mgt 4550 - family business management succession - senior generation’s perspective chapter 5...

MGT 4550 - Family Business Management

Succession - Senior Generation’s Perspective

ChapterChapter 5 5

Family Business Management, Concepts and Practice

By A. Bakr Ibrahim & Willard H. Ellis

Instructor: Dr. Irene Duhaime

Dr. Irene M. Duhaime 2

Class Schedule - Week 5Class Schedule - Week 5

Succession - Senior Generation’s Perspective

Reading: chapter 5

Questions

5, 19, 27-30, 33-35, 75, 76, 80 FBAB

Case:

Baker, Inc. p. 287 FBM


Contents Contents

The decision to let go

Resistance to letting go

Setting the price

Buying the CEO out

Timing of succession - the signalsContinued ….


ContentsContents

…. Continued

A family battle in the making Planning the CEO’s/founder’s exit


Question 5

How do you decide if you should pass on the business?


“The final test of greatness in a CEO is how well he chooses a successor and whether he can step aside and let his

successor run the company”

- Peter Drucker


The Decision to Let Go

Critical decision to relinquish control Emotional difficulty Typical scenario:

Owner holds on to control tightly In the meantime, company goes downhill Offspring wait impatiently, reach middle age Intergenerational infighting erupts


Resistance to Letting Go

Figure 5.1 W hy Founders and CEOs of Family Business Resist Letting goFam ily Business m anagem ent, Ibrahim & E llis

Resistance toLetting Go

The emotional attachment Lack of interest in other activities

Fear of retirement and deathLack of trust



Emotional attachment Started and nourished the business

Has seen the business through good and bad

Experiences stress, withdrawal and sense

of loss during transition to less

responsibility



Lack of trust Entrepreneurs: Often show lack of trust in other people’s

skills and competence, including immediate family



Fear of retirementIndividuals sometimes exhibit negative behavior

towards retirement because it represents

Discontinuity in their activities

Loss of self-respect

Reminder of aging and death



Lack of other interests Work long hours

Business IS their hobby

Find it difficult to adjust to quiet lifestyle

at retirement


Question 19

How does a successor get the older generation to retire and what happens if they won’t let go?


Stakeholders’ barriers tosuccession planning

Founder: psychological barriers; loss ofrole, influence, identity, work activity

Spouse: loss of role, activity

Family: norms against discussing futurebeyond parents, especially economic;adherence to principle of equality amongsiblings; fear of parents’ deaths

Adapted from: Family business Management: Concepts and Practice, by A. Bakr Ibrahim and Willard H. Ellis. Dubuque, Iowa: Kendall Hunt Publishing, 1994. Chapter 5


Adapted from: Family business Management: Concepts and Practice, by A. Bakr Ibrahim and Willard H. Ellis. Dubuque, Iowa: Kendall Hunt Publishing, 1994. Chapter 5

Stakeholders’ barriers tosuccession planning

Employees: personal relationship withfounder versus future structured reportingrelationships, systems, controls

Environment: peer entrepreneurs withown succession anxieties; clientsdependent on personal relationship withfounder


Question 27

How does a founder get and keep qualified children interested in the business, especially when he’s not yet ready to retire and there’s no sign of stepping aside?


Question 30

How does a business leader attract qualified family members and choose the best successor, while screening out those who are not as good?


Question 80

How does the founder deal with a lack of competence or commitment in the next generation?

What are the options?


Question 75

Why is a succession plan necessary?

What can be done is there isn’t one?


Planning for BusinessContinuity: A Checklist

Develop children’svalues andcapabilities

Create lifelongfinancial security forparents

Finalize the family’smission statement

Finalize the owners’estate plan

Finalize the business’sstrategic plan

Select a successorPlan successor’s

personal developmentMap career paths for

other family members

Adapted from: The Final Test of Greatness, by Craig E. Aronoff, Ph.D. And John L. Ward, Ph.D. Marietta, GA Business Owner Resources, 1992.


Adapted from: The Final Test of Greatness, by Craig E. Aronoff, Ph.D. And John L. Ward, Ph.D. Marietta, GA Business Owner Resources, 1992.

Planning For BusinessContinuity: A Checklist

Transfer ownershipand control

Build a family team ofowners

Write participationpolicy for familymembers

Retain non-familymanagers

Install outsidedirectors

Prepare forretirement

Prepare contingencyplan for succession incrisis

Develop a newmanagement plan


The First Steps to Succession Planning

Business Strategic Plan

Founder’s Personal Financial Plan

Family’s Mission Statement

Owner’s Estate Plan Succession: The Final Test of Greatness, Aranoff and Ward


Question 76

What about planning for income and emotional needs in retirement?


Setting the Price

To ensure a continued stream of income and

thus a pleasant retirement

To ensure the seriousness and

commitment of the successor

A ploy to discourage a potential successor,

stay at the helm


Buying the CEO Out

The successor may buy the CEO/founder out by:

Leverage Buy Out (LBO) approach Pledge the firm’s assets against a loan, then use

the loan to buy the CEO’s/founder’s stock Equity capital approach

Have friends invest in the business, then use the money to buy founder out

One Founder’s Plan for Personal Financial Security

GoalsLifetime annual income of $200,000 per yearLiquid asset “security blanket” of $1,000,000

MeansLong-term lease on business real estate of $100,000 per year8 percent annual income on $1,250,000 of liquid assets for $100,000 per year

Plans for Amassing $1.25 Million Private CapitalExtra “bonus” compensation of $150,000 per year for four yearsSale of some stock back to company for approximately $625,000 (that the business borrows from the bank) after four years Succession: The Final Test of Greatness, Aranoff and Ward


Timing of Succession - Signals

Founder/CEO feels overextended or overburdened by work-related activities

Founder / CEO feels that he or she no longer has the management skills to handle the business



Lack of familiarity with functional issues, or with growing complexity of external environment

Problems with communication, motivation and interpersonal skills



Decline in the overall performance (market share or profitability) of the firm - External causes or CEO match ?

Problems with customers and suppliers, product or service quality Family business image may be threatened


A Family Battle in the Making

Over time, tension grows and often affects other relationships in the family

Brewing political battle among family members Intergenerational infighting may erupt Heirs may take steps to dislodge CEO/founder Rift may be too deep for interventions from

peacemakers to make a difference Could result in bitter court battles

Continuity of the Firm

A. Outside board of directors

B. Planning and preparing for succession

Succession: The Final Test of Greatness, Aranoff and Ward


Letting Go

Set firm retirement date

Give up voting stock control at or before that time

• Succession: The Final Test of Greatness, Aranoff and Ward


Question 29

What is the best relationship for a founder or owner to have with the business if he retires?


Roles for Retiring Founders

Industry leadership

Business history

External public relations

New business Succession: The Final Test of Greatness, Aranoff and Ward


Planning the CEO’s/Founder’s Exit

Accept own limitations and mortality

Accept change and value difference between generations

Plan gradual retirement, plan activities after retirement

Family members should Be sensitive to the difficulties being faced by

founder/CEO Assist in the gradual exit / retirement


Question 28

How can you avoid morale problems that result from employee’s fears of change expected by the involvement and eventual management takeover by your successors?


Question 33

How does a boss handle a successor’s improper decision-making?

How do successors keep the older generation from sabotaging their decisions?


Question 35

What is the best way for a founder to give a successor a sense of well-being and self-worth in family business?


Questions and Cases Questions and Cases

Questions

5, 19, 27-30, 33-35, 75, 76, 80 FBAB

Case:

Baker, Inc. p. 287 FBM


Class Schedule - Class Schedule - Next Week (02/23)Next Week (02/23)

First exam

Project updates - project update report due


Class Schedule - Class Schedule - Following week (03/01)Following week (03/01)

SUCCESSION - LEADER DEVELOPMENT, IMPLEMENTATION Reading:

Chapter 6 & 7 FBM

Questions

10-18, 20, 22, 23, 25, 36, 37 FBAB

Case:

Freida’s, Inc. FBM

mgt 4550 - family business management succession - senior generation’s perspective chapter 5...

Documents

irene duhaimedr

immediate family

succession planningfounder

succession planningemployees

bakr ibrahim willard

ceo outtiming of succession

continueda family battle

duhaimestakeholders