2-1McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

2-2

Family-Owned Family-Owned BusinessBusiness

Organizing/Operating Family-Owned Organizing/Operating Family-Owned BusinessBusiness

Family Relationships & BusinessFamily Relationships & Business

Preparing For Succession & The Preparing For Succession & The Next GenerationNext Generation

Tax/Estate PlanningTax/Estate Planning

Ch

apte

r

22

2-3McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Family & BusinessFamily & BusinessWritten Mission StatementWritten Mission Statement

Include Children Include Children In DecisionsIn Decisions

Family DiscussionsFamily Discussions

2-4McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Family Mission StatementFamily Mission Statement

Start From Trust/OpennessStart From Trust/OpennessUnanimous Agreement On Values Unanimous Agreement On Values

& Vision& VisionCopies To AllCopies To AllAvoid:Avoid:

Rushing FamilyRushing FamilyFavoring An AgendaFavoring An AgendaForgetting PurposeForgetting Purpose

Photodisc

2-5McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Trends In Family BusinessTrends In Family Business

Kids Start Business & Get Capital Kids Start Business & Get Capital From ParentsFrom Parents

Parent Given Executive Parent Given Executive PositionPosition

Spouses Working Spouses Working Together- Service Together- Service Businesses With TechnologyBusinesses With Technology

Needs Clear Chain Of CommandNeeds Clear Chain Of Command

Royalty-Free/CORBIS

2-6McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Tips For Spousal OwnershipTips For Spousal Ownership

Monica Lau/Getty Images

2-7McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Daughters ConsideringDaughters ConsideringSuccession To Family BusinessSuccession To Family Business

♀Express InterestExpress Interest

♀Outside ExperienceOutside Experience

♀Learn From Learn From

SeniorsSeniors

♀Be SensitiveBe Sensitive

♀Get InvolvedGet Involved

♀Meet WomenMeet Women

♀Define YourselfDefine Yourself

♀Develop A VisionDevelop A Vision

Royalty-Free/CORBIS

2-8McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

SuccessfulSuccessfulFamily InteractionFamily Interaction

Founder = HeadFounder = HeadSome Family In High Some Family In High PositionsPositions

Incur “Sense Of Ownership”Incur “Sense Of Ownership”Deal With IncompetentsDeal With IncompetentsCompensateCompensateRecognize LimitationsRecognize Limitations

2-9McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Steps In DivorceSteps In Divorce

1.1. Business AppraisalBusiness Appraisal

2.2. Negotiate BuyoutNegotiate Buyout

3.3. Decide What To Do Decide What To Do

With StockWith Stock

4.4. Seek Tax ProfessionalsSeek Tax Professionals

2-10McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Family Culture & BusinessFamily Culture & Business

Large FamiliesLarge FamiliesStay-At-Home MomStay-At-Home MomDevelop Hobbies As Develop Hobbies As

BusinessBusinessWorking Moms Establish BusinessWorking Moms Establish Business

Economy More DifficultEconomy More DifficultNeed Additional IncomeNeed Additional IncomeLarge Business No Longer Family-Large Business No Longer Family-

FriendlyFriendly

Keith Brofsky/Getty Images

2-11McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Family ResourcesFamily ResourcesBorrow CapitalBorrow Capital

Sell StockSell Stock

Selling Personal AssetsSelling Personal Assets

OtherOtherPhotoLink/Getty Images

2-12McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Next Generation PreparationNext Generation Preparation

Start Part/Full-Time Start Part/Full-Time JobJob

Start Entry/Higher-Start Entry/Higher-Level Position In Level Position In BusinessBusiness

Outside ExperienceOutside ExperienceRotate JobsRotate Jobs

Earn PromotionsEarn Promotions

Teaching/TrainingTeaching/Training

Leave Work At Leave Work At

WorkWork

If Prepared, Give If Prepared, Give

ResponsibilityResponsibility

2-13McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Succession PlanningSuccession PlanningPlan Early & CarefullyPlan Early & Carefully

Groom SuccessorGroom Successor

http://http://www.businesslaw.govwww.businesslaw.govDoug Menuez/Getty Images

2-14McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Succession ProblemsSuccession ProblemsTreat Treat AllAll Children Fairly Children FairlyNonfamily Employees?Nonfamily Employees?Family Concerns:Family Concerns:

CommunicationCommunicationConflictConflictEstate TaxesEstate Taxes

More Than 1 Child SuccessionMore Than 1 Child Succession

2-15McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Succession PlanningSuccession PlanningObstacles: FounderObstacles: Founder

Financial SecurityFinancial SecuritySudden Free TimeSudden Free TimeSelf-EsteemSelf-EsteemFounder Fair To Founder Fair To

Successor(s)Successor(s)Successor Ready?Successor Ready?Jealousy/ Rivalry To Jealousy/ Rivalry To

SuccessorSuccessorEffect On SpouseEffect On Spouse

Founder’s Fiduciary Founder’s Fiduciary Responsibility To Responsibility To Nonfamily EmployeesNonfamily Employees

Friends Continue To Friends Continue To WorkWork

Fear Of DeathFear Of DeathReluctance To Release Reluctance To Release

PowerPowerCoaching Skills?Coaching Skills?

Source: Family Business Experts, www.familybusinessexperts.com

2-16McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Spouse’s Role In BusinessSpouse’s Role In BusinessReluctance To Discuss Reluctance To Discuss Future Beyond Parents’ Future Beyond Parents’ LifeLife

Fairness vs. FavoritismFairness vs. FavoritismFear Of Parents’ DeathFear Of Parents’ Death

Succession PlanningSuccession PlanningObstacles: FamilyObstacles: Family

Source: Family Business Experts, www.familybusinessexperts.com

Jack Hollingsworth/Getty Images

2-17McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Personal Relationship With Personal Relationship With FounderFounder

Differentiating Amongst Differentiating Amongst Key ManagersKey Managers

Reluctance To Establish Formal Reluctance To Establish Formal ControlsControls

Fear Of ChangeFear Of Change

Succession PlanningSuccession PlanningObstacles: EmployeesObstacles: Employees

Source: Family Business Experts, www.familybusinessexperts.com

Royalty-Free/CORBIS

2-18McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Customers & SuppliersCustomers & Suppliers

Dependence On FounderDependence On Founder

Trust/Confidence In Trust/Confidence In Potential SuccessorPotential Successor

Succession PlanningSuccession PlanningObstacles: OutsidersObstacles: Outsiders

Source: Family Business Experts, www.familybusinessexperts.com

Royalty-Free/CORBIS

2-19McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Causes Of SuccessionCauses Of SuccessionFamily Leader:Family Leader:

Sudden DepartureSudden DepartureDiesDiesBecomes IncapacitatedBecomes Incapacitated

Planned DeparturePlanned DepartureLeaves CompanyLeaves CompanyRetiresRetires

Royalty-Free/CORBIS\

2-20McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Family Leader:Family Leader:Replacement OptionsReplacement Options

2-21McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Selling To FamilySelling To FamilyMembers- Advantages Members- Advantages

Stays In FamilyStays In FamilySource Of Family EmploymentSource Of Family EmploymentStature MaintainedStature MaintainedOwner = RelaxOwner = RelaxPleasure Of SuccessPleasure Of SuccessStrengthen FamilyStrengthen Family

2-22McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Assured IncomeAssured Income

Lack Of WorryLack Of Worry

Consult?Consult?

Release TensionRelease Tension

Relief Of ResponsibilityRelief Of Responsibility

Selling ToSelling ToOutsiders- Advantages Outsiders- Advantages

2-23McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Loss Of Family IDLoss Of Family ID

Loss = SadnessLoss = Sadness

Selling ToSelling ToOutsiders- Disadvantages Outsiders- Disadvantages

Greg Kuchik/Getty Images

2-24McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Ease TheEase TheTransition For OwnerTransition For Owner

Broaden FocusBroaden Focus

Devote Time To:Devote Time To:HobbiesHobbies

Other GroupsOther Groups

Gradually Turn Over ControlGradually Turn Over Control

Doug Menuez/Getty Images

2-25McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Estate Planning IssuesEstate Planning IssuesMinimize TaxesMinimize Taxes

Retain ControlRetain Control

Maintain Business Maintain Business FlexibilityFlexibility

Steven Cole/Getty Images

2-26McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Inc. 500 CEOs’ Net WorthInc. 500 CEOs’ Net Worth

0%

10%

20%

30%

40%

50%

60%

<$1Million

$1-5Million

$5-10Million

$10-25Million

$25Million+

Source: Inc. Magazine, “Compensation”, November 2004.

2-27McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

INC. 500 CEOs’ INC. 500 CEOs’ Take-Home PayTake-Home Pay

0% 5% 10% 15% 20% 25% 30% 35% 40%

<$100,000

$100-250 K

$250-500 K

$500-750 K

$750-1 M

$1-3 M

$3 M+

Source: Inc. Magazine, “Compensation”, November 2004.

2-28McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Financial PlanningFinancial PlanningTax - Annual Conferences With Tax Tax - Annual Conferences With Tax

AccountantAccountantEstate – Transfer Of Assets At DeathEstate – Transfer Of Assets At Death

PerpetuationPerpetuationLiquidityLiquidity

Business StandpointBusiness StandpointReduce Cash StrainReduce Cash StrainMaintain Beneficiaries’ InterestMaintain Beneficiaries’ InterestSmooth TransitionSmooth Transition

Keith Brofsky/Getty Images

2-29McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Estate Planning TechniquesEstate Planning Techniques

GiftsGiftsStock SalesStock SalesLiving TrustsLiving TrustsFamily Limited PartnershipsFamily Limited Partnerships

Minimize CostMinimize CostRetain ControlRetain Control

Buy/Sell AgreementBuy/Sell Agreement

PhotoLink/Getty Images

2-30McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Business ValuationBusiness ValuationComparablesComparables

Earnings Earnings CapitalizationCapitalization

Book ValueBook Value