitsFinancial benefits Knowing the businessKnowing the business Disadvantages Less access to capital markets may curtail growth Confusing organization Nepotism Spoiled-kid syndrome Paternalistic/autocratic rule Financial strain Succession dramas

The Management Succession Issue

Barriers to Succession Planning in Family Firms Founder/Owner Death anxietyDeath anxiety Dilemma of choiceDilemma of choice Generational envyGenerational envy Family Death as taboo Fear of sibling rivalry Change of spouse’s position

Key Factors in Succession

Pressures and Interests in a Family Business Inside the Family The Family Managers The Relatives Inside the Business Outside the Business Outside the Family The Employees The Outsiders The Family Managers Hanging onto or getting Hold of Company Control Selection of Family Members as Members Continuity of Family Investment and Involvement Building a Dynasty Rivalry The Employees Rewards for Loyalty Sharing of Equity, Growth, and Success Professionalism Bridging Family Transitions Stake in the Company The Relatives Income and Inheritance Family Conflicts and Alliances Degree of Involvement in the Business The Outsiders Competition Market, Product, Supply, and Technology Influence Tax Laws Regulatory Agencies

Forcing Events Forcing events are those happenings that cause the replacement of the owner-manager: DeathDeath IllnessIllness Mental or psychological breakdownMental or psychological breakdown Abrupt departureAbrupt departure Legal problemsLegal problems Severe business declineSevere business decline Financial difficultiesFinancial difficulties

Sources of Succession An entrepreneurial successor is someone who is high in ingenuity, creativity, and drive.An entrepreneurial successor is someone who is high in ingenuity, creativity, and drive. The managerial successor is someone who is interested in efficiency, internal control, and the effective use of resources.The managerial successor is someone who is interested in efficiency, internal control, and the effective use of resources.

Two Key Strategies The early entry strategy versus the delayed entry strategy. The main question is the ability of the successor to gain credibility with the firm’s employees.

Legal Restrictions Oakland Scavenger Company (a garbage collection firm).Oakland Scavenger Company (a garbage collection firm). “nepotistic concerns cannot supersede the nation’s paramount goal of equal economic opportunity for all.”“nepotistic concerns cannot supersede the nation’s paramount goal of equal economic opportunity for all.” It means, conceivably, that almost any small business can be sued by an employee of a different ethnic origin than the owner, based upon not being accorded the same treatment of a son or daughter.It means, conceivably, that almost any small business can be sued by an employee of a different ethnic origin than the owner, based upon not being accorded the same treatment of a son or daughter.

Developing a Succession Strategy

Understanding the Contextual Aspects TimeTime Type of VentureType of Venture Capabilities of ManagersCapabilities of Managers Entrepreneur’s VisionEntrepreneur’s Vision Environmental FactorsEnvironmental Factors

Identifying Successor Qualities

Understanding Influencing Forces Family and Business Culture IssuesFamily and Business Culture Issues Owner’s ConcernsOwner’s Concerns Family Member ConcernsFamily Member Concerns

Carrying Out the Succession Plan Identifying a SuccessorIdentifying a Successor Groom an HeirGroom an Heir Agree on a PlanAgree on a Plan Consider Outside HelpConsider Outside Help

The Harvest Strategy: Selling Out Entrepreneurs consider selling their venture for numerous reasons: 1.Boredom and burnout 2.Lack of operating and growth capital 3.No heirs to leave the business to 4.Desire for liquidity 5.Aging and health problems 6.Desire to pursue other interests

Steps for Selling a Business Step 1: Prepare a Financial Analysis Step 2: Segregate Assets Step 3: Value the Business Step 4: Identify the Appropriate Timing Step 5: Publicize the Offer to Sell Step 6: Finalize the Prospective Buyers Step 7: Remain Involved through the Closing Step 8: Communicate after the Sale