1. MGT 4550 - Family Business Management FINANCIAL ISSUES FOR BUSINESS AND FAMILY Chapter 9 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 11 (04/05) 4 FINANCIAL ISSUES FOR THE BUSINESS AND FAMILY l Reading: Chapter 9 Going Public, FBM l Questions: n 6, 42-51, 79, 97-100 FBAB

3. Dr. Irene M. Duhaime3 The Decision to Go Public 4 Going public is a financial strategy 4 Reasons: l Need for capital to fund growth l Prestige

4. Dr. Irene M. Duhaime4 Question 98 At what point or under what circumstances should the company go public? If the company needs capital are there other ways to raise it other than by selling or going public?

5. Dr. Irene M. Duhaime5 Advantages of Going Public 4 Raise equity, avoiding debt financing and high interest cost. 4 Increase the net worth and potential borrowing power (improved debt-to-equity). 4 Successful initial public offering makes it easier to raise funds through different debt financing instruments (e.g. debentures). ….continued

6. Dr. Irene M. Duhaime6 Advantages of Going Public ….continued 4 As the market value of the company’s shares appreciates, bankers and lenders are more likely to lend the business money. 4 Personal benefits for the owner and family members if the company becomes successful. 4 Enhances the firm’s image and prestige.

7. Dr. Irene M. Duhaime7 Disadvantages of Going Public 4 High cost of going public l Underwriter’s commission (8%) l Prospectus cost l Registration fees l Accounting cost 4 Family could lose control l Family members must retain at least 51% ….continued

8. Dr. Irene M. Duhaime8 Disadvantages of Going Public ….continued 4 Loss of privacy. Public companies: l Must disclose all business transactions l Are scrutinized by n regulators and financial analysts n shareholders and potential investors n customers, suppliers and competitors 4 Change family business culture radically.

9. Dr. Irene M. Duhaime9 Question 99 How much does going public cost? Who should take the firm public?

10. Dr. Irene M. Duhaime10 Criteria for Going Public 4 Management Capacity l handle responsibility and pressures of going public 4 Proven Track Record l at least two years consistent high growth and outstanding performance 4 Potential for Growth l existing products, services and/or opportunity have potential growth, new market and/or innovation.

11. Dr. Irene M. Duhaime11 Question 100 How will family members’ roles change after the business goes public or is sold?

12. Dr. Irene M. Duhaime12 The Business Plan 4 Allows the underwriter to evaluate: l The business l Potential growth l The management team

13. Dr. Irene M. Duhaime13 Business Plan - Critical Factors 4 Well documented l sufficiently detailed and informative 4 Look and read professionally l accurate calculations and latest analysis techniques 4 Avoid ambiguity (perception of deceiving investors) 4 CEO/Founder’s personal commitment

14. Dr. Irene M. Duhaime14 The Effective Plan 4 Focuses on interests of all stakeholders l Customers n why buy product and services l Investors n viability and returns l Stockholders (owners) n ownership and returns

15. Dr. Irene M. Duhaime15 Outline of the Business Plan

16. Dr. Irene M. Duhaime16 Question 79 What red flags may arise as senior- generation family members begin to transfer their stock to their children ?

17. Dr. Irene M. Duhaime17 Question 42 When should estate planning begin and how should you start a discussion, particularly if you’re the spouse or heir?

18. Dr. Irene M. Duhaime18 Question 44 What type of insurance should you consider to help pay estate taxes and provide funds for your heirs? How much insurance do you need? Who should be the owner and beneficiary of the policy?

19. Dr. Irene M. Duhaime19 Question 43 What are the basics of transfer tax planning? What is the value of your business for transfer tax purposes? Where should the funds come from to pay these taxes?

20. Dr. Irene M. Duhaime20 Question 45 When does a family limited partnership (FLP) make sense and when is it not a good idea?

21. Dr. Irene M. Duhaime21 Question 49 What other estate planning techniques should you consider for shifting ownership to the next generation(s)?

22. Dr. Irene M. Duhaime22 Question 46 Is it fair to give equal ownership to both active and inactive children?

23. Dr. Irene M. Duhaime23 Question 47 How can you both be fair and equal when it comes to estate planning if you decide that some children should not receive stock?

24. Dr. Irene M. Duhaime24 Question 48 Should a spouse or children not active in the business receive any stock or other assets?

25. Dr. Irene M. Duhaime25 Question 97 Business is booming. Should the family sell the company? What will life be like after the sale?

26. Dr. Irene M. Duhaime26 Question 6 When is the best time to sell a family business?

27. Dr. Irene M. Duhaime27 Class Schedule - Remaining weeks 4 Apr. 12 l SECOND EXAM 4 Apr. 19 l Presentations - ALL FINAL PROJECTS DUE 4 Apr. 26 l Presentations