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Copyright 2006 Prentice Hall Publishing Company

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1 Management Succession and Risk Management Strategies in the Family Business

2 Copyright 2006 Prentice Hall Publishing Company
Family Businesses A vital part of the U.S. economy: Nearly 90% of all U.S. businesses are family-owned Generate 50% of the nation's GDP Account for 60% of all employment and 78% of all job creation Pay 65% of all wages Average annual sales = $36.5 million Copyright 2006 Prentice Hall Publishing Company

3 The Dark Side of Family Businesses
Management succession! 70% of first-generation businesses fail to survive into the second generation. Of those that do, only 12% make it to the third generation. Result: Average life expectancy of a family business is 24 years. Copyright 2006 Prentice Hall Publishing Company

4 Management Succession
Why are the odds of succession so low? No management succession plan! 80% of all business founders intend to pass their companies on to their children. But % had not engaged in any kind of estate planning. Copyright 2006 Prentice Hall Publishing Company

5 Qualities Essential to a Successful Family Business
Shared values Shared power Tradition A willingness to learn Behaving like families Strong family ties Copyright 2006 Prentice Hall Publishing Company

6 Copyright 2006 Prentice Hall Publishing Company
Exit Strategies Selling to Outsiders Straight sale Selling to Insiders Cash plus a note Leveraged buyouts (LBOs) Employee stock ownership plans (ESOPs) Copyright 2006 Prentice Hall Publishing Company

7 Management Succession
Between 2001 and 2017, $12 trillion in wealth will be transferred from one generation to the next, much of it through family businesses. The businesses with the greatest chance of surviving to the next generation are those with management succession plans. Copyright 2006 Prentice Hall Publishing Company

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9 Management Succession
For a smooth transition from one generation to the next, family businesses need a succession plan. A plan allows one generation to pass leadership to the next just as runners in a relay race pass a baton. Copyright 2006 Prentice Hall Publishing Company

10 Stages in Management Succession

11 Skills a Successor Needs
Financial abilities Technical knowledge Negotiating ability Leadership qualities Communication skills Juggling skills Integrity Commitment to the business Copyright 2006 Prentice Hall Publishing Company

12 Families Whose Businesses Survive to the Next Generation…
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. Copyright 2006 Prentice Hall Publishing Company

13 Developing a Management Succession Plan
Step 1. Select the successor. Copyright 2006 Prentice Hall Publishing Company

14 Copyright 2006 Prentice Hall Publishing Company
Selecting a Successor Make it clear that children are not required to join the family business. Do not assume that the successor must always come from within the family. Give family members the opportunity to work outside the family business first. Don’t procrastinate! Make the choice based on skill, ability, and merit rather than on gender or birth order. Copyright 2006 Prentice Hall Publishing Company

15 Developing a Management Succession Plan
Step 1. Select the successor. Step 2. Create a survival kit for the successor. Step 3. Groom the successor. Copyright 2006 Prentice Hall Publishing Company

16 Grooming the Successor
A founder must be: Patient Willing to accept mistakes Skillful at using mistakes to teach An effective communicator Capable of establishing reasonable expectations Able to articulate the keys to the successor’s performance Copyright 2006 Prentice Hall Publishing Company

17 Developing a Management Succession Plan
Step 1. Select the successor. Step 2. Create a survival kit for the successor. Step 3. Groom the successor. Step 4. Promote an environment of trust and respect. Step 5. Cope with the financial realities of estate and gift taxes. Copyright 2006 Prentice Hall Publishing Company

18 Tools to Minimize Estate and Gift Taxes
Buy/sell agreement Lifetime gifting Trusts Bypass trust Irrevocable life insurance trust Irrevocable asset trust Grantor retained annuity trust (GRAT) Estate Freeze Family limited partnership Copyright 2006 Prentice Hall Publishing Company

19 Risk Management Strategies
Risk avoidance Risk reduction Risk anticipation Risk transfer Copyright 2006 Prentice Hall Publishing Company

20 Figure 20.3 The Risk Pyramid.
AAA High severity High probability High loss = High Risk AAB ABA BAA AAC ABB ACA BAB BBA CAA AAD ABC ACB ADA BAC BBB Low severity Low probability Low loss = Low Risk BCA CAB CBA DAA ABD ACC ADB Event Severity of event Probability of event Loss from event _____ A-D A-D A-D

21 Major Types of Insurance
Start with a basic business owner’s policy (BOP); then consider adding property and casualty insurance: Property and casualty Extra expense coverage Business interruption Machinery and equipment Auto Electronic data processing (EDP) Surety Marine Crime Copyright 2006 Prentice Hall Publishing Company

22 Major Types of Insurance
Start with a basic business owner’s policy (BOP); then, consider adding life and disability insurance: Life Key-person Disability Copyright 2006 Prentice Hall Publishing Company

23 Major Types of Insurance
Start with a basic business owner’s policy (BOP); then consider adding health insurance and workers’ compensation Traditional indemnity plans Managed care plans HMOs PPOs Health Savings Accounts (HSAs) Self-insurance Workers’ Compensation Copyright 2006 Prentice Hall Publishing Company

24 Major Types of Insurance
Start with a basic business owner’s policy (BOP); then, consider adding liability insurance: Professional liability (“errors and omissions” coverage) Employment practices liability Copyright 2006 Prentice Hall Publishing Company

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26 Controlling Insurance Costs
Aggressively pursue a loss-control program. Increase your policies' deductibles. Work with a qualified professional insurance broker or agent. Find an agent who understands your needs. Copyright 2006 Prentice Hall Publishing Company

27 Controlling Insurance Costs
Find insurance companies that want small companies’ business. Utilize the resources of your insurance company. Conduct a periodic insurance audit. Copyright 2006 Prentice Hall Publishing Company

28 Controlling Health Insurance Costs
Increase employees’ insurance contributions or deductibles. Switch to HMOs or PPOs. Join an insurance pool. Conduct a yearly utilization review. Copyright 2006 Prentice Hall Publishing Company

29 Controlling Insurance Costs
Make sure your company’s health plan fits the needs of your employees. Create a wellness program for employees. Conduct a safety audit. Create a safety manual and use it. Create a safety team. Copyright 2006 Prentice Hall Publishing Company


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