1. MGT 4550 - Family Business Management Succession - Senior Generation’s Perspective Chapter 5 Family Business Management, Concepts and Practice By A. Bakr Ibrahim & Willard H. Ellis Instructor: Dr. Irene Duhaime

2. Dr. Irene M. Duhaime2 Class Schedule - Week 5 4 Succession - Senior Generation’s Perspective l Reading: chapter 5 l Questions n 5, 19, 27-30, 33-35, 75, 76, 80 FBAB l Case: n Baker, Inc. p. 287 FBM

3. Dr. Irene M. Duhaime3 Contents 4 The decision to let go 4 Resistance to letting go 4 Setting the price 4 Buying the CEO out 4 Timing of succession - the signals Continued ….

4. Dr. Irene M. Duhaime4 Contents …. Continued 4 A family battle in the making 4 Planning the CEO’s/founder’s exit

5. Dr. Irene M. Duhaime5 Question 5 How do you decide if you should pass on the business?

6. Dr. Irene M. Duhaime6 “The final test of greatness in a CEO is how well he chooses a successor and whether he can step aside and let his successor run the company” - Peter Drucker

7. Dr. Irene M. Duhaime7 The Decision to Let Go 4 Critical decision to relinquish control 4 Emotional difficulty 4 Typical scenario: l Owner holds on to control tightly l In the meantime, company goes downhill l Offspring wait impatiently, reach middle age l Intergenerational infighting erupts

8. Dr. Irene M. Duhaime8 Resistance to Letting Go

9. Dr. Irene M. Duhaime9 Resistance to Letting Go 4 Emotional attachment l Started and nourished the business l Has seen the business through good and bad l Experiences stress, withdrawal and sense of loss during transition to less responsibility

10. Dr. Irene M. Duhaime10 Resistance to Letting Go 4 Lack of trust Entrepreneurs: l Often show lack of trust in other people’s skills and competence, including immediate family

11. Dr. Irene M. Duhaime11 Resistance to Letting Go 4 Fear of retirement Individuals sometimes exhibit negative behavior towards retirement because it represents l Discontinuity in their activities l Loss of self-respect l Reminder of aging and death

12. Dr. Irene M. Duhaime12 Resistance to Letting Go 4 Lack of other interests l Work long hours l Business IS their hobby l Find it difficult to adjust to quiet lifestyle at retirement

13. Dr. Irene M. Duhaime13 Question 19 How does a successor get the older generation to retire and what happens if they won’t let go?

14. Dr. Irene M. Duhaime14 Adapted from: Family business Management: Concepts and Practice, by A. Bakr Ibrahim and Willard H. Ellis. Dubuque, Iowa: Kendall Hunt Publishing, 1994. Chapter 5

15. Dr. Irene M. Duhaime15 Adapted from: Family business Management: Concepts and Practice, by A. Bakr Ibrahim and Willard H. Ellis. Dubuque, Iowa: Kendall Hunt Publishing, 1994. Chapter 5

16. Dr. Irene M. Duhaime16 Question 27 How does a founder get and keep qualified children interested in the business, especially when he’s not yet ready to retire and there’s no sign of stepping aside?

17. Dr. Irene M. Duhaime17 Question 30 How does a business leader attract qualified family members and choose the best successor, while screening out those who are not as good?

18. Dr. Irene M. Duhaime18 Question 80 How does the founder deal with a lack of competence or commitment in the next generation? What are the options?

19. Dr. Irene M. Duhaime19 Question 75 Why is a succession plan necessary? What can be done is there isn’t one?

20. Dr. Irene M. Duhaime20 Adapted from: The Final Test of Greatness, by Craig E. Aronoff, Ph.D. And John L. Ward, Ph.D. Marietta, GA Business Owner Resources, 1992.

21. Dr. Irene M. Duhaime21 Adapted from: The Final Test of Greatness, by Craig E. Aronoff, Ph.D. And John L. Ward, Ph.D. Marietta, GA Business Owner Resources, 1992.

22. Dr. Irene M. Duhaime22 The First Steps to Succession Planning 4 Business Strategic Plan 4 Founder’s Personal Financial Plan 4 Family’s Mission Statement 4 Owner’s Estate Plan Succession: The Final Test of Greatness, Aranoff and Ward

23. Dr. Irene M. Duhaime23 Question 76 What about planning for income and emotional needs in retirement?

24. Dr. Irene M. Duhaime24 Setting the Price 4 To ensure a continued stream of income and thus a pleasant retirement 4 To ensure the seriousness and commitment of the successor 4 A ploy to discourage a potential successor, stay at the helm

25. Dr. Irene M. Duhaime25 Buying the CEO Out The successor may buy the CEO/founder out by: 4 Leverage Buy Out (LBO) approach l Pledge the firm’s assets against a loan, then use the loan to buy the CEO’s/founder’s stock 4 Equity capital approach l Have friends invest in the business, then use the money to buy founder out

26. One Founder’s Plan for Personal Financial Security Goals 4 Lifetime annual income of $200,000 per year 4 Liquid asset “security blanket” of $1,000,000 Means 4 Long-term lease on business real estate of $100,000 per year 4 8 percent annual income on $1,250,000 of liquid assets for $100,000 per year Plans for Amassing $1.25 Million Private Capital 4 Extra “bonus” compensation of $150,000 per year for four years 4 Sale of some stock back to company for approximately $625,000 (that the business borrows from the bank) after four years Succession: The Final Test of Greatness, Aranoff and Ward

27. Dr. Irene M. Duhaime27 Timing of Succession - Signals 4Founder/CEO feels overextended or overburdened by work-related activities 4Founder / CEO feels that he or she no longer has the management skills to handle the business

28. Dr. Irene M. Duhaime28 Timing of Succession - Signals 4Lack of familiarity with functional issues, or with growing complexity of external environment 4Problems with communication, motivation and interpersonal skills

29. Dr. Irene M. Duhaime29 Timing of Succession - Signals 4Decline in the overall performance (market share or profitability) of the firm - External causes or CEO match ? 4Problems with customers and suppliers, product or service quality l Family business image may be threatened

30. Dr. Irene M. Duhaime30 A Family Battle in the Making 4 Over time, tension grows and often affects other relationships in the family 4 Brewing political battle among family members 4 Intergenerational infighting may erupt 4 Heirs may take steps to dislodge CEO/founder 4 Rift may be too deep for interventions from peacemakers to make a difference 4 Could result in bitter court battles

31. Continuity of the Firm A.Outside board of directors B. Planning and preparing for succession Succession: The Final Test of Greatness, Aranoff and Ward

32. Dr. Irene M. Duhaime32 Letting Go 4 Set firm retirement date 4 Give up voting stock control at or before that time Succession: The Final Test of Greatness, Aranoff and Ward

33. Dr. Irene M. Duhaime33 Question 29 What is the best relationship for a founder or owner to have with the business if he retires?

34. Dr. Irene M. Duhaime34 Roles for Retiring Founders 4 Industry leadership 4 Business history 4 External public relations 4 New business Succession: The Final Test of Greatness, Aranoff and Ward

35. Dr. Irene M. Duhaime35 Planning the CEO’s/Founder’s Exit 4 Accept own limitations and mortality 4 Accept change and value difference between generations 4 Plan gradual retirement, plan activities after retirement 4 Family members should l Be sensitive to the difficulties being faced by founder/CEO l Assist in the gradual exit / retirement

36. Dr. Irene M. Duhaime36 Question 28 How can you avoid morale problems that result from employee’s fears of change expected by the involvement and eventual management takeover by your successors?

37. Dr. Irene M. Duhaime37 Question 33 How does a boss handle a successor’s improper decision-making? How do successors keep the older generation from sabotaging their decisions?

38. Dr. Irene M. Duhaime38 Question 35 What is the best way for a founder to give a successor a sense of well-being and self-worth in family business?

39. Dr. Irene M. Duhaime39 Questions and Cases l Questions n 5, 19, 27-30, 33-35, 75, 76, 80 FBAB l Case: n Baker, Inc. p. 287 FBM

40. Dr. Irene M. Duhaime40 Class Schedule - Next Week (02/23) 4 First exam 4 Project updates - project update report due

41. Dr. Irene M. Duhaime41 Class Schedule - Following week (03/01) 4 SUCCESSION - LEADER DEVELOPMENT, IMPLEMENTATION l Reading: n Chapter 6 & 7 FBM l Questions n 10-18, 20, 22, 23, 25, 36, 37 FBAB l Case: n Freida’s, Inc. FBM