Chapter 8 Family Businesses ENTREPRENEURSHIP 4e By Lambing

Learning Objectives n n To become aware that most of the businesses in the United States are family owned To understand the advantages and disadvantages of being an entrepreneurial couple To understand the alternatives for the entrepreneur’s children to enter the business To comprehend the issues that need to be addressed in a succession plan ENTREPRENEURSHIP, 4/e By Lambing and Kuehl 2 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458

Family Business n n A majority of ownership or control lies within a family Two or more family members are directly involved ENTREPRENEURSHIP, 4/e By Lambing and Kuehl 3 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458

Impact on Economy n Family businesses account for n n ENTREPRENEURSHIP, 4/e By Lambing and Kuehl 78 60 80 35 percent of of all new job creation the nation’s employment U. S. businesses Fortune 500 companies 4 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458

Advantages of Family Businesses n n n Stability Trust Ability to sacrifice for long term ENTREPRENEURSHIP, 4/e By Lambing and Kuehl 5 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458

Disadvantages of Family Businesses n n n Family issues spill over into business Family based on emotion, nurturing, security Business based on productivity, accomplishment, profit ENTREPRENEURSHIP, 4/e By Lambing and Kuehl 6 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458

Advantages of Entrepreneurial Couples n n n Both work long hours/dedicated to success Spouses take shifts at home Marriage and careers are intertwined ENTREPRENEURSHIP, 4/e By Lambing and Kuehl 7 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458

Disadvantages of Entrepreneurial Couples n n n Too much togetherness Conversations at home about business Divorce may cause loss of business ENTREPRENEURSHIP, 4/e By Lambing and Kuehl 8 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458

Effect of Divorce n n May force sale of business May cause financial ruin

Divorce Laws n Community Property State n n All assets and liabilities acquired during marriage are split 50/50 if a divorce occurs Equitable Distribution State n ENTREPRENEURSHIP, 4/e By Lambing and Kuehl Courts divide assets and liabilities according to family circumstances and state guidelines 10 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458

Bringing in the Children n One third of family businesses are transferred to second generation 10 to 20 percent are transferred to the third generation Less than 13 percent of businesses stay in the family more than 60 years ENTREPRENEURSHIP, 4/e By Lambing and Kuehl 11 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458

Reasons for Unsuccessful Transfers n n Children do not want the business Sibling rivalry Entrepreneur reluctant to give up control Children of founding partners do not get along ENTREPRENEURSHIP, 4/e By Lambing and Kuehl 12 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458

Succession Plan n n n Should the company be sold? How and when should the company be transferred? Active vs. inactive family members Low entry vs. delayed entry Hiring and compensation policy Family Council and Advisory Board Choosing a successor ENTREPRENEURSHIP, 4/e By Lambing and Kuehl 13 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458

The Succession Plan n The process of transferring leadership of a business to the next generation Needs to occur over a long period of time Needs well-designed strategy ENTREPRENEURSHIP, 4/e By Lambing and Kuehl 14 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458

Sale to Employees? n n n Sale to employees through Employee Stock Ownership Plan (ESOP) Through ESOP, stock owned by the entrepreneur is purchased by the company Stock is then transferred to employees ENTREPRENEURSHIP, 4/e By Lambing and Kuehl 15 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458

How and When Should the Company be Transferred? n n n Sell to family members? Give to family members as gift/inheritance? Transfer while entrepreneur is still living or upon death? ENTREPRENEURSHIP, 4/e By Lambing and Kuehl 16 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458

Active vs. Inactive Family Members n n n Active family member works in the business Inactive family member does not take part in daily company operations Equal or unequal ownership when company is transferred? ENTREPRENEURSHIP, 4/e By Lambing and Kuehl 17 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458

Entry Options n Low-Entry Strategy n n Children begin working in family business at entry-level position Delayed-Entry Strategy n n ENTREPRENEURSHIP, 4/e By Lambing and Kuehl Children work outside the family business Rejoin company after gaining outside experience 18 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458

Family Council and Advisory Board n Family Council n n Meeting of family members to discuss business issues and problems Advisory Board n ENTREPRENEURSHIP, 4/e By Lambing and Kuehl Group of family and nonfamily employees as well as outside employees 19 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458

Choosing a Successor n n n Choose one child as company president? Children share power equally? Make decision clear to everyone ENTREPRENEURSHIP, 4/e By Lambing and Kuehl 20 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458

The Family Business and the Business Plan n n Role of family members described in “management” section State if the following exists: n n n ENTREPRENEURSHIP, 4/e By Lambing and Kuehl Family Council Advisory Board Succession Plan 21 PRENTICE HALL © 2007 by Pearson Education, Inc. Upper Saddle River, NJ 07458