1. Mgt Succession/Risk Mgt 1 Copyright 1999 Prentice Hall Publishing Company Management Succession and Risk Management Strategies in the Family Business

2. Mgt Succession/Risk Mgt 2 Copyright 1999 Prentice Hall Publishing Company Family Businesses l More than 80% of all U.S. businesses are family-owned. l Generate 50% of the nation's GDP. l Employ more than 40 million people. l Pay 65% of all wages.

3. Mgt Succession/Risk Mgt 3 Copyright 1999 Prentice Hall Publishing Company Qualities Essential to a Successful Family Business l Shared values l Shared power l Tradition l A willingness to learn and grow l Behaving like families l Strong family ties

4. Mgt Succession/Risk Mgt 4 Copyright 1999 Prentice Hall Publishing Company Exit Strategies l Selling to Outsiders â Straight sale l Selling to Insiders â Cash plus a note â Leveraged buyouts (LBOs) â Employee stock ownership plans (ESOPs)

5. Mgt Succession/Risk Mgt 5 Copyright 1999 Prentice Hall Publishing Company Management Succession l Unfortunately, only 30% of first-generation businesses survive into the second generation. l Of those that do survive to the second generation, only 13% make it to the third generation. Why? No management succession plan! â 80% of all business founders intend to pass their companies on to their children. â But... 54% do not have a formal management succession plan!

6. Mgt Succession/Risk Mgt 6 Copyright 1999 Prentice Hall Publishing Company Management Succession l For a smooth transition from one generation to the next, family businesses need a succession plan. l A plan allows one generation to pass leadership to the next just as runners in a relay race pass a baton.

7. Mgt Succession/Risk Mgt 7 Copyright 1999 Prentice Hall Publishing Company Skills a Successor Needs l Financial abilities l Technical knowledge l Negotiating ability l Leadership qualities l Communication skills l Juggling skills l Commitment to the business

8. Mgt Succession/Risk Mgt 8 Copyright 1999 Prentice Hall Publishing Company Developing a 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.

9. Mgt Succession/Risk Mgt 9 Copyright 1999 Prentice Hall Publishing Company The Impact of Estate and Gift Taxes l Survey of business owners: â More than half said their estates would be hit with a tax bill that would limit their companies’ growth potential. â One-third said paying expected state taxes would require heirs to sell all or part of their businesses. l Tax rates start at 37% and climb to 55%.

10. Mgt Succession/Risk Mgt 10 Copyright 1999 Prentice Hall Publishing Company Tools to Minimize Estate and Gift Taxes l Buy/sell agreement l Lifetime gifting l Trusts â Bypass trust â Irrevocable life insurance trust â Irrevovable asset trust â Grantor retained annuity trust l Estate Freeze l Family limited partnership

11. Mgt Succession/Risk Mgt 11 Copyright 1999 Prentice Hall Publishing Company Risk Management Strategies l Risk avoidance. l Risk reduction. l Risk anticipation. l Risk transfer.

12. Mgt Succession/Risk Mgt 12 Copyright 1999 Prentice Hall Publishing Company Major Types of Insurance l Property and casualty â Property â Extra expense coverage â Business interruption â Surety â Marine â Crime â Fidelity bonds â Forgery bonds Start with a basic business owner’s policy (BOP); consider adding:

13. Mgt Succession/Risk Mgt 13 Copyright 1999 Prentice Hall Publishing Company Major Types of Insurance l Property and casualty â Property â Extra expense coverage â Business interruption â Surety â Marine â Crime â Fidelity bonds â Forgery bonds Start with a basic business owner’s policy (BOP); consider adding: l Life and Disability â Life â Key-person â Disability â Surety l Health â Traditional Indemnity Plans â Managed Care Plans â Medical Savings Accounts â Self-insurance

14. Mgt Succession/Risk Mgt 14 Copyright 1999 Prentice Hall Publishing Company Major Types of Insurance Start with a basic business owner’s policy (BOP); consider adding: l Workers’ Compensation l Liability â Professional liability (“Errors and Omissions”) â Malpractice â Employment practices liability

15. Mgt Succession/Risk Mgt 15 Copyright 1999 Prentice Hall Publishing Company Controlling Insurance Costs l Aggressively pursue a loss-control program. l Increase your policies' deductibles. l Work with a qualified professional insurance broker. l Search the insurance market for the coverage you need at the best price. l Increase the amount of employees' contributions to insurance coverage.

16. Mgt Succession/Risk Mgt 16 Copyright 1999 Prentice Hall Publishing Company Controlling Insurance Costs l Consider using HMOs and PPOs to provide employee health care. l Conduct an annual policy utilization review. l Create a wellness program for employees. l Conduct a safety audit. l Create a safety manual and use it. l Create a safety team.