Part VI – Contemporary Part VI – Contemporary Challenges in Challenges in Entrepreneurship EntrepreneurshipChapter 18 – Acquisition and Valuation of Chapter 18 – Acquisition and Valuation of Business Ventures Business VenturesChapter 19 – Management Succession andChapter 19 – Management Succession and Continuity: A Family Continuity: A Family Business Perspective Business PerspectiveChapter 20 – Women and Minority Chapter 20 – Women and Minority Entrepreneurship EntrepreneurshipChapter 21 – Total Quality Management: The Chapter 21 – Total Quality Management: The Continuous Improvement Challenge Continuous Improvement Challenge for Entrepreneurs for Entrepreneurs

Copyright (c) 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Chapter 19 – Management Chapter 19 – Management Succession and Succession and Continuity: Continuity: A Family Business A Family Business Perspective Perspective

Family–Owned BusinessFamily–Owned Business

Research has shown that Research has shown that approximately 92 percent of all U.S. approximately 92 percent of all U.S.

business ventures are under the business ventures are under the strategic control of a family and are strategic control of a family and are

intended to remain in the family.intended to remain in the family.

Advantages and Disadvantages of Family Advantages and Disadvantages of Family Controlled FirmsControlled Firms

AdvantagesAdvantages• Long-term orientationLong-term orientation• Greater independence of Greater independence of

actionaction• Family culture as a source Family culture as a source

of prideof pride• Greater resilience in hard Greater resilience in hard

timestimes• Less bureaucratic and Less bureaucratic and

impersonalimpersonal• Financial benefitsFinancial benefits• Knowing the businessKnowing the business

DisadvantagesDisadvantages• Less access to capital Less access to capital

markets may curtail growthmarkets may curtail growth• Confusing organizationConfusing organization• NepotismNepotism• Spoiled-kid syndromeSpoiled-kid syndrome• Paternalistic/autocratic rulePaternalistic/autocratic rule• Financial strainFinancial strain• Succession dramasSuccession dramas

The Management The Management Succession IssueSuccession Issue

Barriers to Succession Planning in Barriers to Succession Planning in Family FirmsFamily Firms

Founder/OwnerFounder/Owner• Death anxietyDeath anxiety• Dilemma of choiceDilemma of choice• Generational envyGenerational envy

FamilyFamily• Death as tabooDeath as taboo• Fear of sibling rivalryFear of sibling rivalry• Change of spouse’s Change of spouse’s

positionposition

Key Factors in SuccessionKey Factors in Succession

Pressures and Interests in a Family BusinessPressures and Interests in a Family BusinessInside the FamilyInside the Family

The FamilyThe FamilyManagersManagers

The RelativesThe Relatives

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Outside the FamilyOutside the Family

The EmployeesThe Employees

The OutsidersThe Outsiders

The Family ManagersThe Family Managers

Hanging onto orHanging onto orgetting Hold ofgetting Hold of

Company ControlCompany Control

Selection of FamilySelection of FamilyMembers as MembersMembers as Members

Continuity of FamilyContinuity of FamilyInvestment andInvestment and

InvolvementInvolvement

Building a DynastyBuilding a Dynasty

RivalryRivalry

The EmployeesThe Employees

Rewards for LoyaltyRewards for Loyalty

Sharing of Equity,Sharing of Equity,Growth, and SuccessGrowth, and Success

ProfessionalismProfessionalism

Bridging FamilyBridging FamilyTransitionsTransitions

Stake in theStake in theCompanyCompany

The RelativesThe Relatives

Income and InheritanceIncome and Inheritance

Family ConflictsFamily Conflictsand Alliancesand Alliances

Degree of InvolvementDegree of Involvementin the Businessin the Business

The OutsidersThe Outsiders

CompetitionCompetition

Market, Product,Market, Product,Supply, andSupply, and

Technology Influence Technology Influence

Tax LawsTax Laws

Regulatory AgenciesRegulatory Agencies

Forcing EventsForcing EventsForcing eventsForcing events are those happenings that cause are those happenings that cause

the replacement of the owner-manager:the replacement of the owner-manager:• DeathDeath• IllnessIllness• Mental or psychological breakdownMental or psychological breakdown• Abrupt departureAbrupt departure• Legal problemsLegal problems• Severe business declineSevere business decline• Financial difficultiesFinancial difficulties

Sources of SuccessionSources of Succession• AnAn entrepreneurial successor entrepreneurial successor is is

someone who is high in ingenuity, someone who is high in ingenuity, creativity, and drive.creativity, and drive.

• The The managerial successormanagerial successor is is someone who is interested in someone who is interested in efficiency, internal control, and the efficiency, internal control, and the effective use of resources.effective use of resources.

Two Key StrategiesTwo Key Strategies

The The early entry strategyearly entry strategy versus the versus the delayed entry strategydelayed entry strategy. The main . The main

question is the ability of the question is the ability of the successor to gain credibility with the successor to gain credibility with the

firm’s employees.firm’s employees.

Legal RestrictionsLegal Restrictions• Oakland Scavenger Company (a garbage Oakland Scavenger Company (a garbage

collection firm).collection firm).• ““nepotistic concerns cannot supersede the nepotistic concerns cannot supersede the

nation’s paramount goal of equal economic nation’s paramount goal of equal economic opportunity for all.”opportunity for all.”

• It means, conceivably, that almost any small It means, conceivably, that almost any small business can be sued by an employee of a business can be sued by an employee of a different ethnic origin than the owner, based different ethnic origin than the owner, based upon not being accorded the same treatment upon not being accorded the same treatment of a son or daughter.of a son or daughter.

Developing a Developing a Succession StrategySuccession Strategy

Understanding the Contextual AspectsUnderstanding the Contextual Aspects

• TimeTime

• Type of VentureType of Venture

• Capabilities of ManagersCapabilities of Managers

• Entrepreneur’s VisionEntrepreneur’s Vision

• Environmental FactorsEnvironmental Factors

Identifying Successor Identifying Successor QualitiesQualities

Understanding Influencing ForcesUnderstanding Influencing Forces

• Family and Business Culture IssuesFamily and Business Culture Issues

• Owner’s ConcernsOwner’s Concerns

• Family Member ConcernsFamily Member Concerns

Carrying Out the Succession PlanCarrying Out the Succession Plan

• Identifying a SuccessorIdentifying a Successor

• Groom an HeirGroom an Heir

• Agree on a PlanAgree on a Plan

• Consider Outside HelpConsider Outside Help

The Harvest Strategy: Selling OutThe Harvest Strategy: Selling Out

Entrepreneurs consider selling their Entrepreneurs consider selling their venture for numerous reasons:venture for numerous reasons:

1.1. Boredom and burnoutBoredom and burnout2.2. Lack of operating and growth capitalLack of operating and growth capital3.3. No heirs to leave the business toNo heirs to leave the business to4.4. Desire for liquidityDesire for liquidity5.5. Aging and health problemsAging and health problems6.6. Desire to pursue other interestsDesire to pursue other interests

Steps for Selling a BusinessSteps for Selling a Business

Step 1: Prepare a Financial AnalysisStep 1: Prepare a Financial AnalysisStep 2: Segregate AssetsStep 2: Segregate AssetsStep 3: Value the BusinessStep 3: Value the BusinessStep 4: Identify the Appropriate TimingStep 4: Identify the Appropriate TimingStep 5: Publicize the Offer to SellStep 5: Publicize the Offer to SellStep 6: Finalize the Prospective BuyersStep 6: Finalize the Prospective BuyersStep 7: Remain Involved through the Step 7: Remain Involved through the

Closing ClosingStep 8: Communicate after the SaleStep 8: Communicate after the Sale