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
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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.
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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.
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5. Qualities Essential to a Successful Family Business
Shared values
Shared power
Tradition
A willingness to learn
Behaving like families
Strong family ties
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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)
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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.
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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.
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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
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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.
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13. Developing a Management Succession Plan
Step 1. Select the successor.
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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.
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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.
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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
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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
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19. Risk Management Strategies
Risk avoidance
Risk reduction
Risk anticipation
Risk transfer
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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
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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
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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
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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
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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.
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27. Controlling Insurance Costs
Find insurance companies that want small companies’ business.
Utilize the resources of your insurance company.
Conduct a periodic insurance audit.
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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.
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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.
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