1 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Chapter 8: Family Businesses

2 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Learning Objectives To become aware that most of the businesses in the United States are family owned To understand the advantages and disadvantages of being an entrepreneurial couple To understand the alternatives for the entrepreneur’s children to enter the business To comprehend the issues that need to be addressed in a succession plan

3 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Family Business A majority of ownership or control lies within a family Two or more family members are directly involved

4 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Impact on Economy Family businesses account for 78 percent of all new job creation 60 percent of the nation’s employment 80 percent of U.S. businesses 35 percent of Fortune 500 companies

5 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Advantages of Family Businesses Stability Trust Ability to sacrifice for long term

6 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Disadvantages of Family Businesses Family issues spill over into business Family based on emotion, nurturing, security Business based on productivity, accomplishment, profit

7 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Advantages of Entrepreneurial Couples Both work long hours/dedicated to success Spouses take shifts at home Marriage and careers are intertwined

8 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Disadvantages of Entrepreneurial Couples Too much togetherness Conversations at home about business Divorce may cause loss of business

9 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Effect of Divorce May force sale of business May cause financial ruin

10 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Divorce Laws Community Property State All assets and liabilities acquired during marriage are split 50/50 if a divorce occurs Equitable Distribution State Courts divide assets and liabilities according to family circumstances and state guidelines

11 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Bringing in the Children One third of family businesses are transferred to second generation 10 to 20 percent are transferred to the third generation Less than 13 percent of businesses stay in the family more than 60 years

12 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Reasons for Unsuccessful Transfers Children do not want the business Sibling rivalry Entrepreneur reluctant to give up control Children of founding partners do not get along

13 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Succession Plan Should the company be sold? How and when should the company be transferred? Active vs. inactive family members Low entry vs. delayed entry Hiring and compensation policy Family Council and Advisory Board Choosing a successor

14 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ The Succession Plan The process of transferring leadership of a business to the next generation Needs to occur over a long period of time Needs well-designed strategy

15 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Sale to Employees? Sale to employees through Employee Stock Ownership Plan (ESOP) Through ESOP, stock owned by the entrepreneur is purchased by the company Stock is then transferred to employees

16 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ How and When Should the Company be Transferred? Sell to family members? Give to family members as gift/inheritance? Transfer while entrepreneur is still living or upon death?

17 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Active vs. Inactive Family Members Active family member works in the business Inactive family member does not take part in daily company operations Equal or unequal ownership when company is transferred?

18 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Entry Options Low-Entry Strategy Children begin working in family business at entry-level position Delayed-Entry Strategy Children work outside the family business Rejoin company after gaining outside experience

19 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Family Council and Advisory Board Family Council Meeting of family members to discuss business issues and problems Advisory Board Group of family and nonfamily employees as well as outside employees

20 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Choosing a Successor Choose one child as company president? Children share power equally? Make decision clear to everyone

21 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ The Family Business and the Business Plan Role of family members described in “management” section State if the following exists: Family Council Advisory Board Succession Plan