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Introduction to Family Business and Entrepreneurial Couples | BUS 231, Study notes of Introduction to Business Management

College of the Sequoias (COS)Introduction to Business Management
Prof. Mike Clarke

Material Type: Notes; Professor: Clarke; Class: Starting A New Business; Subject: Business; University: College of the Sequoias; Term: Spring 2010;

Typology: Study notes

2009/2010

Uploaded on 03/06/2010

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CHAPTER 8
FAMILY BUSINESSES
CHAPTER OVERVIEW
This chapter provides an overview of family-owned businesses and discusses the
increasing number of entrepreneurial couples. It also identifies issues that must be
considered when children are brought into the business and discusses topics that should
be included in a succession plan.
LEARNING OBJECTIVES
To become aware that most of the businesses in the United States are family
owned.
To understand the advantages and disadvantages of being an entrepreneurial
couple.
To understand the alternatives for the entrepreneur’s children to enter the
business.
To comprehend the issues that need to be addressed in a succession plan.
CHAPTER OUTLINE
I. Introduction
A. Definition
1. The term “family business” is defined in a number of ways.
2. The Small Business Administration defines a family business as
any business in which a majority of the ownership or control lies
within a family, and in which two or more family members are
directly involved.
3. A family business has also been defined as one which meets one of
the following criteria—other family members work in the business,
the owner intends to pass on ownership to a close relative, or the
owner considers the firm to be a family business.
4. Over 80 percent of the businesses in the United States and the
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CHAPTER 8

FAMILY BUSINESSES

CHAPTER OVERVIEW

This chapter provides an overview of family-owned businesses and discusses the increasing number of entrepreneurial couples. It also identifies issues that must be considered when children are brought into the business and discusses topics that should be included in a succession plan. LEARNING OBJECTIVES  To become aware that most of the businesses in the United States are family owned.  To understand the advantages and disadvantages of being an entrepreneurial couple.  To understand the alternatives for the entrepreneur’s children to enter the business.  To comprehend the issues that need to be addressed in a succession plan. CHAPTER OUTLINE I. Introduction A. Definition

  1. The term “family business” is defined in a number of ways.
  2. The Small Business Administration defines a family business as any business in which a majority of the ownership or control lies within a family, and in which two or more family members are directly involved.
  3. A family business has also been defined as one which meets one of the following criteria—other family members work in the business, the owner intends to pass on ownership to a close relative, or the owner considers the firm to be a family business.
  4. Over 80 percent of the businesses in the United States and the

international majority) are family owned. II. Advantages and Disadvantages A. Advantages include stability, trust, resilience, positive public perception, and the ability to sacrifice for the long haul. B. One disadvantage is that family issues often spill over into the business operations. III. Entrepreneurial Couples A. Advantages and Disadvantages

  1. Entrepreneurial couples are one of the fastest-growing segments of the business population.
  2. In the early years of the company both people are willing to work long hours.
  3. Spouse-partnerships can also balance work and family life.
  4. Too much togetherness may be a concern. B. Recommendations for Success
  5. Each spouse should have specific areas of responsibility to avoid problems over power and decision making.
  6. The couple must have the same goals and share the same vision for the company.
  7. A divorce may result in the financial ruin or forced sale of a company even if only one spouse was the owner/operator.
  8. Some states are considered community-property states in which all assets and liabilities acquired during a marriage are spilt 50-50.
  9. Most states (41 out of 50) are equitable-distribution states in which the courts divide assets and liabilities according to family circumstances and state guidelines. IV. Bringing in the Children A. The Transition

employees. C. When and How Should the Company Be Transferred?

  1. It can be transferred as a gift to the children.
  2. It may be sold to the children.
  3. The company can be transferred while the found is still alive upon his/her death. D. Active Versus Inactive Family Members
  4. In families with several children, it is common for some children to be active in the family business and others to have their own careers.
  5. Parents must decide if all children will receive stock in the company or if only the active children will be given stock.
  6. If inactive children are not given stock, the entrepreneur must decide if they will be financially compensated in another manner. E. Low-Entry versus Delayed-Entry
  7. The low-entry strategy recommends that children begin working in the company in an entry-level position to learn all aspects of the company.
  8. The low-entry strategy allows the children to develop skills that are important for the business.
  9. If the entrepreneur is not good at training his or her children the low-entry method may result in conflicts.
  10. The delayed-entry strategy recommends that children work outside the company to learn new ideas and be successful in their own careers.
  11. Problems may arise with the delayed-entry strategy, though, because the children may lack the specific expertise that the company needs. F. Hiring and Compensation Policy
  12. The entrepreneur must decide whether any and all family members

will be hired and whether they will be paid market rates or higher.

  1. Most experts advise that family members should not be hired unless they meet the same criteria as outside employees. G. Should There Be a Family Council and Advisory Board?
  2. A council is a meeting of family members to discuss business issues.
  3. An advisory board has family and nonfamily employees as well as outside advisors. H. Choosing a Successor From Active Family Members
  4. If there are several children who want to manage the company, the entrepreneur must decide if one child will be made president or if there will be equal power sharing among the children.
  5. Although equal power sharing does not always work, a recent study indicated that 42 percent of entrepreneurs were considering appointing more than one CEO as successors. SUGGESTED RESPONSES TO DISCUSSION QUESTIONS
  6. From the children’s perspective, what would be the advantages and disadvantages of growing up in a family in which one parent owns a business and the other works as an employee in another firm? What would be the advantages and disadvantages of having both parents work in the family business? If one parent is self-employed and the other is not, the child is able to see the advantages and disadvantages of both situations and may be able to make a more objective career decision. The experiences of both will provide the child with a greater understanding of careers. The demands of both careers, though, like any two-career family, may place a strain on the family. If both parents work in the company and share the same goals, they may be able to balance work and home life easier than with two different jobs and this may make life easier for the child. They will learn to appreciate the teamwork between their parents. However, their perspective will not be as balanced as if their parents have two separate careers.
  7. Why is it important to establish a hiring and compensation policy for family members? Compensation policies in family businesses vary greatly. Some families pay their children and relatives less than the market rate while others pay an average or

Is there a family council or advisory board? HELPFUL WEBSITES http://fobi.gvsu.edu/fobi/ The Family-Owned Business Institute includes research, events, and an “Ask the Experts” column. It also includes excellent profiles of family-owned businesses. www.sba.gov/library/pubs/ed-l.pdf This is a 33-page report on the topic of transferring management in the family- owned business. It includes topics such as balancing family and business goals, choosing a successor, and estate planning. www.nfib.com The National Federation of Independent Businesses has numerous articles of interest to family-business owners. These articles can be retrieved by going to the nfib.com website and typing “family business” in the “search” box.