978-0134741086 Chapter 17 Part 2

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

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

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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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)

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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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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