MGT 4550 - Family Business Management Chapter 9

							        MGT 4550 -
Family Business Management
FINANCIAL ISSUES FOR
BUSINESS AND FAMILY


              Chapter 9
 Family Business Management,
           Concepts and Practice
     By A. Bakr Ibrahim & Willard H. Ellis



Instructor: Dr. Irene Duhaime
          Class Schedule - Week 11
          (04/05)
 FINANCIALISSUES FOR THE
 BUSINESS AND FAMILY
    Reading: Chapter 9 Going Public, FBM
    Questions:
         6, 42-51, 79, 97-100 FBAB




                      Dr. Irene M. Duhaime   2
      The Decision to Go Public

 Going public is a financial strategy
 Reasons:
   Need for capital to fund growth
   Prestige




                Dr. Irene M. Duhaime     3
    Question 98

     At what point or under what
 circumstances should the company go
                  public?
If the company needs capital are there
   other ways to raise it other than by
         selling or going public?


              Dr. Irene M. Duhaime        4
      Advantages of Going Public

 Raise equity, avoiding debt financing and
  high interest cost.
 Increase the net worth and potential
  borrowing power (improved debt-to-equity).
 Successful initial public offering makes it
 easier to raise funds through different debt
 financing instruments (e.g. debentures).
                                        ….continued

                 Dr. Irene M. Duhaime                 5
        Advantages of Going Public
….continued

 As the market value of the company’s
  shares appreciates, bankers and lenders are
  more likely to lend the business money.
 Personal benefits for the owner and family
  members if the company becomes
  successful.
 Enhances    the firm’s image and prestige.
                   Dr. Irene M. Duhaime         6
        Disadvantages of Going
        Public
 High   cost of going public
     Underwriter’s commission (8%)
     Prospectus cost
     Registration fees
     Accounting cost
 Family    could lose control
     Family members must retain at least 51%
                                           ….continued

                    Dr. Irene M. Duhaime                 7
            Disadvantages of Going
            Public
….continued

 Loss      of privacy. Public companies:
      Must disclose all business transactions
      Are scrutinized by
           regulators and financial analysts
           shareholders and potential investors
           customers, suppliers and competitors
 Change        family business culture radically.

                          Dr. Irene M. Duhaime       8
  Question 99

How much does going public cost?
Who should take the firm public?




           Dr. Irene M. Duhaime    9
        Criteria for Going Public
 Management        Capacity
     handle responsibility and pressures of going
      public
 Proven    Track Record
     at least two years consistent high growth and
      outstanding performance
 Potential   for Growth
     existing products, services and/or opportunity
      have potential growth, new market and/or
      innovation.
                    Dr. Irene M. Duhaime               10
     Question 100

How will family members’ roles change
  after the business goes public or is
                 sold?




              Dr. Irene M. Duhaime       11
      The Business Plan

 Allows   the underwriter to evaluate:
   The business
   Potential growth

   The management team




                Dr. Irene M. Duhaime      12
        Business Plan -
        Critical Factors
 Well   documented
     sufficiently detailed and informative
 Look    and read professionally
     accurate calculations and latest analysis
      techniques
 Avoid  ambiguity (perception of deceiving
  investors)
 CEO/Founder’s personal commitment

                     Dr. Irene M. Duhaime         13
       The Effective Plan

 Focuses       on interests of all stakeholders
     Customers
          why buy product and services
     Investors
          viability and returns
     Stockholders (owners)
          ownership and returns

                       Dr. Irene M. Duhaime        14
         Outline of the Business
         Plan
1. Executive Summary                9. Human Resource Plan
2. The Business Concept             10. Selection of Location
3. The Management team:             11. The Financial Plan
   (Family and Non-family)
4. The Legal form of the            12. The Organizational
   Organization                       Structure
5. Products or Service Market       13. The Deal Structure
6. External Analysis                14. Risk Assessment
7. Marketing Plan and Strategy      15. The Operational Plan
8. The Production Plan              16. Appendix:
                                      Copies of Contracts
                                      Copies of Trademarks and
                                      Patents
                         Dr. Irene M. Duhaime                    15
   Question 79

What red flags may arise as senior-
 generation family members begin to
transfer their stock to their children ?




             Dr. Irene M. Duhaime          16
    Question 42

When should estate planning begin and
  how should you start a discussion,
  particularly if you’re the spouse or
                  heir?




              Dr. Irene M. Duhaime       17
   Question 44

What type of insurance should you
consider to help pay estate taxes and
   provide funds for your heirs?
How much insurance do you need?
  Who should be the owner and
     beneficiary of the policy?

             Dr. Irene M. Duhaime       18
    Question 43

 What are the basics of transfer tax
               planning?
What is the value of your business for
         transfer tax purposes?
Where should the funds come from to
            pay these taxes?

              Dr. Irene M. Duhaime       19
     Question 45

When does a family limited partnership
 (FLP) make sense and when is it not a
              good idea?




              Dr. Irene M. Duhaime       20
    Question 49

What other estate planning techniques
   should you consider for shifting
 ownership to the next generation(s)?




             Dr. Irene M. Duhaime       21
      Question 46

Is it fair to give equal ownership to both
        active and inactive children?




                Dr. Irene M. Duhaime         22
   Question 47

How can you both be fair and equal
 when it comes to estate planning if
you decide that some children should
         not receive stock?




            Dr. Irene M. Duhaime       23
    Question 48

Should a spouse or children not active
  in the business receive any stock or
              other assets?




              Dr. Irene M. Duhaime       24
   Question 97

       Business is booming.
Should the family sell the company?
What will life be like after the sale?




              Dr. Irene M. Duhaime       25
     Question 6

When is the best time to sell a family
              business?




              Dr. Irene M. Duhaime   26
         Class Schedule -
         Remaining weeks
 Apr.   12
     SECOND EXAM
 Apr.   19
     Presentations - ALL FINAL PROJECTS
      DUE
 Apr.   26
     Presentations

                  Dr. Irene M. Duhaime     27