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percent of the U.S. economy’s net new jobs. The stumbling block for most family
businesses is management succession. Only about 30 percent of first-generation
businesses survive into the second generation, and only about 12 percent make it to the
third generation, and just 3 percent make it to the fourth generation and beyond. The
Step 2: Create a survival kit for the successor. This should include all of the
company’s critical documents, (wills, trusts, insurance policies, financial
statements, bank accounts, key contracts, corporate bylaws, etc.).
Step 3: Groom the successor. This is the founder’s greatest teaching and
to 10 years.
Step 5: Cope with the financial realities of estate and gift taxes. Without proper
estate planning, taxes can be as high as 40 percent. Refer to Table 17.9, Changes
in the Estate and Gift Taxes. Entrepreneurs should be actively engaged in estate
planning no later than age 45.
to their three children and their spouses over a period of 10 years without incurring any
estate or gift taxes.
Setting Up a Trust. A trust is a contract between a grantor (the company founder) and a
trustee in which the grantor gives the trustee assets (e.g. company stock) that the trustee
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Chapter 17, Page 283
holds for the trusts’ beneficiaries (e.g. the grantor’s heirs). A revocable trust is a trust
that a grantor can change or revoke during his or her lifetime. An irrevocable trust is a
trust in which a grantor cannot require the trustee to return the assets held in trust.
Business owners use several types of irrevocable trust to lower their estate tax liabilities:
Irrevocable life insurance trust (ILIT)
Irrevocable asset trust
Grantor retained annuity trust (GRAT)
Estate Freeze. An estate freeze is a strategy that minimizes estate taxes by creating two
classes of stock for a business: preferred voting stock for the parents, and nonvoting
Entrepreneurs who are planning to retire often use one or two exit strategies: sell to
outsiders, or sell to insiders who are not family members
Selling to Outsiders.
Selling a business takes time, patience, and preparation to locate a suitable buyer, strike a
deal, and make the transition. A straight sale may be best for those who want to step
choose either a leveraged buyout or employee stock ownership plan.
A leveraged buyout (LBO) is a situation in which managers and/or employees borrow
money from a financial institution to purchase a business and then use the money from the
company’s operations to pay off the debt.
An employee stock ownership plan (ESOP) is an arrangement in which employees and/or
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Chapter 17, Page 284
Conclusion
Leadership is the process of influencing and inspiring others and is quite different than the
idea of “management.” It shapes the culture of the company and its direction.
When the time arrives, a management succession plan is essential to transfer leadership.
The exit plan then allows the entrepreneur to optimize what he or she has invested into the
business.
1. Identify at least three lessons that other leaders of small businesses can learn
from Kevin Hancock’s experience. (LO 2) (AACSB: Reflecting thinking)
2. What other principles described in this chapter might Hancock benefit from?
Explain. (LO 2) (AACSB: Application of knowledge)
You Be the Consultant: “Avoid These Hiring
Mistakes”
1. Why are hiring mistakes so expensive for companies, particularly small
businesses? (LO 2) (AACSB: Reflecting thinking)
The average company loses more than $14,000 for every job that is vacant for at least
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Chapter 17, Page 285
The average cost that a company incurs when an employee leaves is 20 percent of the
employee’s annual salary (for employees who earn less than $50,000 annually), and 213
percent of the annual salary for an executive who leaves.
2. Suppose your best friend is about to hire someone to work in his or her
company. List at least three other tips that will enable him or her to avoid making a
hiring mistake. (LO 2) (AACSB: Reflecting thinking)
Students should discuss the importance of conducting a job analysis in order to prepare a
job description and job specifications before beginning the hiring process.
You Be the Consultant: “Time for the Next
Generation?”
1. Are the issues that Carla and Tricia Staible face concerning management
succession in the family business unusual? Explain. (LO 2 (AACSB: Reflecting
2. Can Robinson Fans continue to be successful with two sometimes three competing
leaders at the helm? Explain. (LO 4) (AACSB: Reflecting thinking)
3. One family business expert says that when it comes to management succession, a
leader should pass the baton to the successor not when the leader is ready to leave
but when the successor is ready to lead. Do you agree? How does this principle
apply to Robinson Fans? (LO 4) (AACSB: Application of knowledge)
Copyright © 2019 Pearson Education, Inc.
Chapter 17, Page 286
This is a very apt statement and it applies to Robinson Fans. It is clear from the case
description that Tricia is ready to lead Robinson Fans now. However, Carl believes that
she should lead only when he is ready to retire. As the Florida decision indicates, Tricia
has good ideas and only by bypassing Carl and going to the board did she get approval for
her decision.
4. What specific advice can you offer Carl and Tricia Staible about management
succession? (LO 2) (AACSB: Reflecting thinking)
17-1. What is leadership? What is the difference between leadership and
management? (LO 1) (AACSB: Reflecting thinking)
17-2. What behaviors do effective leaders exhibit? (LO 1) (AACSB: Reflecting
1. Create a set of values and beliefs for employees and passionately pursue them.
2. Respect and support their employees.
17-3. Why is it so important for small companies to hire the right employees?
What can small business owners do to avoid making hiring mistakes? (LO 2)
17-4. What is a job description? A job specification? What functions do they serve
in the hiring process? (LO 2) (AACSB: Reflecting thinking)
17-5. Outline the procedure for conducting an effective interview. (LO 2)
(AACSB: Reflecting thinking)
17-6. What is company culture? What role does culture play in a small company’s
success? What threats does rapid growth pose for a company’s culture? (LO 3)
17-7. Is money the best motivator? (LO 3) (AACSB: Reflecting thinking)
Money may not always be the best motivator because its effect as a motivator is usually
17-8. How do pay-for-performance compensation systems work? What other
rewards are available to small business managers to use as motivators? How
effective are they? (AACSB: Reflecting thinking)
Pay-for-performance compensations systems are those in which employees’ pay depends
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Chapter 17, Page 288
After its initial impact, money loses its effectiveness; for many workers, the most
meaningful motivational factors are recognition, praise, feedback, job security,
promotions. None of these cost the company any money, but are often the best
motivators and have more impact on employee performance over time.
17-9. Briefly describe the options a small business owner wanting to pass the
family business on to the next generation can take to minimize the impact of estate
taxes. (LO 5) (AACSB: Reflecting thinking)
Buy-Sell Agreement. A buy-sell agreement is a contract among co-owners of a business
stating that each agrees to buy out the others in case of the death or disability of one.
trust in which a grantor cannot require the trustee to return the assets held in trust.
classes of stock for a business: preferred voting stock for the parents, and nonvoting
common stock for the children.
Family Limited Partnership.
Part 5: Case Study
The following text cases may be used for lecture and assignments for topics presented in
this chapter.
Case 5: Intertech Construction Corporation
Case 10: Nuts.com
Part 6: Online Videos and Podcasts
These online videos may enhance class discussion and provide additional insight for the
chapter topics.
7 Essential Qualities of All Great Leaders 4:14 minutes
https://www.youtube.com/watch?v=eG16EmA2Fe0
You Can’t Send a Duck to Eagle School – Hiring 2:30 minutes
http://www.eagleschoolmovie.com/
How to Ask Behavioral Interview Questions 3:08 minutes
https://www.youtube.com/watch?v=9FdsdqaDoUg
Good Interview Questions to Ask 1:57 minutes
http://www.youtube.com/watch?v=o6YBlvInWfU
Deepak Gupta on Family Business Management 2:57 minutes
https://www.youtube.com/watch?v=K-FYKwvSBVY
Team Building 8:57 minutes
http://www.sba.gov/strategiesforgrowth/teambuilding/index.html
Creating a Culture of Trust One Slice at a Time (TED) 10:10 minutes
https://www.youtube.com/watch?v=YwwX1SSZKME
How & Why to Build Great Company Culture 1:57 minutes
https://www.youtube.com/watch?v=m2zPxE5bdkk
10 Non-financial Ways to Motivate Employees 3:56 minutes
https://www.youtube.com/watch?v=Gn2pkyEL308
Issues Faced by Family Owned Companies (MSNBC) 11:07 minutes
https://www.youtube.com/watch?v=l0uYVfsqAp0
Business Owner Succession and Exit Planning 9:03 minutes
http://www.youtube.com/watch?v=BC2hPdkSf2k
Distribute Equity in Closely-Held Business, Family Business 9:44 minutes
http://www.youtube.com/watch?v=RiHcM-ZUjnM
Succession Planning Tips 2:39 minutes
http://www.youtube.com/watch?v=Ch-drp0SWrM&feature=related
Links to additional online resources are available on the companion Web site at
