Chapter 02 – Family-Owned Businesses
2–13
CHAPTER OUTLINE AND TEACHING NOTES
3. The sudden death or incapacity of the
owner can be very disruptive, unless
advanced plans are made.
4. An owner should make a will and
C. Planned Departure
1. What happens when owners plan to
leave depends on the type of busi-
ness ownership.
D. Selling to Family Members
1. The advantages:
a. The business stays in the family.
b. It provides a source of employ-
ment for family members.
Chapter 02 – Family-Owned Businesses
2–14
CHAPTER OUTLINE AND TEACHING NOTES
REAL WORLD EXAMPLE 2.11
Dudley Feuerborn, the previous owner of the Feuerborn-
Farris Memorial Chapel featured in the opening profile, sold
the business to son Reuben. He has purchased a motor home
and plans to travel extensively.
2. The business can also be sold to out-
REAL WORLD EXAMPLE 2.12
Charles Alfieri sold his hair replacement business to a Jap-
anese company. Nine years later, the family repurchased the
business.
E. Selling to Outsiders
1. If no relative will assume responsibil-
ity, the owner can sell to a partner, an
2. Reasons for selling to outsiders:
a. Assured income.
3. However, selling to someone outside
the family can hurt the family since it
marks the loss of something the
founder built.
REAL WORLD EXAMPLE 2.13
Chapter 02 – Family-Owned Businesses
2–15
CHAPTER OUTLINE AND TEACHING NOTES
Sometimes selling to outsiders can have a beneficial effect
on family relationships, as happened to one troubled family
business.
F. Making the Transition Easier
1. Owners need to broaden their focus
in preparation for their departure.
IV. TAXES AND ESTATE PLANNING
Learning Objective 5.
Discuss the need for tax and estate planning in small com–
panies.
A. Planning is needed to minimize estate
taxes.
1. When a firm has appreciated in
B. Tax Planning
1. The owner must consider the influ-
C. ESTATE PLANNING is preparing for the
orderly transfer of the owner’s equity in
the business when death occurs.
Chapter 02 – Family-Owned Businesses
2–16
CHAPTER OUTLINE AND TEACHING NOTES
1. Usually the major concerns are keep-
ing the business running and main-
3. For a small business, estate planning
can:
a. Reduce the need for beneficiar-
ies to withdraw funds.
c. Provide for a smooth transition.
4. Estate planning can be in the form of:
a. Gifts to children.
5. Estate planning activities must com-
ply with IRS regulations.
6. There are three methods for deter-
mining the true value of a business:
a. Determine the value of a compa-
Chapter 02 – Family-Owned Businesses
2–17
CHAPTER OUTLINE AND TEACHING NOTES
c. Estimating the business’s value
by determining its book value.
7. A BUY/SELL AGREEMENT provides
for the corporation to buy back a
shareholder’s stock when he or she
leaves the company.
a. This agreement binds the IRS to
ity stockholder.
REAL WORLD EXAMPLE 2.14
One young woman held 28% of the stock in her em-
ployer’s corporation. When she lost her job, her employer re-
fused to redeem the stock.
V. ESTATE PLANNING TO MINIMIZE TAXES
A. The owner will want to minimize taxes on
the estate so that the benefits of the es-
B. Estate Planning Issues
1. Trying to minimize taxes.
C. Estate Planning Techniques
1. Making gifts to family, as soon as
possible, is one way to reduce taxes
on your estate.
a. Gifts must be of “present interest”
rather than a “future interest.”
Chapter 02 – Family-Owned Businesses
2–18
CHAPTER OUTLINE AND TEACHING NOTES
b. The first $13,000 in gifts made by
each spouse to each person dur-
2. Establish a limited family partnership
a. Forming a family partnership al-
3. Sell stock to children
a. You can also sell all or a part of
4. Establish a living trust
a. A LIVING TRUST resembles a
will but, in addition to providing
Chapter 02 – Family-Owned Businesses
2–19
CHAPTER OUTLINE AND TEACHING NOTES
b. The owner can put property into
a living trust while they are still
alive.
c. Then when the owner dies the
firm’s assets can be automati-
Chapter 02 – Family-Owned Businesses
2–20
LEARNING OBJECTIVES REVISITED
1. Discuss some problems involved in organizing and operating small family-owned busi-
nesses.
● Family members may not have the desire, talents, or experience to lead the business.
2. Explain how family relationships can affect the business.
● To the extent feasible, ownership and management should be separated from family affairs.
3. Describe the activities needed to prepare the next generation to enter the firm.
● Start planning for succession early to smooth any sudden transition.
● If family members are going to run the business, training should begin early.
4. Discuss the importance and method of preparing for management succession.
● Children may not automatically want to enter the family business, having become bored
with the business.
Chapter 02 – Family-Owned Businesses
2–21
5. Discuss the need for tax and estate planning in small companies.
● Estate planning can minimize the tax burden on the owner’s heirs.
KEY TERMS USED IN THIS CHAPTER
A buy-sell agreement provides for the corporation to buy back a shareholder’s stock when he or she
leaves the company.
NOTES FOR DISCUSSION QUESTIONS
1. Why is management succession an important issue for any small firm? For a family firm?
Management succession is important in any small firm because, if it is not handled properly, there
2. Why is it often difficult to make reasonable decisions in a family business? What problems are
caused by a family organization structure?
Reasonable decisions are sometimes difficult to make because personal emotions and conflicts
interfere with professional judgment. Emotions and differing value systems can cause conflicts between
Chapter 02 – Family-Owned Businesses
3. What problems face a company when a key officer leaves suddenly?
When a key officer leaves suddenly, questions such as the following can bring about many prob-
lems. Will the officer return? Who will replace him temporarily or permanently as the case may be? How
will the business be run?
4. If you start a business when you are in your twenties and thirties, should you do anything about
your replacement? Explain.
You should give some thought to your replacement, because doing so will avoid succession prob-
5. Suppose you have a successful business now, but decide you want to leave it. What might be some
reasons for leaving it? What alternatives do you have for the business?
An owner might decide to retire, because he or she has reached the perceived retirement age, be-
cause of health problems, or simply because they are tired of the business. They may also want to give the
6. How important is estate planning? How can you do it?
Estate planning minimizes estate taxes and prepares for the transfer of the equity of an owner at
NOTES FOR CASE QUESTIONS
CASE 2.1: Tire Rack
This is an example of a family-run business that works. They want the company to “feel like a
family” to all employees. Such an atmosphere is hard to achieve.
1. Why is management succession so important in a family firm?
Owners often neglect succession planning, sometimes refusing to face the reality of their eventual
Chapter 02 – Family-Owned Businesses
2–23
2. Why is it often difficult to make decisions in a family-run business?
Family businesses can be a source of unresolved family tensions and conflicts, which can create
3. What qualities have contributed to the success of Tire Rack?
Mike Joines and his father-in law, Peter Veldman, created Tire Rack to sell name-brand tires to
BONUS EXERCISE
2.1 Managing a Family Business
This exercise gives students a chance to “manage” a family business. Use Handout 2-A: Manag-
ing a Family Business on the following page. This can be an individual assignment or a small group pro-
ject.
HANDOUT 2-A
Managing a Family Business
Nicholas Stavros opened his first restaurant in Cedar City twenty-five years ago. Stavros’s fam-
ily-style Greek food and atmosphere proved popular, and three additional restaurants were opened in out-
lying suburbs. One of Papa Nick’s children now runs each: Maria’s Stavros, Peter’s Stavros, and Eric’s
Stavros. Nick Junior runs the original Nick’s Stavros.
Customer comment cards have begun to show some problem areas at Peter’s Stavros Restaurant.
Service ratings have fallen to “fair,” and many customers have written specific comments about slow ser-
vice and poor wait service attitude.