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Management Succession and Risk Management Strategies in the Family Business.

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Presentation on theme: "Management Succession and Risk Management Strategies in the Family Business."— Presentation transcript:

1 Management Succession and Risk Management Strategies in the Family Business

2 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 2 Family Businesses A vital part of the U.S. economy: Nearly 90% of all U.S. businesses are family-owned Nearly 90% of all U.S. businesses are family-owned Generate 50% of the nation's GDP Generate 50% of the nation's GDP Account for 60% of all employment and 78% of all job creation Account for 60% of all employment and 78% of all job creation Pay 65% of all wages Pay 65% of all wages Average annual sales = $36.5 million Average annual sales = $36.5 million

3 Chapter 20 Mgt Succession & Risk Mgt 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. 70% of first-generation businesses fail to survive into the second generation. Of those that do, only 12% make it to the third generation. Of those that do, only 12% make it to the third generation. Result: Average life expectancy of a family business is 24 years. Result: Average life expectancy of a family business is 24 years.

4 Chapter 20 Mgt Succession & Risk Mgt 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... 19% had not engaged in any kind of estate planning.

5 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 5 Qualities Essential to a Successful Family Business Shared values Shared values Shared power Shared power Tradition Tradition A willingness to learn A willingness to learn Behaving like families Behaving like families Strong family ties Strong family ties

6 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 6 Exit Strategies Selling to Outsiders Selling to Outsiders  Straight sale Selling to Insiders Selling to Insiders  Cash plus a note  Leveraged buyouts (LBOs)  Employee stock ownership plans (ESOPs)

7 Chapter 20 Mgt Succession & Risk Mgt 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. 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. The businesses with the greatest chance of surviving to the next generation are those with management succession plans.

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9 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 9 Management Succession For a smooth transition from one generation to the next, family businesses need a succession plan. 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. A plan allows one generation to pass leadership to the next just as runners in a relay race pass a baton.

10 Stages in Management Succession

11 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 11 Skills a Successor Needs Financial abilities Financial abilities Technical knowledge Technical knowledge Negotiating ability Negotiating ability Leadership qualities Leadership qualities Communication skills Communication skills Juggling skills Juggling skills Integrity Integrity Commitment to the business Commitment to the business

12 Chapter 20 Mgt Succession & Risk Mgt 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. Believe that owning the business helps achieve their families’ mission. Are proud of the values on which their businesses are built. 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. 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. Rely on management succession plans to assure the continuity of the company.

13 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 13 Developing a Management Succession Plan Step 1. Select the successor.

14 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 14 Selecting a Successor Make it clear that children are not required to join the family business. 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. 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. Give family members the opportunity to work outside the family business first. Don’t procrastinate! Don’t procrastinate! Make the choice based on skill, ability, and merit rather than on gender or birth order. Make the choice based on skill, ability, and merit rather than on gender or birth order.

15 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 15 Step 1. Select the successor. Step 2. Create a survival kit for the successor. Step 3. Groom the successor. Developing a Management Succession Plan

16 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 16 Grooming the Successor A founder must be: Patient Patient Willing to accept mistakes Willing to accept mistakes Skillful at using mistakes to teach Skillful at using mistakes to teach An effective communicator An effective communicator Capable of establishing reasonable expectations Capable of establishing reasonable expectations Able to articulate the keys to the successor’s performance Able to articulate the keys to the successor’s performance

17 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 17 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. Developing a Management Succession Plan

18 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 18 Tools to Minimize Estate and Gift Taxes Buy/sell agreement Buy/sell agreement Lifetime gifting Lifetime gifting Trusts Trusts  Bypass trust  Irrevocable life insurance trust  Irrevocable asset trust  Grantor retained annuity trust (GRAT) Estate Freeze Estate Freeze Family limited partnership Family limited partnership

19 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 19 Risk Management Strategies Risk avoidance Risk avoidance Risk reduction Risk reduction Risk anticipation Risk anticipation Risk transfer Risk transfer

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

21 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 21 Major Types of Insurance  Property and casualty  Extra expense coverage  Business interruption  Machinery and equipment Start with a basic business owner’s policy (BOP); then consider adding property and casualty insurance:  Auto  Electronic data processing (EDP)  Surety  Marine  Crime

22 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 22 Start with a basic business owner’s policy (BOP); then, consider adding life and disability insurance: Major Types of Insurance  Life  Key-person  Disability

23 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 23 Major Types of Insurance  Traditional indemnity plans  Managed care plans HMOs HMOs PPOs PPOs  Health Savings Accounts (HSAs)  Self-insurance  Workers’ Compensation Start with a basic business owner’s policy (BOP); then consider adding health insurance and workers’ compensation

24 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 24 Start with a basic business owner’s policy (BOP); then, consider adding liability insurance:  Professional liability (“errors and omissions” coverage)  Employment practices liability Major Types of Insurance

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26 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 26 Controlling Insurance Costs Aggressively pursue a loss- control program. Aggressively pursue a loss- control program. Increase your policies' deductibles. Increase your policies' deductibles. Work with a qualified professional insurance broker or agent. Work with a qualified professional insurance broker or agent. Find an agent who understands your needs. Find an agent who understands your needs.

27 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 27 Controlling Insurance Costs Find insurance companies that want small companies’ business. Find insurance companies that want small companies’ business. Utilize the resources of your insurance company. Utilize the resources of your insurance company. Conduct a periodic insurance audit. Conduct a periodic insurance audit.

28 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 28 Controlling Health Insurance Costs Increase employees’ insurance contributions or deductibles. Increase employees’ insurance contributions or deductibles. Switch to HMOs or PPOs. Switch to HMOs or PPOs. Join an insurance pool. Join an insurance pool. Conduct a yearly utilization review. Conduct a yearly utilization review.

29 Chapter 20 Mgt Succession & Risk Mgt Copyright 2006 Prentice Hall Publishing Company 29 Controlling Insurance Costs Make sure your company’s health plan fits the needs of your employees. Make sure your company’s health plan fits the needs of your employees. Create a wellness program for employees. Create a wellness program for employees. Conduct a safety audit. Conduct a safety audit. Create a safety manual and use it. Create a safety manual and use it. Create a safety team. Create a safety team.


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