Family Business MGMT Final

All of the following are common estate planning mistakes except a. Failing to consider tax ramifications sufficiently b. Failing to include outside advice or review c. Failing to include successors in planning d. Trying to treat all heirs equally

a. Failing to consider tax ramifications sufficiently

How can family businesses optimize the business-family relationship? a. Parallel processes between the family council and the management develop visions for the future that are then integrated by the board of directors. b. All business and family decisions are made at meetings of the board of directors, as long as the board has both family and independent membership. c. The family council sets a vision and goals, which the management team uses to create a strategic plan. d. The board develops a strategic plan, which family members and management review and adapt to their own needs.

a. Parallel processes between the family council and the management develop visions for the future that are then integrated by the board of directors.

A family charter is a. a policy to outline how family members will be selected for management roles or board membership. b. an agreement for how the family will relate to and communicate with non-family shareholders and management. c. an agreement between family members governing their interaction. d. a statement of the family's mission and values, as well as policies relating to them.

a. a policy to outline how family members will be selected for management roles or board membership.

The socioemotional returns of a family business a. can be calculated by considering both the financial benefits of family businesses that aren't available in publicly traded companies and net value of emotional returns minus emotional costs b. can generally provide positive rewards that offset slower rates of return. c. cannot be calculated but should be taken into account. d. can be calculated by considering long-term financial gains and lowered costs of healthcare and other stress-related costs.

a. can be calculated by considering both the financial benefits of family businesses that aren't available in publicly traded companies and net value of emotional returns minus emotional costs

New venture projects by family businesses should a. have a business plan and be evaluated by a venture review board b. be evaluated by a board made up of nonfamily managers. c. be limited to midsized or larger family businesses. d. stay within the core business of the firm

a. have a business plan and be evaluated by a venture review board

Owners should require a return on their investment in the business that a. is at least as great as they would get with the same risk outside the family business. b. is based on the ROIC, not the ROE. c. is higher but takes longer to achieve than other investments. d. is independent of socioemotional considerations.

a. is at least as great as they would get with the same risk outside the family business.

Dividends a. limit the money that can be reinvested in the business. b. are only necessary in families where members are not committed to the company's long-term sustainability. c. are only possible when the company appreciates in value. d. can easily be replaced by a buy-sell agreement to transfer stock.

a. limit the money that can be reinvested in the business.

In addition to reducing taxes, estate planning should cover all of the following except a. limiting strategic changes that can be made during the transition to the next generation b. planning for next-generation business management c. day-to-day business and family relationships d. the CEO's retirement needs

a. limiting strategic changes that can be made during the transition to the next generation

The Board of Directors a. should push the owners to commit to estate planning. b. should ensure that the estate planning focuses on business strategy. c. should create an estate plan themselves if the family fails to do so d. should not be involved in estate planning until the CEO and family have made initial plans

a. should push the owners to commit to estate planning.

The balance sheet shows a. the overall financial picture, including assets and liabilities. b. the rate of return for individual shareholders. c. total profits for the year, calculated after taxes. d. annual investments in the business.

a. the overall financial picture, including assets and liabilities.

Owner plans do all the following except a. Express the family's tolerance for risk b. Define strategic plans for the business c. Allow the family to agree on shared goals d. Define expectations and responsibilities to the board

b. Define strategic plans for the business

What is the main concern in managing the relationship between the board and the family council? a. There is often too much overlap between the family council and the board so that family issues leak into board strategy discussions b. Family council members who are not active in the business may second-guess and interfere in company management. c. The family council tends to trust the board entirely on strategic decisions and move away from their family goals d. The board may move away from the values espoused by the family council.

b. Family council members who are not active in the business may second-guess and interfere in company management.

The Owners Plan Template suggests including all of the following except a. A list of family values b. Guidelines on estate planning c. Suggestions for the board of directors d. A description of the process for continued planning

b. Guidelines on estate planning

The income statement does all of the following except a. Shows net income or net loss for the year b. Includes changes in net working capital c. Shows total sales d. Includes the cost of income taxes

b. Includes changes in net working capital

Which of the following is not a responsibility of the board of directors? a. Help the business maintain ethical management practices b. Monitor family shareholders to ensure that they are working for the benefit of the company rather than themselves c. Help form company strategy, including multiyear succession and continuity processes d. Review the performance of the CEO and top management

b. Monitor family shareholders to ensure that they are working for the benefit of the company rather than themselves

The most important difference between ROE and ROIC is a. The ROE accurately reflects the company's increase in value and the ROIC does not. b. The ROIC considers the return on all capital, while the ROE considers only equity c. The ROE should be used as a proxy for required return, but the ROIC should not d. The ROIC is calculated after taxes and the ROE is calculated before taxes.

b. The ROIC considers the return on all capital, while the ROE considers only equity

How can estate planning affect family businesses' speed and agility? a. Passing control to the next generation results in reduced entrepreneurial commitment. b. The greater number of owners in later generations can make the company slow to make decisions. c. Once family members know who the new CEO is, they are often less motivated to help. d. The hit taken from taxes and other costs of transfer limits the ability to respond to new market considerations.

b. The greater number of owners in later generations can make the company slow to make decisions.

Which of the following is not a feature of a for-profit business board? a. It is small, around 5-9 members b. The members are friends of the family or other people with a close working tie to the business c. The members, except the CEO, are not company managers. d. The members are committed to long-term relationships with the business.

b. The members are friends of the family or other people with a close working tie to the business

Which of the following is not a reason for the top management team to include nonfamily executives? a. They complement the skills of family members b. They provide ethical and legal oversight c. They raise the bar for managerial performance d. They help eliminate second-guessing about strategic decisions

b. They provide ethical and legal oversight

Recapitalizing common stock a. limits the ability of the heirs to make their inheritance liquid. b. allows division of the estate equally in terms of value. c. allows division of the estate equally in terms of control d. is only allowed to S corporations.

b. allows division of the estate equally in terms of value.

The Owners Plan template suggests beginning with a. the family's vision for the company. b. an explanation of why an owners plan was adopted. c. financial distribution requirements d. a clear statement of the overall goals

b. an explanation of why an owners plan was adopted.

The family business can best identify its competitive advantages by a. comparing themselves to nonfamily businesses in the same field. b. considering which features add value from the customer's perspective. c. analyzing their ability in areas where family businesses typically excel, like flexibility and shareholder commitment. d. comparing themselves to other family businesses of the same size.

b. considering which features add value from the customer's perspective.

Having a high cash position a. is a common response to family business aversion to debt. b. is usually a waste of assets. c. results in a higher ROA reported on balance sheets. d. helps a company have competitive advantage.

b. is usually a waste of assets.

The residual dividend policy a. balances the need for family liquidity and business growth equally b. pays owners only after the business funds its own growth. c. is the most common way of distributing dividends. d. is the best way of distributing family wealth for tax reasons.

b. pays owners only after the business funds its own growth.

Board-member compensation in family-owned private companies a. should be calculated as an hourly rate multiplied by the number of hours spent in board meetings. b. should be calculated at approximately the CEO's salary divided by 110. c. should be paid only at the end of the year, regardless of the amount. d. should be around $15,000, assuming four board meetings a year.

b. should be calculated at approximately the CEO's salary divided by 110.

The example of Adelphia Communications shows a. that boards of directors should have all family members who can adequately stand up to the CEO. b. that boards of directors need independent external members who are fully informed. c. that family businesses are at risk for major fraud. d. that family-run businesses run into trouble when there are multiple candidates for second-generation leadership

b. that boards of directors need independent external members who are fully informed.

Why shouldn't a family business rely on internal professional service providers to perform tasks like estate planning or negotiating family conflicts? a. Because external oversight is legally and ethically required b. Because internal members rarely have the necessary skills c. Because outside perspectives are helpful in planning and executing changes d. Because the performance of outside specialists is guaranteed

c. Because outside perspectives are helpful in planning and executing changes

Why is an advisory board sometimes chosen over an independent board of directors? a. Because the advisory board usually has fewer conflicts of interests than directors do b. Because the advisory board is not subject to the same legal rules as the board of directors c. Because the family prefers to keep the board of directors entirely family-run d. Because the advisory board is less of a threat to the CEO

c. Because the family prefers to keep the board of directors entirely family-run

Why do owner-managers often resist change? a. Because they don't trust their heirs to have the same values as they do b. Because they are afraid of messing up a system that works c. Because their pride in existing success makes them less aware of potential problems d. Because they lack the professional training to develop future-oriented strategy

c. Because their pride in existing success makes them less aware of potential problems

Successful family meetings should have all the following, except: a. Goals or expectations b. Rules of conduct c. Participation by all family members d. An agenda or schedule of discussion

c. Participation by all family members

How can owners best help nonfamily managers appreciate the family business culture? a. Ensuring that valued nonfamily managers receive shares in the business b. Hiring nonfamily managers only after they have considerable experience with the business c. Regular informal and formal mutual communication about needs and values d. Using the outside board to negotiate all nonfamily compensation

c. Regular informal and formal mutual communication about needs and values

What is the most common way that family enterprises promote professionalization of family members? a. Inspiring competition among heirs b. Requiring work experience outside the family business c. Requiring an MBA or professional degree d. Directly comparing family and nonfamily employee performance

c. Requiring an MBA or professional degree

What is the best way to avoid the zero-sum family dynamic? a. Regular diversification of product lines to counteract market shifts b. Ensuring that future plans include official business positions for all direct family members c. Strategic planning to create growth and keep lines of communication open d. Including regular options for extended family to divest their shares as part of the financial strategy

c. Strategic planning to create growth and keep lines of communication open

What is the main reason family businesses fail to have adequate estate planning? a. The CEO fears showing favor to one family member over another. b. It is expensive, especially when done properly. c. The CEO has no plans to retire d. It takes attention away from more immediate strategic planning.

c. The CEO has no plans to retire

Which of the following is not one of the factors that should be taken into account for assessing competitive intensity? a. The ease with which a buyer could switch products b. The comparative power of the supplier relative to the customer base c. The absolute number of competitors for the company's product d. The likelihood that new businesses will enter the market

c. The absolute number of competitors for the company's product

If the family business with an outgoing CEO needs dramatic change, the best solution may be a. ensuring external experience for the new CEO b. a permanent shift to nonfamily management c. a nonfamily manager as a bridging CEO d. to have the board select the new CEO

c. a nonfamily manager as a bridging CEO

The Kropps Family Constitution recognizes the role of family members in the business as a. varied, depending on age and relationship to the founder. b. varied, depending on ability. c. desirable, but only when the family members are in leadership positions. d. a priority, keeping as many family members in business roles as possible

c. desirable, but only when the family members are in leadership positions.

The Next-Generation Committee is designed to a. train members of the next generation in management positions. b. train members of the next generation in their roles as shareholders. c. encourage stewardship and commitment to the family business. d. include all members of the non-management generation.

c. encourage stewardship and commitment to the family business.

Family shareholder groups and the family business managers should a. make sure the strategic plan for the business always takes precedence to ensure profitability. b. have the same strategic plan to ensure equal commitment to the business. c. ensure that their strategic plans are complementary, but that both focus on the future. d. have different strategic plans to reflect the different goals of the family and the family business.

c. ensure that their strategic plans are complementary, but that both focus on the future.

Unless the business is _____, value creation should not be based on physical assets. a. publicly traded b. in its first or second generation c. involved in areas that require significant physical assets like mining or real estate development d. international in its scope

c. involved in areas that require significant physical assets like mining or real estate development

Family-business consultants a. are required to be from a business or finance background b. deal primarily with the family ownerships. c. need to be able to balance needs of ownership, family, and business management. d. focus on a single subject of expertise.

c. need to be able to balance needs of ownership, family, and business management.

The sale or gift of stock to nonfamily members a. is a good incentive to reward commitment to the business. b. is a good way to minimize estate taxes for the next generation. c. results in capital-gains taxes. d. should always be composed of nonvoting stock.

c. results in capital-gains taxes.

Independent members of the board are ideally a. selected because they work well independently and will thus maintain objectivity b. selected because they can provide the business with important networking or capital raising connections c. selected because they are successful CEOs or management heads from similar companies. d. selected for their familiarity with the company

c. selected because they are successful CEOs or management heads from similar companies.

Nonfamily managers a. should work to minimize the impact of family dynamics on the company. b. should not be expected to manage family relationships. c. should accept that their role includes awareness of family chemistry. d. should avoid encouraging the influence of a family "culture."

c. should accept that their role includes awareness of family chemistry.

A family business facilitator or adviser a. should never be a family member. b. should be a psychologist or general management consultant c. should remain objective. d. should always be a family member.

c. should remain objective.

Using the DuPont method to analyze ABC shows a. that ABC increased their debt between 2013 and 2014. b. that ABC makes more money per dollar of sale than its competitors. c. that ABC may be relying too much on debt to finance their ROE. d. that ABC's low profit margin hurting their financial health.

c. that ABC may be relying too much on debt to finance their ROE.

The family assembly is all of the following, except: a. A way to involve all family members b. A yearly meeting for a large multigenerational family c. A way for the family council to report to the larger family group d. A way for the family to vote on business strategy and board composition

d. A way for the family to vote on business strategy and board composition

How can ABC, Inc., estimate future cash flows? a. By comparing estimated investments in the company to expected market growth rates b. By determining absolute working capital c. By combining EBIT with net operating profit d. By using the firm's generated cash flows, taxes, and investment required for future growth

d. By using the firm's generated cash flows, taxes, and investment required for future growth

Which of the following was not a result of the growing influence of internet on family business strategies? a. Family businesses changed relationships with their suppliers and distributors. b. Family businesses relied on brand equity to maintain and develop customer bases. c. Family businesses had to develop digital strategies for working with customers. d. Family businesses that acted as "middlemen" in the distribution chain went out of business.

d. Family businesses that acted as "middlemen" in the distribution chain went out of business.

How does "interpreneurship" help family businesses be more sustainable in the current business climate? a. It encourages the family to develop internal skill sets. b. It focuses the family internally on its core values. c. It allows the family to strategically revive its original competitive advantage. d. It encourages engagement and growth in next-generation family members.

d. It encourages engagement and growth in next-generation family members.

Which type of shares are typically valued lowest? a. Marketable minority—privately held b. Controlling interest c. Marketable minority—publicly held d. Nonmarketable minority

d. Nonmarketable minority

Nonfamily managers were more satisfied than family managers with which aspect of business practice? a. Short-term benefits b. CEO selection practices c. Succession planning d. Performance feedback

d. Performance feedback

Recommended ways to reduce nonfamily dissatisfaction with manager compensation include all of the following except a. Reminders of non-monetary compensation like job flexibility b. Long-term incentives c. Phantom stock d. Shares in the company

d. Shares in the company

The family office becomes necessary at which stage of Doud's model? a. Stage one, because this office is always helpful in managing family business needs b. Stage four, because this when the family business investments and non-business wealth have grown to be almost a separate process c. Stage two, because, this is when the business is growing and needs a more professionalized organization d. Stage three, because family nonbusiness assets have grown and require more management

d. Stage three, because family nonbusiness assets have grown and require more management

Who should attend the annual shareholders' meeting? a. Family shareholders, their family members, and the board of directors b. Only legal shareholders c. The board of directors and shareholders with voting rights d. The board of directors and direct shareholders

d. The board of directors and direct shareholders

Current (2016) US estate tax law a. allows $5.45 million in untaxed inheritance for an individual or a married couple. b. allows a spouse to receive up to $10.9 million before paying estate tax. c. allows an individual to receive up to $5.45 million before paying estate tax. d. allows an individual to leave up to $5.45 million to heirs before paying estate tax.

d. allows an individual to leave up to $5.45 million to heirs before paying estate tax.

The competitive advantages that are most useful to a family business are a. financial resources because they enable the business to invest in long-term planning and make changes to respond to the market. b. creative management models, since family businesses aren't required to have the same management practices as non-family businesses c. equipment because it requires considerable liquid capital. d. assets like people's skills and values because they are less likely to be easily replicated elsewhere.

d. assets like people's skills and values because they are less likely to be easily replicated elsewhere.

Family meetings are used to a. discuss immediate business needs. b. provide a private discussion space for family away from other shareholders or independent management. c. make interventions in family relationships to resolve estrangements. d. develop policies for family business relationships in a structured, strategic way.

d. develop policies for family business relationships in a structured, strategic way.

The Kropps Family Constitution was designed to a. codify the role of the family council. b. help transition between an all-family board and a board with independent members. c. support a period of significant expansion in the Kropps family business. d. facilitate the transfer between generations.

d. facilitate the transfer between generations.

GRAT and IDGT types of trusts a. are better than state domiciled trusts or dynasty trusts. b. are risky because of changes to the way IRS evaluates trusts. c. only apply to non-voting stock. d. help minimize estate taxes.

d. help minimize estate taxes.

Ideally, the owners plan a. only needs to be revised every 3-5 years. b. replaces the need for a standing family council. c. defines the board's role. d. includes discussion of the family's core values.

d. includes discussion of the family's core values.

Enterprise value a. is the value of the company if each asset were to be sold off. b. is calculated based on the most conservative estimates of business growth. c. shows only the value of the company without taking debt into account. d. is calculated based on equity capital, outstanding debt, and cash holdings.

d. is calculated based on equity capital, outstanding debt, and cash holdings

For family businesses, significant capital a. is easier to raise because family members do not require returns as quickly. b. is usually funded by taking on debt. c. is only necessary at the early stages of the business. d. is more difficult to raise because they tend to resist outside funding.

d. is more difficult to raise because they tend to resist outside funding

The term "governance," as used in reference to family businesses, refers to a. the system of management a family chooses to run the business. b. keeping family members in control of the business when independent managers or board members are brought on. c. the way the family deals with independent agencies or outside regulatory bodies. d. joint decision making to control relationships between family members, shareholders, and managers.

d. joint decision making to control relationships between family members, shareholders, and managers.

The owner can determine family business worth by a. looking at the balance sheets from the previous five years. b. valuing the company based on its current use, not its potential highest performance. c. calculating book value (assets minus liabilities). d. making sure to consider the value of the company as an ongoing operating business.

d. making sure to consider the value of the company as an ongoing operating business.

The Discovery Action Research Project found a. family owners had trouble valuing nonfamily managers. b. nonfamily managers struggled to understand the competitive advantage of family businesses. c. nonfamily managers preferred being treated like family members. d. nonfamily managers generally considered the firms to have worse governance than owners did.

d. nonfamily managers generally considered the firms to have worse governance than owners did.

The example of ABC Snackfood Company shows a. that ABC's acquisition of XYZ increased its value by more than the cost of the acquisition b. that ABC's ROE declined because XYZ wasn't a good investment. c. that acquisition of a successful company is a good way to increase ROE. d. that ABC's growth did not result in increased value.

d. that ABC's growth did not result in increased value.

The anecdote about the Cadbury family business illustrates a. the board's relationship to an advisory board. b. the board's role in monitoring the CEO. c. the board's importance when a family business goes public. d. the board's role in succession planning.

d. the board's role in succession planning.

In the guideline transaction method, a. the company's value is largely based on their rates of mergers and acquisitions. b. the company is evaluated based on its investment in capital resources. c. the company is evaluated based on its success meeting earlier financial goals. d. the company can only be compared to other companies in the same industry.

d. the company can only be compared to other companies in the same industry.

The value of a business a. should be computed based on the cost approach. b. should be the same regardless of the purpose. c. should be computed based on the income approach. d. will be lower if the stock is closely owned.

d. will be lower if the stock is closely owned.