Question 1

The use of a formal family council with an open discussion of all ideas is a way to demonstrate the essential quality of:

Accepted Answer

B

Question 2

A(n)________ gives the surviving owner or heir of a family business the right to purchase the stock of the deceased owner at a price established by a predetermined formula.

Accepted Answer

A buy/sell agreement is a legal arrangement where the surviving owner or heir of a family business has the right to purchase the stock of the deceased owner at a price established by a predetermined formula. This agreement ensures that the business remains under the control of the remaining owners or heirs and prevents outsiders from acquiring an interest in the company.

Question 3

When Marshall Paisner decided to pass his Scrub-A-Dub car wash chain on to his children,he violated one of the cardinal rules of the transfer of power,but it worked.What he did was:

Accepted Answer

By making both of his sons co-presidents and having them share power and the company, Marshall Paisner ensures a smooth transition of power while also avoiding any potential power struggles between family members. This also allows for more diverse perspectives and ideas to be brought to the company's management.

Question 4

In ________ of the management succession process,the successor's real decision-making power grows rapidly.The final assessment of the individual's abilities is determined.

Accepted Answer

In Stage IV of the management succession process, the successor's real decision-making power grows rapidly, and it is the phase where the final assessment of the individual's abilities is determined. This stage is critical as it marks the transition to actual leadership and the culmination of the succession planning process.

Question 5

During the transfer of power,when the successor makes mistakes,the owner should:

Accepted Answer

Using mistakes as a teaching opportunity can help the successor learn and grow in their role, ultimately benefiting the company in the long run. Option B may undermine the successor's authority and potential for growth, while option C may lead to micromanagement and hinder the successor's ability to make independent decisions. Option D may indicate a lack of trust in the successor and can cause tension and conflicts.

Question 6

The most common and popular estate planning tool for small business owners is the:

Accepted Answer

A buy/sell agreement is the most popular and effective tool for small business owners. This agreement outlines what will happen to the business in the event of an owner's death, disability or retirement. It ensures a smooth and organized transition of ownership and management while minimizing conflicts and potential legal issues. The buy/sell agreement can also address funding options for a buyout, such as life insurance or installment payments.

Question 7

A formal mentoring program should be established in ________,using both internal and external people.As the successor develops his/her skills and performance,he/she will transition to the next stage.

Accepted Answer

Stage III is the stage where a formal mentoring program should be established, using both internal and external people.

Question 8

A(n)________ is an agreement between a grantor and a trustee where the trustee holds legal title to property for the beneficiaries of the trust.

Accepted Answer

The definition provided describes a trust, where the grantor transfers legal ownership of assets to a trustee, who manages and distributes them according to the terms of the trust for the benefit of the named beneficiaries. A grantor-retained annuity trust, family limited partnership, and estate freeze are all estate planning strategies, but they do not match the specific details of the given definition.

Question 9

The essential quality for a family business that shows a recognition that decisions should be left to the person with the greatest talent in that area is the quality of:

Accepted Answer

Shared power means that decisions are not solely made by one person, but are distributed among various family members. However, within a family business, it is important to recognize that different family members may have different talents and strengths in certain areas. Therefore, the person with the greatest talent in a particular area should be given the power to make decisions in that area. This allows for the best possible decisions to be made, which ultimately benefits the business as a whole.

Question 10

________ is an essential quality for a successful family business but it can also become a barrier to change.When it provides a foundation,it works well,when it restricts the future,it becomes a barrier.

Accepted Answer

The keyword in the question is "barrier to change," which is a common issue when tradition becomes too rigid and resistant to new ideas or approaches. While shared power and values are also important for a successful family business, they do not necessarily have the potential to become a barrier in the same way that tradition does. Family behavior is too vague and could refer to many different things, some of which may be positive or negative for a family business.

Question 11

While a large percentage of business founders plan to pass on their businesses,few create management succession plans because:

Accepted Answer

Many business founders struggle with the idea of letting go of their businesses, leading to reluctance to create management succession plans. While some may not know how to create a plan or may not be able to afford professional fees, these reasons are typically not the primary factor in the lack of succession planning. Additionally, assuming a child will automatically take over the business can lead to problems if the child is not actually interested or capable of managing the business.

Question 12

Alicia has decided to retire and sell her business.She wants to walk away from the business and enjoy her retirement without having to think about the business.She has no children or employees who want to buy it.Her best choice of an exit strategy is:

Accepted Answer

Since Alicia has no successors interested in buying her business, a straight sale would be the most appropriate exit strategy. This allows her to sell the business for cash and transfer ownership to the buyer, freeing her from any further obligations or responsibilities related to the business. This would ensure a clean and simple exit for Alicia. A sale for cash plus a note might be an option but it could involve some risk if the buyer defaults on payments. A leveraged buyout requires the buyer to use the assets of the business itself to finance the purchase, which might not be feasible in this case. An ESOP involves the sale of the business to an Employee Stock Ownership Plan, which is not applicable here since Alicia has no employees interested in buying the business.

Question 13

Small business owners can make a number of mistakes in their management succession plan including:

Accepted Answer

Assuming children want control of the business can be a mistake as they may not have the interest or capability to manage it.

Question 14

The employees of Martin's Cleaners,a small retail chain of dry cleaner stores and laundromats,are buying the business from the owner,who is retiring.They are offering the owner a percentage of the asking price in cash plus quarterly payments on the balance,with payoff complete in three years.This is an example of:

Accepted Answer

This scenario describes a sale for cash plus a note, where the employees offer a portion of the asking price in cash upfront and agree to make quarterly payments on the remaining balance until it is fully paid off within three years.

Question 15

A business founder relying on a lifetime giving strategy to minimize the taxes on the estate she is passing on to her son can give him a maximum gift of ________ in company stock each year,tax exempt.

Accepted Answer

The annual gift tax exclusion for 2021 is $14,000 per individual, so the founder can give her son up to $14,000 worth of company stock each year without triggering any gift tax or using any of her lifetime gift tax exemption. Therefore, choice B is the correct answer.

Question 16

Amanda and William run a retail clothing store together.Amanda is a CPA with great financial analysis skills.William has the sense of style and strong negotiating skills.Financial decisions are largely left to Amanda,while buying and display decisions are left to William.This is an example of the essential quality of:

Accepted Answer

This scenario exemplifies shared power, where Amanda and William divide responsibilities based on their strengths—financial decisions to Amanda and buying/display decisions to William—highlighting a partnership where power and responsibilities are distributed according to each partner's skills and expertise.

Question 17

While it is an essential quality for a successful family business,this quality is the one that cannot be imposed or forced.If family members refuse to embrace it,they can still be part of the business.

Accepted Answer

The answer of While it is an essential quality for...

Question 18

In a(n)________ managers and/or employees borrow money from a financial institution and pay the owner the total agreed-upon price at closing;then they use the cash generated from the company's operations to pay off the debt.

Accepted Answer

The described situation is a leveraged buyout (LBO), where the managers and/or employees use borrowed money to purchase the company and then pay off the debt with cash generated from operations. Option A describes a family loan, which is not necessarily related to the company's operations. Option B refers to an employee stock ownership plan, which involves purchasing company stock rather than the entire company. Option D describes a sale where some of the purchase price is paid in cash and the rest in a note, but it does not necessarily involve borrowing money from a financial institution.

Question 19

Ted is retiring in five years and is thinking of selling the business.Ramon,his general manager,tells him that he,the other managers,and the employees want to buy the business from him.Ted sets up a process where all the managers and employees "buy" stock in the company each month through payroll deductions,so that in five years the employees hold 100% of the company.This is an example of:

Accepted Answer

This is an example of an Employee Stock Ownership Plan (ESOP), as the employees are gradually buying stock in the company over time through payroll deductions. The ultimate goal is for the employees to own 100% of the company, which is a common objective of ESOP arrangements.

Question 20

In ________ of the management succession process,the successor is allowed to rotate through a variety of jobs to broaden the base understanding of the business as well as to have his/her skills evaluated.

Accepted Answer

Stage II of the management succession process involves preparing the successor for the role by providing them with adequate training and development opportunities. This often includes job rotation, where the successor is allowed to work in different positions within the company to gain a broad understanding of the business and have their skills evaluated. Stage I involves identifying potential successors, Stage III involves the actual transition of power, and Stage IV involves evaluating the effectiveness of the succession plan.

Quiz 22: Management Succession and Risk Management Strategies in the Family Business