2-1 Family-Owned Business Organizing/Operating Family-Owned Business Organizing/Operating Family-Owned Business Family Relationships & Business Family Relationships & Business Preparing For Succession & The Next Generation Preparing For Succession & The Next Generation Tax/Estate Planning Tax/Estate Planning Chapter 2

2-2 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Some Facts Around 90% of all US companies are family owned Around 90% of all US companies are family owned Most have fewer than 20 employees Most have fewer than 20 employees Only 30% survive to the second generation of family members Only 30% survive to the second generation of family members 46 million Americans work in home businesses 46 million Americans work in home businesses Family businesses needs management too Family businesses needs management too

2-3 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Issues Emotions Emotions Interaction of business and household issues Interaction of business and household issues Reputation Reputation A criminal act by a single family member may damage the whole family’s business A criminal act by a single family member may damage the whole family’s business

2-4 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Family & Business Written Mission Statement Written Mission Statement Include Children In Decisions Include Children In Decisions Family Discussions Family Discussions

2-5 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Family Mission Statement Start From Trust/Openness Unanimous Agreement On Values & Vision Copies To All Avoid: Rushing Family Favoring An Agenda Forgetting Purpose Photodisc

2-6 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Trends In Family Business Kids Start Business & Get Capital From Parents Parent Given Executive Position Spouses Working Together- Service Businesses With Technology Needs Clear Chain Of Command Royalty-Free/CORBIS

2-7 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Tips For Spousal Ownership Monica Lau/Getty Images

2-8 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Daughters Considering Succession To Family Business ♀Express Interest ♀Outside Experience ♀Learn From Seniors ♀Be Sensitive ♀Get Involved ♀Meet Women ♀Define Yourself ♀Develop A Vision Royalty-Free/CORBIS 30% of businesses are now owned by women

2-9 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Successful Family Interaction  Founder = Head  Some Family In High Positions  Incur “Sense Of Ownership”  Deal With Incompetents  Compensate  Recognize Limitations

2-10 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Steps In Divorce 1.Business Appraisal 2.Negotiate Buyout 3.Decide What To Do With Stock 4.Seek Tax Professionals

2-11 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Family Culture & Business Large Families Large Families Stay-At-Home Mom Stay-At-Home Mom Develop Hobbies As Business Develop Hobbies As Business Working Moms Establish Business Working Moms Establish Business Economy More Difficult Economy More Difficult Need Additional Income Need Additional Income Large Business No Longer Family- Friendly Large Business No Longer Family- Friendly Keith Brofsky/Getty Images

2-12 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Family Resources Borrow Capital Sell Stock Selling Personal Assets Other PhotoLink/Getty Images

2-13 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Next Generation Preparation Start Part/Full-Time Job Start Part/Full-Time Job Start Entry/Higher- Level Position In Business Start Entry/Higher- Level Position In Business Outside Experience Outside Experience Rotate Jobs Rotate Jobs Earn Promotions Earn Promotions Teaching/Training Teaching/Training Leave Work At Work Leave Work At Work If Prepared, Give Responsibility If Prepared, Give Responsibility

2-14 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Succession Planning  Plan Early & Carefully  Groom Successor  Doug Menuez/Getty Images

2-15 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Succession Problems Treat All Children Fairly Treat All Children Fairly Nonfamily Employees? Nonfamily Employees? Family Concerns: Family Concerns: Communication Communication Conflict Conflict Estate Taxes Estate Taxes More Than 1 Child Succession More Than 1 Child Succession

2-16 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Succession Planning Obstacles: Founder Financial Security Financial Security Sudden Free Time Sudden Free Time Self-Esteem Self-Esteem Founder Fair To Successor(s) Founder Fair To Successor(s) Successor Ready? Successor Ready? Jealousy/ Rivalry To Successor Jealousy/ Rivalry To Successor Effect On Spouse Effect On Spouse Founder’s Fiduciary Responsibility To Nonfamily Employees Founder’s Fiduciary Responsibility To Nonfamily Employees Friends Continue To Work Friends Continue To Work Fear Of Death Fear Of Death Reluctance To Release Power Reluctance To Release Power Coaching Skills? Coaching Skills? Source: Family Business Experts,

2-17 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Spouse’s Role In Business Spouse’s Role In Business Reluctance To Discuss Future Beyond Parents’ Life Reluctance To Discuss Future Beyond Parents’ Life Fairness vs. Favoritism Fairness vs. Favoritism Fear Of Parents’ Death Fear Of Parents’ Death Succession Planning Obstacles: Family Source: Family Business Experts, Jack Hollingsworth/Getty Images

2-18 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Personal Relationship With Founder Personal Relationship With Founder Differentiating Amongst Key Managers Differentiating Amongst Key Managers Reluctance To Establish Formal Controls Reluctance To Establish Formal Controls Fear Of Change Fear Of Change Succession Planning Obstacles: Employees Source: Family Business Experts, Royalty-Free/CORBIS

2-19 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Customers & Suppliers Customers & Suppliers Dependence On Founder Dependence On Founder Trust/Confidence In Potential Successor Trust/Confidence In Potential Successor Succession Planning Obstacles: Outsiders Source: Family Business Experts, Royalty-Free/CORBIS

2-20 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Causes Of Succession Family Leader: Sudden Departure Sudden Departure Dies Dies Becomes Incapacitated Becomes Incapacitated Planned Departure Planned Departure Leaves Company Leaves Company Retires Retires Royalty-Free/CORBIS \

2-21 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Family Leader: Replacement Options

2-22 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Selling To Family Members- Advantages Stays In Family Stays In Family Source Of Family Employment Source Of Family Employment Stature Maintained Stature Maintained Owner = Relax Owner = Relax Pleasure Of Success Pleasure Of Success Strengthen Family Strengthen Family

2-23 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Assured Income Assured Income Lack Of Worry Lack Of Worry Consult? Consult? Release Tension Release Tension Relief Of Responsibility Relief Of Responsibility Selling To Outsiders- Advantages

2-24 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Loss Of Family ID Loss Of Family ID Loss = Sadness Loss = Sadness Selling To Outsiders- Disadvantages Greg Kuchik/Getty Images

2-25 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Ease The Transition For Owner Broaden Focus Broaden Focus Devote Time To: Devote Time To: Hobbies Hobbies Other Groups Other Groups Gradually Turn Over Control Gradually Turn Over Control Doug Menuez/Getty Images

2-26 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Estate Planning Issues Minimize Taxes Minimize Taxes Retain Control Retain Control Maintain Business Flexibility Maintain Business Flexibility Steven Cole/Getty Images

2-27 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Inc. 500 CEOs’ Net Worth Source: Inc. Magazine, “Compensation”, November 2004.

2-28 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. INC. 500 CEOs’ Take-Home Pay Source: Inc. Magazine, “Compensation”, November 2004.

2-29 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Financial Planning Tax - Annual Conferences With Tax Accountant Tax - Annual Conferences With Tax Accountant Estate – Transfer Of Assets At Death Estate – Transfer Of Assets At Death Perpetuation Perpetuation Liquidity Liquidity Business Standpoint Business Standpoint Reduce Cash Strain Reduce Cash Strain Maintain Beneficiaries’ Interest Maintain Beneficiaries’ Interest Smooth Transition Smooth Transition Keith Brofsky/Getty Images

2-30 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Estate Planning Techniques Gifts Gifts Stock Sales Stock Sales Living Trusts Living Trusts Family Limited Partnerships Family Limited Partnerships Minimize Cost Minimize Cost Retain Control Retain Control Buy/Sell Agreement Buy/Sell Agreement PhotoLink/Getty Images

2-31 McGraw-Hill/Irwin© 2006 The McGraw-Hill Companies, Inc. All rights reserved. Business Valuation Comparables Comparables Earnings Capitalization Earnings Capitalization Book Value Book Value