7. Succession in the Family Business (Section 7.1-7.7)

1. 7. Succession in the Family Business(Section 7.1-7.7) (c) Thomas Zellweger, 2017

2. Why is intra-family succession decreasing in many developed countries? • What drives the complexity of the succession process? • Will family firms disappear as a consequence of the relatively low interest among next-generation family members in taking over their parents’ firm? • When advising in the succession context, why is it in appropriate to start with topics such as the legal setup or the tax considerations? (c) Thomas Zellweger, 2017

3. What are the critical abilities an advisor needs to have to professionally advise in the succession context? • Describe the differences in viewpoints of incumbent and successor with regard to succession. • In addition to the type of successor, how is intra-family succession different from transferring the firm to employees? • What questions should the incumbent address when clarifying goals and priorities for succession? (c) Thomas Zellweger, 2017

4. What makes the succession career path attractive for next-generation family members? • Why are next-generation family members from very cohesive families less inclined to join their parents’ firm? • Why do incumbent and successor have such different perceptions about the fair value of the firm? (c) Thomas Zellweger, 2017

5. Describe the types of commitment that successors can have with regard to the family firm, and explain how the type of commitment relates to work effort. • Ability and willingness are both critical characteristics for a successor. What are the likely consequences when insufficiently qualified or committed successors enter the firm? (c) Thomas Zellweger, 2017

6. 7. Succession in the Family Business (Section 7.8 – 7.9) (c) Thomas Zellweger, 2017

7. Why is reviewing the firm’s strategy important for the succession process? • What strategic challenges do owner-managed family firms typically face when approaching the succession phase? • Given these strategic challenges, what questions do the incumbent and successor need to address? • ‘Parallel engagement of the incumbent and successor in the firm should be minimized’. Do you agree or disagree? Why? (c) Thomas Zellweger, 2017

8. How do the roles of incumbent and successor change throughout the succession process? • Consider a firm you know well. What does the roadmap for management, ownership and board succession look like? • What are the potential sources of conflict if management and ownership succession are not well defined between successor and incumbent? • What can parents do to help integrate their children into the family firm? (c) Thomas Zellweger, 2017

9. 7. Succession in the Family Business (Section 7.10) (c) Thomas Zellweger, 2017

10. Why does corporate value appear so different for incumbent and successor? • How do you assess the net asset value of a firm? What are the advantages/disadvantages of this valuation method? • How do you assess the EBIT multiple value of a firm? What are the advantages/disadvantages of this valuation method? • How do you assess the DCF value of a firm? What are the advantages/disadvantages of this valuation method? (c) Thomas Zellweger, 2017

11. What assumptions in a DCF valuation have an important impact on the resulting firm value? • What is the difference between equity value and enterprise value? • How do you calculate free cash flow, starting with EBIT? • How do you calculate the weighted average cost of capital of a firm? • Why is a fully equity-financed firm not necessarily worth more than a partly leveraged firm? (c) Thomas Zellweger, 2017

12. 7. Succession in the Family Business (Section 7.11) (c) Thomas Zellweger, 2017

13. Assuming that the successor is unable to fully finance the succession with his/her own equity and a bank loan, how could the financing gap be closed? • How can the incumbent facilitate the financing of the transfer? • What typical financing options are available in private firm successions? • How do banks assess the debt capacity of a firm? (c) Thomas Zellweger, 2017

14. Describe the typical conditions that banks impose to secure their credit. • Explain the various combinations of financing options in private firm successions, and the characteristics, advantages and challenges of each. (c) Thomas Zellweger, 2017

15. 7. Succession in the Family Business (Section 7.12) (c) Thomas Zellweger, 2017

16. Describe the differences between estate and gift tax. • What are the arguments in favor of and against gift tax? • What are the pros and cons of trusts? • What is the difference between an employee stock ownership plan (ESOP) and an MBO? • Why is the fragmentation of shareholdings problematic for family firms? What can the owner/managers do about it? (c) Thomas Zellweger, 2017

17. What are the pros and cons of a private equity recapitalization? • Describe the use of a pass-through entity in a leveraged buyout (LBO). (c) Thomas Zellweger, 2017

18. What are the risks if a family only focuses on business management and neglects investment management? • What are the risks if a family only focuses on investment management and neglects business management? • How does business management evolve throughout the process of transgenerational value creation? • How does investment management evolve throughout the process of transgenerational value creation? (c) Thomas Zellweger, 2017