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Date Created: 10/05/15
CHAPTER 8 FAMILY BUSINESSES CHAPTER OVERVIEW This chapter provides an overview of familyowned businesses and discusses the increasing number of entrepreneurial couples It also identi es issues that must be considered when children are brought into the business and discusses topics that should be included in a succession plan LEARNING OBJECTIVES I To become aware that most of the businesses in the United States are family owned I To A J the J and J39 J of being an entrepreneurial couple I To understand the alternatives for the entrepreneur s children to enter the business I To comprehend the issues that need to be addressed in a succession plan CHAPTER OUTLINE I Introduction A De nition 1 The term family business is de ned in a number of ways 2 The Small Business Administration de nes a family business as any business in which a majority of the ownership or control lies within a family and in which two or more family members are directly involved 3 A family business has also been de ned as one which meets one of the following criteriaiother family members work in the business the owner intends to pass on ownership to a close relative or the owner considers the rm to be a family business 4 Over 80 percent of the businesses in the United States and the international majority are family owned 11 Advantages and Disadvantages A Advantages include stability trust resilience positive public perception and the ability to sacri ce for the long haul B One disadvantage is that family issues often spill over into the business operations III Entrepreneurial Couples A Advantages and Disadvantages l Entrepreneurial couples are one of the fastest growing segments of the business population 2 In the early years of the company both people are willing to work long hours 3 Spousepartnerships can also balance work and family life 4 Too much togetherness may be a concern B Recommendations for Success 1 Each spouse should have specific areas of responsibility to avoid problems over power and decision making 2 The couple must have the same goals and share the same vision for the company 3 A divorce may result in the financial ruin or forced sale of a company even if only one spouse was the owneroperator 4 Some states are considered communityproperty states in which all assets and liabilities acquired during a marriage are spilt 5050 5 Most states 41 out of 50 are equitabledistribution states in which the courts divide assets and liabilities according to family circumstances and state guidelines IV Bringing in the Children A The Transition Transferring the ownership from parent to child is often a difficult process Only a small percentage approximately 30 percent of family businesses are successfully transferred to the second generation B Reasons for Low Succession Rate 1 Businesses often do not survive into the second generation because the children do not want to own the family business 2 A business may not be transferred successfully to the second generation because of sibling rivalry 3 Even when the children want ownership it is often difficult for an entrepreneur to relinquish control of the company to hisher children 4 If the company was founded by a partnership the children of the partners may not get along V The Succession Plan A The Transfer 1 The process of transferring leadership to the next generation is known as succession 2 A successful transfer requires the transferring of hard assets as well as leadership and values 3 The strategy for the transfer is known as the succession plan B Selling the Company 1 One option for entrepreneurs who plan to retire is to sell the company instead of passing it on to the children The company may be sold to an outside party or to employees If the company is to be sold to the employees a common method for the transfer is through an Employee Stock Ownership Plan ESOP With an ESOP the stock that was owned by the entrepreneur is purchased by the company and is then transferred to the employees When and How Should the Company Be Transferred 1 It can be transferred as a gift to the children 2 It may be sold to the children 3 The company can be transferred while the found is still alive upon hisher death Active Versus Inactive Family Members 1 In families with several children it is common for some children to be active in the family business and others to have their own careers 2 Parents must decide if all children will receive stock in the company or if only the active children will be given stock 3 If inactive children are not given stock the entrepreneur must decide if they will be financially compensated in another manner LowEntry versus DelayedEntry l The lowentry strategy recommends that children begin working in the company in an entrylevel position to learn all aspects of the company 2 The lowentry strategy allows the children to develop skills that are important for the business 3 If the entrepreneur is not good at training his or her children the lowentry method may result in con icts 4 The delayedentry strategy recommends that children work outside the company to learn new ideas and be successful in their own careers 5 Problems may arise with the delayedentry strategy though because the children may lack the specific expertise that the company needs Hiring and Compensation Policy l The entrepreneur must decide whether any and all family members will be hired and whether they will be paid market rates or higher 2 Most experts advise that family members should not be hired unless they meet the same criteria as outside employees G Should There Be a Family Council and Advisory Board 1 A council is a meeting of family members to discuss business issues 2 An advisory board has family and nonfamily employees as well as outside advisors H Choosing a Successor From Active Family Members 1 If there are several children who want to manage the company the entrepreneur must decide if one child will be made president or if there will be equal power sharing among the children 2 Although equal power sharing does not always work a recent study indicated that 42 percent of entrepreneurs were considering appointing more than one CEO as successors SUGGESTED RESPONSES TO DISCUSSION QUESTIONS 1 From the children s perspective what would be the advantages and disadvantages of growing up in a family in which one parent owns a business and the other works as an employee in another rm What would be the advantages and disadvantages of having both parents work in the family business If one parent is selfemployed and the other is not the child is able to see the advantages and disadvantages of both situations and may be able to make a more objective career decision The experiences of both will provide the child with a greater understanding of careers The demands of both careers though like any twocareer family may place a strain on the family If both parents work in the company and share the same goals they may be able to balance work and home life easier than with two different jobs and this may make life easier for the child They will learn to appreciate the teamwork between their parents However their perspective will not be as balanced as if their parents have two separate careers Why is it important to establish a hiring and compensation policy for family members Compensation policies in family businesses vary greatly Some families pay their children and relatives less than the market rate while others pay an average or aboveaverage amount Some families believe that all family members should be paid equally no matter what their duties Most experts agree that family members should be paid market rates for the job they are performing This makes the compensation a business decision not an emotional one and will also minimize bad feelings among nonfamily employees 3 What is the difference between the lowentry strategy and the delayedentry strategy Which do you believe is best Why The lowentry strategy states that children should begin working at the company in an entrylevel position so that they can work their way up in the company and learn all aspects of the business The delayedentry strategy recommends that children work outside the company to learn new ideas and to be successful in their own careers Students may not agree on which strategy is best Many experts recommend the delayed entry but each family and business situation is different and the best strategy for one may not be the best for the other 4 What problems arise if a succession plan is not clearly stated If a succession plan is not clearly stated the children cannot plan their careers and are left to make career decisions without accurate information Also if a succession plan is not in place the business may fail when the transition occurs LINK TO THE BUSINESS PLAN If a business is family owned this can be a real advantage when obtaining financing since the dedication and commitment of family members are strengths of many family businesses When writing the business plan the family participation should be discussed in the management section of the business plan The business plan should include answers to the following How is the ownership split among family members How is management divided among family members Do family members have specific responsibilities Are there inactive family members If so who are they Are there plans to bring other family members into the company Is there a succession plan Is there a family council or advisory board HELPFUL WEBSITES httpfobigysuedufobi The FamilyOwned Business Institute includes research events and an Ask the Experts column It also includes excellent pro les of familyowned businesses wwwsbagovlibra pubsedlpdf This is a 33page report on the topic of transferring management in the family owned business It includes topics such as balancing family and business goals choosing a successor and estate planning wwwn bcom The National Federation of Independent Businesses has numerous articles of interest to familybusiness owners These articles can be retrieved by going to the n bcom website and typing family business in the search box