Deck 20: Management Succession and Risk Management Strategies in the Family Business

Question 1

Answer 1

Question 2

What steps are involved in building a successful management succession plan

Answer 2

Succession planning is a kind of activity an entrepreneur should do carefully. "Succession works best when family members have enough fortitude to discuss everything among them and design the plan accordingly.
Steps in creating a succession plan:
SUCCESSOR SELECTION
Entrepreneurs should be impartial while choosing the successor. In the choice of a successor, merit and desire are better, rather than hand-over it to their own members of family who is not worth of being a successor or not willing to be. It will be beneficial for both the business and the family if the successor is chosen on the basis of abilities and skills to handle the business.
CREATE GUIDELINESS FOR THE SUCCESSOR
The entrepreneur should prepare guidelines for the future leader. These guidelines should state all the important documents and policies of the business. The successor should thoroughly understand the guidelines and follow them for carrying out business successfully.
SUCCESSOR GROOMING
To implement the succession plan efficiently the founder must groom the successor in all possible ways. The successor should be trained about various issue the business faces, or has to face in future. He should also be taught about how to address the business problem and come to a solution.
ESTABLISHING OF TRUSTWORTHY AND RESPECTABLE ENVIRONMENT :
An environment of trust and respect should be promoted in the business. This help the successor to develop the decision making power and gain confidence.
ADJUSTING FINANCIAL REALITIES OF ESTATE AND GIFT TAXES:
For effective succession plan the founder should make sure that there is minimum effect of taxes, gifts on the family and business. Failing which may result in selling of successful business to pay these taxes.

Question 3

What exit strategies are available to entrepreneurs wanting to step down from their businesses

Answer 3

E xit Strategie s:
Strategies which the entrepreneurs have if they want to exit from the business:
1. Selling to outsiders :
If the owner wants to get rid of the business at once this is the best option to choose.
Selling business to an outsider is not easy and takes time, patience, and preparation to locate a suitable buyer. The selling price of the business is affected by the financial status of the firm. Thus, before deciding to sell the business to an outsider, the owner should properly plan the finances and select suitable time. This help him to get appropriate cost and sufficient bidders agreeing to buy the business.
2. Selling to insiders :
The entrepreneurs sell the business to the employee of the company. This is chosen in the case when the owner has no one in the family to take over the business.
Options available to the owner while selling the business to an employee are:
• Sale for cash plus a note
• A leveraged buyout
• Employee stock ownership plan (ESOP)
A Sale for Cash plus a Note -
In this case the certain amount is paid in cash while the buyer signs a promissory note to pay rest of the amount in installments.
Leverage Buyout (LBO) -
The company is bought using the money which is borrowed from different financial institutions.
Employee Stock Ownership Plans (ESOPs)
In this method the employee gradually buys the business. He buys the shares of the company by contributing his earnings over a period of time.
3. Management succession Plan:
The owner can also exit from the business by transferring the business to his successor

Question 4

What strategies can business owners employ to reduce estate and gift taxes

Question 5

Can insurance eliminate risk Why or why not

Question 6

Outline the four basic risk management strategies and give an example of each.

Question 7

What problems occur most frequently with a risk anticipating strategy

Question 8

What is insurance How can insurance companies bear such a large risk burden and still be profitable

Question 9

Describe the requirements for insurability.

Question 10

Briefly describe the various types of insurance coverage available to small business owners.

Question 11

What kinds of insurance coverage would you recommend for the following businesses
• A manufacturer of steel beams
• A retail gift shop
• A small accounting firm
• A limited liability partnership involving three dentists

Question 12

What can business owners do to keep their insurance costs under control

Question 13

What factors must be present for a strong family business