Question 1

An arrangement in which employees and/or managers contribute a portion of their salaries and wages, over time, toward purchasing shares of a company's stock from the founder until they own the company outright, is referred to as:

Accepted Answer

The arrangement described in the question is known as an ESOP, which stands for Employee Stock Ownership Plan. This is a type of retirement plan that allows employees to become partial owners of the company they work for by purchasing shares of the company's stock over time. The contributions are typically made on a pre-tax basis, which can provide tax benefits to both the employee and the company. Eventually, the employees and/or managers may own enough shares to gain control of the company. This is different from an IPO (initial public offering), which is the first time a company's stock is made available to the public for purchase. It is also different from a leveraged buyout or a hostile takeover, which both involve acquiring a company through means other than gradually purchasing shares over time through an ESOP.

Question 2

Questions like "What are you deeply passionate about?", "What can you be the best in the world at?" and "What drives your economic engine?" are important to define your hedgehog concept, according to the work of Jim Collins.

Accepted Answer

These questions are specifically used in the development of the hedgehog concept, as described by Jim Collins in his book, "Good to Great".

Question 3

Entrepreneurs who are planning to retire often use two strategies:

Accepted Answer

Entrepreneurs who are planning to retire often prefer to sell to outsiders or sell to nonfamily insiders. Selling to outsiders could result in a higher purchase price and selling to nonfamily insiders could ensure that the business remains in good hands with someone who already understands the company's operations. Selling to relatives could result in familial feuds and cause a rift within the family. Assuming the role of a silent partner could limit an entrepreneur's control over the business and deny them the opportunity to enjoy their retirement. IPOs are not a common strategy for small business owners who are planning to retire.

Question 4

In a grantor-retained annuity trust (GRAT):

Accepted Answer

All of the statements are correct. A GRAT allows the grantor to transfer company stock into an irrevocable trust for a fixed term of up to 10 years while retaining the right to receive an annuity payment from the trust. The grantor also retains the power to vote the stock and receive any interest income generated by the trust. At the end of the trust term, the remaining assets pass to the beneficiaries. The value of the gift is based on the discounted present value of the assets transferred, which can result in significant estate and gift tax savings.

Question 5

Effective leaders know they must punish workers who take risks and fail so that other workers do not make the same mistakes.

Accepted Answer

Effective leaders understand that taking risks and making mistakes is a necessary part of innovation and growth. Punishing workers for taking calculated risks and making mistakes can create a culture of fear and hinder progress. Instead, effective leaders encourage workers to take risks, learn from their mistakes, and use those experiences to improve and innovate.

Question 6

Effective leaders recognize that money is not the only reward that motivates workers.

Accepted Answer

Effective leaders understand the importance of non-financial rewards such as recognition, growth opportunities, and work-life balance in motivating their employees.

Question 7

Effective leaders know that what they do is more important than what they say because they set the example for their employees.

Accepted Answer

Effective leaders understand that their actions carry more weight than their words. They model the behaviors and values they want their employees to exhibit, which helps create a positive and productive work environment.

Question 8

A leveraged buyout is an arrangement in which managers and/or employees borrow money from a financial institution and pay the owners:

Accepted Answer

In a leveraged buyout, the buyers use borrowed funds to pay the total agreed-on price at closing, and then use the company's cash flows to pay off the debt over time.

Question 9

Although a small business manager must assume a wide range of ideas, tasks, and responsibilities, none is more important than the role of leader.

Accepted Answer

The statement is true. As a leader, a small business manager is responsible for setting goals, making decisions, motivating employees, and creating a positive workplace culture. Leadership is crucial to the success of a small business as it determines the direction and vision of the company.

Question 10

A strong leader does not share aspects of his or her company's financial health, its future plans, or her vision for it with employees.

Accepted Answer

A strong leader fosters a culture of transparency and open communication, which includes sharing aspects of the company's financial health, its future plans, and their vision for it with employees. This helps to build trust, increase engagement, and align everyone towards a common goal.

Question 11

Both leadership and management are essential to a small company's success, but leadership comes first.

Accepted Answer

Leadership sets the vision and direction for the company, which then requires effective management to execute and achieve the goals. Therefore, leadership must come first before management.

Question 12

Effective leaders make sure that workers have both the tangible and the intangible resources they need to do their jobs well.

Accepted Answer

Effective leaders understand that providing employees with tangible resources such as equipment, tools, and training is just as important as providing intangible resources such as support, recognition, and opportunities for growth. By providing both types of resources, leaders help create a positive work environment and empower employees to perform at their best.

Question 13

Leadership gets a small business going; management keeps it going.

Accepted Answer

Leadership is crucial in initiating a small business and driving it forward with a vision and strategy. However, once the business is established, effective management skills are necessary to sustain operations and ensure growth. Both leadership and management are important for the success of a small business.

Question 14

A(n) ________ is the most basic type of trust, which allows a business owner to put up to $1.3 million into trust, naming his spouse as the beneficiary upon his death. The spouse receives the income from the trust throughout her life, but the principal in the trust goes to the couple's heirs, free of estate taxes, upon the spouse's death.

Accepted Answer

The described trust is a bypass trust, which is also known as a credit shelter trust. It is a basic type of trust that allows a business owner to pass up to $1.3 million to his heirs free of estate taxes. The surviving spouse receives the income from the trust throughout her life, but the principal in the trust goes to the couple's heirs upon her death. This type of trust is designed to "bypass" the surviving spouse's estate and maximize the use of both spouses' federal estate tax exemptions.

Question 15

A family limited partnership (FLP) is a strategy that allows business owning parents to transfer their company to their children and ________ their estate taxes while retaining control over the business.

Accepted Answer

An FLP allows parents to lower their estate taxes by transferring ownership to their children while still retaining control over the business.

Question 16

Management and leadership are essentially the same.

Accepted Answer

While management and leadership do have some similarities, they are not the same thing. Management involves organizing and coordinating resources to achieve specific goals, while leadership involves inspiring and motivating others to work towards a common purpose. A good manager may also be a good leader, but the two roles require different skills and approaches.

Question 17

Today's workforce responds best to a leadership style based on instilling fear and intimidation.

Accepted Answer

This statement is false. Modern research has shown that leaders who rely solely on fear and intimidation may achieve short-term results, but in the long run, such a leadership style can be detrimental to employee morale, job satisfaction, and retention. Instead, today's workforce responds better to leaders who offer support, inspire trust, provide clear expectations, and promote collaboration and empowerment.

Question 18

A(n) ________ attempts to minimize taxes on a family business passed from one generation to the next by creating two classes of stock-one for the parents (preferred voting stock), whose value is locked in, and another for the children (nonvoting common stock), whose value reflects the market value of the business.

Accepted Answer

This is describing an estate freeze, which is a tax planning strategy to minimize taxes when passing a family business from one generation to the next. It involves creating two classes of stock, one for the parents (preferred voting stock) and another for the children (nonvoting common stock). This allows the parents to retain control while locking in the value of their preferred stock, and allows the children to benefit from any future growth in the market value of the business reflected in the value of their nonvoting common stock.

Question 19

Leadership deals with doing things right; management deals with doing the right things.

Accepted Answer

The statement should be the other way around - leadership deals with doing the right things, while management deals with doing things right.

Question 20

In a grantor-retained annuity trust (GRAT),

Accepted Answer

In a grantor-retained annuity trust (GRAT), the grantor retains the interest income from the stock in the trust for up to ten years before the business goes to the beneficiaries. The purpose of a GRAT is to transfer assets to beneficiaries with minimal or no gift or estate taxes. The grantor makes an irrevocable gift of stock, but retains the annuity payment, which means the grantor receives a fixed payment annually for a set number of years. At the end of the term, any remaining assets in the trust pass on to the beneficiaries designated by the grantor.

Quiz 16: Building a Team and Management Succession