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

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:

A)shared power.
B)a willingness to learn and grow.
C)shared values.
D)family behavior.

Answer 1

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.

A)grantor-retained annuity trust
B)estate freeze
C)unified transfer credit
D)buy/sell agreement

Answer 2

D

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:

A)made a quick transition in about 30 days and walked away.
B)made both of his sons co-presidents and had them share power and the company.
C)named his youngest son to the presidency of the company but retained all final decision control.
D)sold the company to an outsider through a cash payment of 10% and a note for 90% of the value of the business.

Answer 3

B

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.

A)Stage I
B)Stage II
C)Stage III
D)Stage IV

Question 5

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

A)use them as a means for teaching.
B)step in and fix them him/herself,to prevent damage to the company.
C)explain how the owner would have handled it and insist it be done that way in the future.
D)retake control of the company.

Question 6

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

A)buy/sell agreement.
B)irrevocable trust.
C)family limited partnership.
D)estate freeze.

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.

A)Stage I
B)Stage II
C)Stage III
D)Stage IV

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.

A)grantor-retained annuity trust
B)family limited partnership
C)trust
D)estate freeze

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:

A)shared power.
B)shared values.
C)tradition.
D)strong family ties.

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.

A)Shared power
B)Shared values
C)Tradition
D)Family behavior

Question 11

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

A)they don't know how to do it.
B)they are reluctant to let go of the business.
C)they can't afford the attorneys' and accountants' fees.
D)they don't feel they need one because they know which child will assume management of 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:

A)a sale for cash plus a note.
B)a leveraged buyout.
C)a straight sale.
D)an ESOP.

Question 13

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

A)naming a successor too early.
B)having another manager in the company mentor the successor.
C)assuming his/her children want control of the business.
D)All of these

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:

A)a sale for cash plus a note.
B)a leveraged buyout.
C)a straight sale.
D)an ESOP.

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.

A)$5,000
B)$14,000
C)$25,000
D)$100,000

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:

A)shared power.
B)a willingness to learn and grow.
C)tradition.
D)shared values and vision.

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.

A)Shared power
B)A willingness to learn and grow
C)Shared values
D)Family behavior

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.

A)family loan
B)employee stock ownership plan (ESOP)
C)leveraged buyout (LBO)
D)sale for cash plus a note

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:

A)a sale for cash plus a note.
B)a leveraged buyout.
C)a straight sale.
D)an ESOP.

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.

A)Stage I
B)Stage II
C)Stage III
D)Stage IV

Question 21

A company that installs a sprinkler system in its corrugated box factory is using a risk ________ strategy.

A)avoidance
B)reduction
C)anticipation
D)transfer

Question 22

In a grantor-retained annuity trust:

A)there is an attempt to minimize taxes on a family by creating two classes of stock-preferred stock,whose value is locked in,and common stock,whose value reflects the market value of the business.
B)a business owner can pass on up to $10,000 annually,which is exempt from federal gift taxes.
C)the grantor retains the voting power and interest income from the stock in the trust for up to ten years.
D)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.

Question 23

A company using a risk transfer strategy would do which of the following?

A)Buy an insurance policy to cover the risk.
B)Cease the process or function that constituted the risk.
C)Educate employees as to the risks and dangers of the problem process.
D)Set resources aside to deal with the problem when it arose.

Question 24

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

A)irrevocable trust
B)buy/sell agreement
C)LBO
D)estate freeze

Question 25

________ allow(s)employees and/or managers (that is,the future owners)to purchase the business gradually,which frees up enough cash to finance the venture's future growth.

A)A sale for cash plus a note
B)Leveraged buyouts (LBOs)
C)Employee stock ownership plans (ESOPs)
D)Selling to insiders

Question 26

A small fireworks manufacturer that shuts its plant down permanently because the risk of fire and the resulting losses are too great is relying on a risk ________ strategy.

A)avoidance
B)reduction
C)anticipation
D)transfer

Question 27

There are specific requirements for insurability which include:

A)the value of the actual loss must be possible to determine.
B)the risk cannot be selected.
C)the risk must be within a single geographical area.
D)there must a pool of insurers who will accept the risk.

Question 28

A small business that puts aside a specific amount of money into a special fund each month to cover the cost of replacing its highly specialized manufacturing equipment is using a risk ________ strategy.

A)avoidance
B)reduction
C)anticipation
D)transfer

Question 29

The business owner's policy (BOP)typically includes only:

A)theft and crime.
B)pensions and annuities,and health.
C)property and casualty,and liability.
D)disability and hospitalization.

Question 30

A company using a risk anticipation strategy would do which of the following?

A)Buy an insurance policy to cover the risk.
B)Cease the process or function that constituted the risk.
C)Educate employees as to the risks and dangers of the problem process.
D)Set resources aside to deal with the problem when it arose.

Question 31

A small business that buys a fire insurance policy on the equipment in its corrugated box factory is relying on a risk ________ strategy.

A)avoidance
B)reduction
C)anticipation
D)transfer

Question 32

Insurance companies are able to assume so much risk because:

A)they are stock-based companies with deep pockets.
B)they are "gamblers" who bet they are going to make money before they have to pay off any claims.
C)they share the risk among numerous policy holders.
D)they are backed by the government and will be "bailed out" if they get into trouble.

Question 33

When a business owner purchases protection for losses occurring when a contract is not completed on time or is performed incorrectly,it is buying ________ insurance.

A)casualty
B)surety
C)liability
D)comprehensive

Question 34

The ________ is a transfer of ownership strategy for an owner to transfer the company to his/her children while retaining control over it him/herself.

A)grantor-retained annuity trust
B)family limited partnership
C)revocable trust
D)estate freeze

Question 35

Life insurance differs from all other types of insurance in that:

A)it cannot be purchased by the one who benefits from the loss.
B)it does not pertain to avoiding risk.
C)it is federally insured.
D)it doesn't pay unless there is a loss.

Question 36

A(n)________ is a contract that co-owners often rely on to ensure the continuity of a business.

A)irrevocable trust
B)buy/sell agreement
C)trust
D)grantor retained annuity trust (GRAT)

Question 37

________ insurance is protection from loss,theft,or destruction applied to vehicles,buildings,etc.It can be written with a broad coverage or to cover a specific item or items.

A)Life and health
B)Pensions and annuities
C)Workers' compensation
D)Property

Question 38

________ is the transfer of risk from one entity (an individual,a group,or a business)to an insurance company.

A)Risk management
B)Trust
C)Pension and annuities
D)Insurance

Question 39

When a risk is evaluated in terms of how much it could affect a company's ability to operate,the risk is being assessed in terms of:

A)probability.
B)cost.
C)actuality.
D)severity.

Question 40

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 stock),whose value is locked in,and another for the children (common stock),whose value reflects the market value of the business.

A)grantor-retained annuity trust
B)estate freeze
C)trust
D)buy/sell agreement

Question 41

Jackson Fast Food restaurant lost thousands of dollars' worth of food when a freezer broke.To cover the loss,Jackson should have:

A)liability insurance.
B)loss of business insurance.
C)machinery and equipment insurance.
D)There is no insurance for this type of loss.

Question 42

The most basic type of trust is the ________ trust,which allows a business owner to put assets into a trust naming his spouse as the beneficiary upon his death.

A)irrevocable
B)grantor
C)bypass
D)ESOP

Question 43

The creation of a safety team,conduct of a safety audit,and creation of a safety manual are all techniques for controlling:

A)property and casualty insurance costs.
B)professional liability insurance costs.
C)health care insurance costs.
D)worker's compensation insurance costs.

Question 44

A dentist or an attorney would buy malpractice insurance to transfer the risk of lawsuits.This is a type of ________ insurance.

A)casualty
B)surety
C)liability
D)comprehensive

Question 45

One-third of the Fortune 500 companies are family businesses.

Question 46

________ offer(s)liability coverage that protects against losses resulting from injuries,damage,or theft involving the use of company vehicles.

A)Worker's compensation
B)Surety insurance
C)Professional liability insurance
D)Auto insurance policies

Question 47

Key to a successful family business is shared values.

Question 48

Under GRAT,the beneficiaries are required:

A)to pay $11,000 gift tax.
B)to deduct the gift tax.
C)to pay gift tax on the value of the assets placed in the GRAT.
D)Beneficiaries are not required to pay any gift tax.

Question 49

In ________,managers or employees,or both,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.

A)a leveraged sellout
B)a leveraged buyout
C)owner financing
D)100% bank financing

Question 50

One of the fastest growing forms of insurance that protects companies against claims due to suits on grounds of the Americans with Disabilities Act and the Medical Leave Act,etc. ,is:

A)worker's compensation.
B)professional liability insurance.
C)surety insurance.
D)employment practices liability insurance.

Question 51

Small business owners have a number of options for controlling health care costs,such as:

A)increasing policy deductibles.
B)conducting a safety audit.
C)pursuing a loss-control program.
D)decreasing the dollar amount of employee contributions.

Question 52

When selling a business to insiders,available options are:

A)leveraged buyout.
B)sale for cash plus a note.
C)an employee stock ownership plan.
D)All of the above

Question 53

Most business founders intend to pass their companies on to their children,and have a formal management succession plan for doing so.

Question 54

What are the exit strategies available to entrepreneurs when it is time to step down?

A)Close the business
B)File for Chapter 7
C)Sell to outsiders
D)Force a family member to take over

Question 55

Employees contribute a portion of their earnings over time toward purchasing shares of the company's stock from the founder until they own the company outright.This is a characteristic of a(n):

A)leveraged buyout.
B)sale for cash plus a note.
C)ESOP.
D)ESPO.

Question 56

A ________ is a special type of irrevocable trust and has become one of the most popular tools for entrepreneurs to transfer ownership of a business while maintaining control over it and minimizing estate taxes.

A)grantor retained leverage trust
B)grantor retained annuity trust
C)guarantee retained annuity trust
D)grantor retained life insurance

Question 57

What types of financing requirement dramatically reduces the number of potential buyers?

A)80% financing,20 % cash
B)100% cash only
C)100% financing by the seller
D)All of the above

Question 58

________ refers to coping with financial realities of estate and gift taxes.

A)Stage 2
B)Stage 3
C)Stage 4
D)Stage 5

Question 59

The majority of first-generation family businesses do not survive into the second generation.

Question 60

________ protects against damage a business causes clients due to a mistake on their part.

A)Worker's compensation
B)Professional liability insurance
C)Surety insurance
D)Employment practices liability insurance

Question 61

A willingness to learn is not as important to a family business as a nonfamily business because the variety of talents and personalities within the family minimize the importance of new ideas and techniques from the outside.

Question 62

The successor to the business owner needs to have both technical ability-knowledge of the business and financial ability-and understanding of the financial aspects of the business for the transition to succeed.

Question 63

Even though the owner has stepped aside,he/she should always jump back in to fix problems as they occur.

Question 64

Whenever a business has shared leadership,such as co-presidents,it is critical that the board of advisers have members on it from outside the family.

Question 65

Playing together is so important to the success of a family business that family members should be forced to play together even when they don't want to.

Question 66

The nice thing about a family business is that there is always a guaranteed successor within the family whenever the owner decides to step down.

Question 67

A straight sale of the family business to outsiders is best for the founder because it is quick,easy,and has minimal tax consequences to the owner.

Question 68

You should never keep your decision as to your successor a secret.

Question 69

It may be valuable for family members to work outside of the business for the purpose of learning how others conduct business.

Question 70

The concept of shared power in the family business means that family members allow those with the greatest expertise in a particular area of the business to make decisions for that area.

Question 71

At Stage II,when the successor graduates from college,real decision-making authority begins to grow rapidly.

Question 72

It is generally safe for the small business owner to assume that his/her children will succeed him/her into the business.

Question 73

Succession planning should begin when the children reach college age.

Question 74

"Playing together" at leisure activities makes it easier for family members to cooperate at work activities in the family business.

Question 75

Tradition,while important,is not essential to a successful family business.

Question 76

It is important to remember that the succession planning process inevitably creates tension and distrust as family members envy the "chosen one."

Question 77

Experts estimate that $10.4 trillion dollars in wealth will be transferred from one generation to another by 2040.

Question 78

The preparation of a successor is a two-way process,showing the direction of the business and what led to its success,but also learning and listening.

Question 79

ESOPs are simply another version of LBOs,used to buy companies from their owners.

Question 80

One barrier to management succession planning is that the founder often becomes so identified with the business it is difficult for him/her to let go.