SBE Chapter 3 Family Business

Succession: Passing the business to the next generation.   

What forces, in short, act against succession planning? -Founder -Family -Employees -Environmental

What components are necessary for a good succession plan? -Establish goals/objectives  -Family involvement in decision-making process -Identify successor(s) -Estate planning -Contingency planning ("what if" scenarios)  -Company structure and transfer methods -Business valuation (if it's being sold)  -Exit strategy -Implementation and follow -up    

What are some important family issues?  -Communication -Employing family/non-family  -Professional management -Employee qualifications -Salaries and compensation -Success  

What two things are important for a family business to be successful? -Understanding the culture of the family business, esp by non-family. -Succession planning is critical  

How can positive or constructive conflict be beneficial to family businesses? When it increases... -Opportunity recognition -Produces high-quality decisions -Encourages growth -Strengths groups and individuals -Increases the learning necessary for entrepreneurial behavior -Increases levels of commitment to decisions

Whats an example of positive conflict? Disagreement between family on strategic direction of the business where they rethink the business plan and agree on a new company vision.

What's an example of negative conflict? Arguments over the successor to the business. So, when they are unable to control the conflict it can contribute to a high mortality rate of family-owned businesses. 

What issues can cause tension at family owned businesses? -Talking about the businesses future strategy -Performance of members -Decisions on who can/can't work there -Failure of some individuals consulting other members on key issues -Decisions on reinvestment of profits -Remuneration levels -Role of in-laws being or not being apart of company -Who can/can't hold shares in business -Which shares should be valued -Rejection of chosen successor by other members h

Family firms are prone to psycho-dynamic effects like:  -Rivalry -Differing vision -Jealousy -Succession -Playing by different rules -Decision making -Compensation and benefits  

What are some negative effects of family squabbling?  -Unprofessional image -Uncomfortable environment -Discrimination -Legal troubles

Avoiding conflict isn't easy but as a family business you must consider:  -First, If the business can afford it, hire a consultant to help with conflict resolutions. -Second, emotional reactions should be differentiated from problem-solving reactions. -Third, focus on professional role over family role. -Fourth, honesty!! -Lastly, founder should keep conflict constructive (using fair decision-making process).  

What is the fundamental psychological conflict in family business? Rivalry

It's important to avoid negative conflict because...  It can cause damage to the business, make people feel uncomfortable, and may ultimately be grounds for a lawsuit. 

Cash-Flow Implications? If a family member's compensation is based on their values where the parents get more than the children (they get less than fair market value) this gives an inflated picture of company's profits, however, it will give the parents more money to spend on the business. Whereas, if the children got excessive compensation it could hurt the cash flow since the amount of money to spend on the business will be reduced. 

What % of U.S. family-owned business survive?  -40% survive into second generation businesses -13% survive into third generation

Whats a huge factor towards the low % of family businesses that survive into the third generation? Technological changes -- With time, technology advances making it harder for the older generation to keep up with. Each type of business has different needs pending their size, industry, and growth.

Family businesses have increased customer value because...  They are family owned rather than a corporate entity. 

Overpaying or underpaying family members has an effect on the businesses cash flow.