"CHAPTER 22 Management Succession and Risk Management Strategies in the FamilyBusiness When it works right, nothing succeeds like a family firm. The roots run deep, embedded infamily values. The flash of the fast buck is replaced with long-term plans. Tradition counts. —Eric Calonius Soul is what drives all of what happens in family businesses, and it is the indefinable essenceof a family‘s spirit and being. Soul is not something that can be measured or quantified, but itis easily recognizable by both its presence and its absence. —Tom Hubler Learning Objectives On completion of this chapter, you will be able to: 1. Explain the factors necessary for a strong family business. 2. Understand the exit strategy options available to an entrepreneur. 3. Discuss the stages of management succession. 4. Explain how to develop an effective management succession plan. 5. Understand the four risk management strategies. 6. Discuss the basics of insurance for small businesses.Family Businesses Nearly 90 percent of all companies in the United States, about 24.5 million businesses, arefamily owned. Yet family-owned businesses, those in which family members controlownership and/or decision making, are often overlooked by the media that focus most of theirattention on the largest companies in our economy. In reality, family businesses generate 64percent of the U.S. gross domestic product, account for 63 percent of all employment and 78percent of job creation, and pay 65 percent of all wages.1 Despite common perceptions, notall family businesses are small; 33 percent of Fortune 500 companies are family businesses.2Globally, family-owned businesses account for 70 to 90 percent of world gross domesticproduct (GDP).3 Some of the best-known companies in the world are family owned,including Ford Motor Company, Samsung, Hyundai, Sainsbury, Mars, Marriott, and Wal- Mart. In fact, Sam Walton‘s heirs own 49 percent of the stock in the world‘s largestcompany, Wal-Mart, and those shares are worth an estimated $128 billion, an amount thatexceeds the GDP of 124 countries in the world.4 1. Explain the factors necessary for a strong family business. When a family business works right, it is a thing of beauty. Family members share deeplyrooted values that guide the company and give it a sense of harmony. Family membersunderstand and support one another as they work together to achieve the company‘s mission.That harmony can produce a significant financial payoff. A study by Jim Lee of Texas A&MUniversity–Corpus Christi shows that family-owned businesses are more profitable andexperience faster employment and revenue growth over time than nonfamily businesses.5Another study of companies in the Standard & Poor‘s 500 Index by Ronald Anderson, DavidReeb, and Sattar Mansi found that family firms outperformed their nonfamily counterparts on a variety of financial measures.6 Other research comparing the financial performances ofsimilar sets of family and nonfamily businesses shows that family businesses produce areturn on assets that averages 6.65 percent higher than that of nonfamily firms.7 Benefits of Family Businesses Family businesses have many advantages over their nonfamily rivals, including thefollowing. Long-Term Focus Because owners of family businesses usually see themselves as stewards of their companiesfor the next generation, they make decisions for the long term rather than for the next quarter.Their focus is on building an enduring legacy rather than on producing quick returns, atendency that plagues most publicly held companies. ?I would have been fired a couple oftimes in a publicly-traded company, where you are judged according to quarterly earnings,?says Count Anton-Wolfgang von Faber-Castell, eighth generation CEO of the family-ownedFaber-Castell Company that started making pencils in Stein, Germany, in 1761.8 ENTREPRENEURIAL PROFILE: Chris McCormick: L.L. Bean Chris McCormick, the first nonfamily CEO of venerable outdoor gear and apparel retailerL.L. Bean, which Leon Leonwood Bean started in 1912, recently went to the board of thefamily-owned company in Freeport, Maine, and recommended that the company ?have an=investment year‘ and allow profits to fall because we needed to make a big investment inmarketing and attracting younger customers.? The decision was an easy one. ?They agreed,?says McCormick. ?Family members understand that we want to be around another 100 years and investments in growth are critical to the long-term financial health of the business.?9 Faster Decision Making Family business owners say that they are more agile than their nonfamily competitorsbecause they can make decisions faster. Their companies can identify emerging marketniches and enter them quickly because decision makers share similar values and vision for thecompany, which streamlines the decision-making process. Anthony Halas, second-generationCEO of Seafolly, a highly successful swim- and casual-wear company based in Australia,says that ?the ability to make good decisions and react quickly and not being bound byoutside investors who are looking solely at the bottom line are definite advantages tooperating a family firm. A family business can really invest in the future.? An Entrepreneurial Mind-Set Family business owners pride themselves on retaining their entrepreneurial spirit, whichmeans that they sometimes must reinvent their companies to survive and thrive. ENTREPRENEURIAL PROFILE: Andrew Cornell: Cornell Iron Works Cornell Iron Works, now in its fifth generation of ownership, began in 1828 in New YorkCity as a blacksmith shop before morphing into an ironworks company. (It created the ironbase and the spiral stairs for the Statue of Liberty and ironwork for the Brooklyn Bridge.) Inits more than 185-year history, the company has reinvented itself several times. During theGreat Depression, the company made sidings for sanitation trucks and security doors forbuildings, including the Metropolitan Museum of Art in New York City. Today, under theleadership of CEO Andrew Cornell, the company, now located in Mountaintop,Pennsylvania, focuses on a profitable niche, making specialty overhead doors for industrial,institutional, and retail customers.10 Strong Commitment to Their Employees"