Universiti Malaysia Perlis

Engineering Entrepreneurship

Assignment about:-

Assignment by: Omar Hussein moqbel

Card number: 0912400855

contents

Introduction1

A Definition of Family Business2

why family business

- Using Life Insurance to Fund a Business Buy-Sell Arrangement.- The Relationship Between Family Businesses and

Entrepreneurship3

Family Resource Management and Family Business4

The Importance of Family Businesses in the Economy and Society

- Economic Value.- The Societal Value.

5

Family Business Theory6

Family Resource Management7

Families and Businesses: Ongoing Adaptation

8

The Current and Future Needs to Advance the Field and Study of Family Business

9

Three Problems Facing Family Businesses:- Deferred Compensation Plans.

- How DCPs Work.- Phantom Stock Option Plans.

- How Phantom Stock Plans Work.10

conclusion111

Introduction:-Family businesses make numerous, critical contributions to the economy and to family well-being both in terms of money income and such intangibles as time, flexibility, control, and personal expertise - if they work. When they don't, family businesses can be difficult to manage, painful experiences at best. The path to

success for any business can follow many routes. Family businesses add the complexities of family life to business challenges, expanding the range of issues, personalities, needs and potential solutions for every decision. Knowing something about family types, communication patterns, managerial styles and the amount of support members can expect from their families may be as important to beginning entrepreneurs as knowing how to reach a market or managing cash flow.

The connection between entrepreneurship and family business appears to be widely unrecognized. An entrepreneur is often defined as someone who specializes in making judgmental decisions about the coordination of scarce resources, is institution-free, deals with the factor of risk, and has influence over the flow of information. Although the literature often portrays the entrepreneur as a single individual, family business literature strongly suggests that families are vital and supportive environments for entrepreneurial behavior. Put simply, entrepreneurship is the start and heart of most family businesses, and the phenomenon of an entrepreneurial family fosters, subsidizes, and enhances the efforts of its members who engage in entrepreneurship. Family business is merely the "wider-lens" view of entrepreneurship as the initial business efforts of one or more family members grow and change over time.

- A Definition of Family Business:-

There are many misconceptions about family business. Perhaps the most pervasive is the "mom and pop" image that the very word, "family business", engenders. Although many small and micro businesses are family-owned and operated, there is evidence that family firms are also fast growth firms andvery large successful firms. Broadly, family business has been defined as a business that is owned and managed (i.e., controlled) by one or more family members (Handler, 1989; Hollander & Elman, 1988). A more detailed definition is provided by Davis and Tagiuri (1982). They define family firms as: "...organizations where two or more extended family members influence the direction of the business through the exercise of kinship ties, management roles, or ownership rights." Moreover, Gallo (1994) has asserted that family businesses are essentially the same in every country in the world relative to their problems, issues, and interests.

why family business

- Using Life Insurance to Fund a Business Buy-Sell Arrangement:-

Many successful businesses, including farms, are closely held, with only a few owners. What happens to these businesses if one of the principal owners dies? Do they continue? Often the remaining owners can manage the business quite successfully. Their problem is the financial ability to buy the deceased owner's share of the business from the estate or heirs. A solution might be a buy-sell arrangement funded with life insurance.

A buy-sell arrangement for co-owners to purchase each other's business property is often suggested for closely held businesses. Upon the death of an owner, the mechanism is in place for an orderly transfer of ownership to the remaining owners, since contract negotiations had previously occurred when the arrangement was drawn. Buy-sell arrangements typically include details concerning who has the option to buy from a seller (including an estate), how the sales price is established, and how the transfer may be financed. If the buy-sell is written for the death of an owner, then life insurance becomes a financing option.

Both life insurance and heir or third-party financing can be used to transfer the business to a continuing operator upon the death of a property owner. A child who operates a business owned by a parent can purchase life insurance on the parent to finance the property purchase from non-business heirs. Life insurance proceeds can similarly fund a partnership or corporate buy-sell arrangement. Insurance premiums are not tax deductible but the proceeds are free from income tax. Since the decedent never owned the policy, the proceeds are not included in his estate. Life insurance premiums begin immediately and cease at death (or sooner) when the insurance proceeds are used to purchase the business. In contrast, the cost of heir or third-party financing will not begin until death and will continue until payments are completed.

The decision whether to use life insurance to fund a buy-sell arrangement would be simple if the purchaser knew with certainty when the insured will die. If death will occur within a few years, then the use of life insurance would be the low-cost option. If death will occur many years hence, the purchase of life insurance would be foolish until shortly before that death. However, death is not known with certainty.

I have studied this decision, incorporating uncertainty into the decision (Tauer 1987, Tauer 1985). Whether to purchase life insurance was found to depend upon the unique characteristics of the business and the individuals involved. Important characteristics are the cost of the insurance, the age of the insured, and the degree of risk aversion of the purchaser.

Although the decision to buy insurance is unique to each situation, some general results were found. First, if the individual is not risk averse, then life insurance should not be pur-chased. The cost of insurance is always greater than the expected loss since insurance companies need to charge sufficient premiums to cover administrative and other costs in

addition to their expected payout. The more risk averse an individual is, the greater percentage of the buy-sell arrangement that should be funded by life insurance.

Second, the more costly the life insurance premium, the less insurance that should be purchased. However, even if the insurance is relatively expensive, the buy-sell arrangement should be at least partially funded with life insurance. This allows diversification in financing of the buy-sell. Most should use some life insurance funding even if it is costly, but very few should completely fund with life insurance, even if it is low cost.

The age of the insured has little impact on the decision. Premiums are higher on older individuals but then the expected loss is greater. If the person buying the insurance has limited funds, however, less insurance should be purchased because those limited funds may have higher value used- elsewhere.

To summarize these results, Tables 1 and 2 show the percentage of the buy-sell purchase to be funded with life insurance for a 40-year-old insured and a 60-year-old insured at four different annual term insurance premiums and three different levels of risk aversion. If the insurance premium is $2.39 per $1,000 of insurance for an insured of age 40, a slightly risk averse purchaser should only fund 60% of the buy-sell with life insurance. In contrast, if the insurance cost is $3.82, then only 10% of the buy-sell should be funded with life insurance.

A decision also needs to be made whether to purchase whole or term insurance. The insurance industry prefers to sell whole-life policies. Yet, research has shown that guaranteed renewable term insurance is the better buy for consumers (Warshawsky).

Small businesses often do not utilize life insurance in buy-sell arrangements. Several explanations are possible. Many owners are myopic and do not plan ahead. Others are averse to the thought of planning for death, even a partner's death. Even if a buy-sell arrangement exists, a businessperson may place a lower subjective probability on the death of a partner. This would decrease the use of life insurance. Some may be averse to a co-owner or the business purchasing and benefiting from life insurance on their lives. Others are never offered low-cost life insurance policies. Finally, many have insufficient funds to purchase life insurance, although it may be the optimal decision without the cash-flow constraint. Survival or growth of the business requires reinvesting all earnings. The fact that insufficient cash or cash flow exists to purchase the business, if necessary, is not relevant since that problem is not imminent.

- The Relationship Between Family Businesses and Entrepreneurship

The connection between entrepreneurship and family business is widely unrecognized. Families are vital and supportive environments for entrepreneurial behavior. Entrepreneurship research has revealed that family support and the presence of self-employed parents are an important influences in venture initiation and business

ownership (Shapero and Sokol, 1982; Cooper, 1986). Sexton and Bowman-Upton (1991) define an entrepreneur as "one who can recognize an opportunity in the marketplace and is willing to marshall the resources necessary to exploit that opportunity for long-term personal gain". Entrepreneurship is the start and heart of most family businesses and the phenomenon of an entrepreneurial family fosters, subsidizes, and enhances the efforts of its members who engage in entrepreneurship. In fact, the family business is quite simply the "wider-lens" view of entrepreneurship as the initial business efforts of one or more family members grow and change over time.

Family Resource Management and Family Business

The application of the models of resource development and allocation and household adjustment and adaptation to family businesses can assist in the understanding and explanation of the behavior of families in family businesses at two different points. First, the relationships posited in the models should be useful in explaining the beginnings and endings of family businesses. Second, they can be used to explain the ongoing interaction between the family and the business.

The Importance of Family Businesses in the Economy and Society

- Economic Value :-

Researchers estimate that at least 90% of the businesses in the United States are family owned and controlled (Ibrahim & Ellis, 1994) and contribute somewhere between 30 and 60 percent of the nation's gross domestic product (GDP) and half of total wages paid (Glueck & Meson, 1980; Ibrahim & Ellis, 1994; Ward, 1987). As of September 30, 1994, the nominal GDP was approximately $6.77 trillion. A conservative estimate of the family business economic universe would therefore be somewhere between $2.03 and $3.38 trillion in annual production of goods and services.

While accurate numbers are hard to come by, it has been estimated that there are at least 2 million family firms with revenues greater than $1 million (Forbes, 1989). Dreux (1990) suggests that one could conservatively estimate that there are 1.7 million business entities that are family-owned and controlled excluding sole proprietorships. More recent data show that except for about 3000 companies earning over $500 million plus annually, privately held companies outnumber publicly held companies in all other ranges of gross revenues (Dreux, 1994 [Dun's Market Indicators]). These greater numbers of privately held companies are substantial with gross sales in the range of $5 to $25 million. According to Dreux, publicly held family firms outnumber publicly traded firms 50 to 1

(approximately 18,000 actively trading public firms including 1719 on the NYSE, 859 on the AMEX, 4,293 on the NASDAQ, and 11,000 to 12,000 on the pink sheets). This ratio excludes actively traded, publicly owned companies that retain extensive family ownership. Dreux (1990) concludes that the family business universe approaches and possibly exceeds the entire publicly owned universe in size and scope of economic activity. He characterizes family firms as a "parallel economy."

The economic value provided by family firms is enhanced by their tendency toward long term strategies rather than a need for quarterly results, an aversion to debt, and their inclination to reinvest dividends (Gallo, 1994). A number of studies have shown that family firms outperform their industry groups and their non-family counterparts. In 1969, Monsen found that family business s net income to net worth ratio was 75% higher than manager-controlled firms. He concluded that family firms provide a greater return on investment, have a better-managed capital structure and more efficient allocation of resources. Jaffe (1990) states that a 1986 study by US News and Word Report found that of the 47 largest family firms, 31 outperformed the Dow-Jones index. Fast growth family firms are being recognized by companies such as Ernst and Young who award, in Texas, the Ernst and Young Fastest Growing Family Business Award (Genusa, 1994). The family firm that won in 1994 demonstrated a 6000% growth rate.

In a recent review of the state of family businesses worldwide, the sheer number of family firms around the world can leave no doubt as to their predominance, and therefore their economic importance and significance (Lank, 1994). In Germany, 75% of the workforce are employed by family businesses, who contribute 66% of the GDP. Reidel (1994) categorizes 80% (about two million companies) of all Germany's companies as family controlled and concludes that they are the "backbone" of the German economy. In Australia, Owens (1994) estimates that 75% of Australia's businesses are family owned and controlled, and that they account for 50% of the country's workforce. In Chile, Martinez (1994) concludes that family firms contribute greatly to Chile's GDP and employment, with around of 75% of the nation's businesses family owned and controlled. Chile is currently the most dramatic example of economic growth in all of Latin America, so the effect of family businesses on the economy there is a particularly positive one, given a recent finding that 65% of medium to large sized enterprises are family owned. The statistics are similar in other regions (Gallo, 1994); in Mexico 80% are family businesses and have been known to dominate the economy there for over 100 years. In Spain, it is known that for companies with over $2 million in annual sales, family firms account for 71% and that 17% of the top 100 Spanish firms are family businesses. In the United Kingdom, 76% of the top 8000 companies are family owned and controlled, with higher proportions expected in the wider business population. "Across Western Europe, between 45% and 65% of the GDP and employment are contributed by family businesses. The lowest level of family business activity is in Portugal and the highest in Italy, where 99% of firms are run by families." (Gallo, 1994, p. 47).

- The Societal Value:-

Family firms lead more directly to self-sufficient people in healthy communities. Few will disagree that private enterprise is the "bricks and mortar" of the U.S. economy. However, as Novak (1983) and Jaffe (1990) point out, the basic economic and social building blocks on which to base our analyses of the economy are "neither the individual worker, nor entrepreneur, nor corporations, but rather the families that create, control and operate businesses." The individual characteristics of entrepreneurs, their ethnic backgrounds, family culture and community involvement are the substratum on which the majority of U.S. businesses are built and managed. Depending on how successful transitions are in family-held firms from one generation to the next, these unique styles and values may or may not be transmitted throughout local and regional communities.

Family wealth and innovation (capitalism) remain a potent force in the development of Western socioeconomic systems. Nevertheless, undue focus has been placed on the plight of larger, typically publicly-held conglomerates. The media, sociologists and economists have until very recently, overlooked how families and family enterprises shape and are shaped by the social and economic systems of which they are part. Considering the preponderance of family firms in the U.S., it is little wonder how the resurgence of focus on the importance of the family and the role of the family in the capitalistic system has emerged; with a particular concentration on smaller, privately-held and family firms. As larger and larger numbers of family-held companies change hands from one generation to the next, more and more family legacies are lost due to poorly planned transitions (Ward, 1987). With new owners with different values taking over these firms, the impact is often negative, both in terms of company productivity and profitability, but also in terms of negative influence on families and communities. Astrachan (1988) has revealed through the examination of the impact of family firms undergoing a transfer of management that sensitivity to the existing culture of the firm and the local community is critical to the continued success of the business.

With increasing pessimism about sustained economic recovery in the U.S., the importance of the family firm for recharging a stagnant economy should be seriously considered. Benedict's (1968) multicultural research revealed the critical nature of the family firm, primarily in developing and immature economies. His investigations led to the conclusion that the family enterprise could not be matched in terms of its potential for taking risks, the development of human resources, access to capital and provision of continuity, particularly in comparison with public sector or larger privately-held entities. Working from both a sociological and economic perspective, Benedict observes how the family firm is more important in the initial rather than the later stages of an economic system's development. At the same time his conclusions suggest the continuing importance of a family firm's characteristics in a deteriorating or unstable system.

The recent political shift in American society suggests that more and more citizens are unconvinced that bigger government and government subsidized social programs can help overcome our economic and social woes. There are clearly increasing expectations for individual responsibility and decentralized distribution of resources for recovery. Coupled with the emerging emphasis on restoring the dignity of the family, further investigation of factors leading to the perpetuation of a robust family business

infrastructure in our economy would be a momentous long-term (cross-generational) investment for our social and economic future.

During the late 1800s and through the mid 1900s a growing sense of anti-dynasticism in our country led to extensive revisions in the tax code and inquiry into family foundations as dynastic mechanisms. The current social, economic and political landscape of our country presents an ideal climate for furthering resolution of this conflict between the family run "dynasty" and the dominant democratic and meritocratic values of our society. Hall (1988) notes in an historical review of family firms in the U.S. that substantial public service and philanthropic efforts were made by families in their attempt to accommodate the conflict between dynasty and democracy over the years. Investigating ways to further capitalize on this inherent discord would be beneficial to both family firms and the communities in which they reside. An increase in accountability and incentives in the private sector for distributing and administering charity and social services, for example, would provide a desirable incentive for family business proprietors to make a more direct and meaningful impact on local communities.

With charitable services visibly linked to specific family enterprises, businesses would have direct incentive for ensuring that programs actually work, providing needy groups and individuals with better opportunities for development and autonomy.

Just as families are the building blocks of a stable society, so are family businesses important in building a stable economy. A family enterprise is by its very nature more inclined than other types of corporations to re-invest in itself to support and perpetuate wealth in future generations. The family firm has the capacity to make long-term investments and resist the pressure of analysts for short-term returns which frequently burden the publicly held corporation.

The downsizing, particularly of middle management over the past decade in primarily large and publicly-held corporations has decreased the overall sense of loyalty to one's employer which has clearly had both economic and social costs. The loss of personal dignity, loyalty, a sense of purpose, security, and independence are but a few of the factors that are hypothesized to be at the core of the social and economic downturn of our country.

Although not always formally delineated, the operating philosophy of a family firm is typically guided by a personalized mission to which employees can bond and rely upon for their sense of autonomy and personal security. Founders and their successors in family firms tend to be highly accountable to themselves and to maintain both a strong sense of family and community responsibility. There is, as a result an increased opportunity for mutual loyalty, responsibility, autonomy and accountability between and among the organization, individual worker and the community.

More so than the formally structured organization, the characteristics of a family business which contribute to higher levels of risk taking, innovation, productivity, and independence can logically be extended to increasing levels of productivity and personal

responsibility in our communities and society at large. However, the irony of the family business is that the same characteristics which give strength to and enhance the potential for a firm's success (e.g., strong, often patriarchal leadership) can also be a disabling burden, particularly during leadership transitions. Family firms are powerful yet delicate entities that often require unique understanding and assistance within the multiple systems they embrace (i.e., family, business, community). Further and more sophisticated research into the dynamics of family firms will have important implications not only for private enterprise but also for the familial, societal and economic systems in which they are embedded.

The family firm literature argues that family firms are different from nonfamily firms. Research indicates family companies are preferred by consumers and are more involved with customer service, offer greater opportunities for women, have a respect for tradition, and take care of their employees (Longenecker, Moore & Schoen, 1989; Lyman, 1991; Prokesch, 1986). At the same time, family firms are reported to have problems with joint decision-making, career choices and supervision of family members as employees, and succession issues, including estate tax burdens.

Davis and Tagiuri (1982) have suggested that the family company has several unique inherent bivalent attributes derived directly from the overlap of family, ownership, and management status. These attributes include such notions as simultaneous roles, shared identity, a lifelong common history, emotional involvement and ambivalence, the private language of relatives, mutual awareness and privacy, and the meaning of the family company. Because of these bivalent attributes, family firms behave differently by caring more about providing jobs for people, treating workers fairly, and socializing family members into the business. Astrachan (1988) has suggested that family firms are more socially conscious and that family members may make great sacrifices and even sustain long-term losses to save the firm and the community around it.

- Family Business Theory:- In his comprehensive review of theory and research in applied to family-owned businesses, Wortman (1994) asserts "Although several conceptual models have been developed for the field of family-owned business, there is no unified paradigm for the field" (p. 3). After reviewing the literature, Wortman offers a typology of theory and research in the field that can serve as a springboard for research and further theory development. The main topics in Wortman's typology are theoretical components, historical components, environmental components, organizational contexts, content components, and the future of family owned businesses. With few exceptions (Kepner, 1991; Whiteside & Brown, 1991), the work reviewed by Wortman, which emanates primarily from the business school tradition, focuses on the family business as another form that business can take. When unique aspects of family businesses are analyzed, the focus is often on issues related to succession (Wortman, 1994) or on dual systems models, defined as models that treat two overlapping or related systems simultaneously (Davis & Stern, 1980; Whiteside & Brown, 1991).

A useful framework within which to examine the overlap between the family and the business is that of bivalent attributes (Davis & Tagiuri, 1982). Each attribute of a family business has both advantages and disadvantages. Attributes listed by Davis and Tagiuri include simultaneous roles: shared identity; a lifelong common history; emotional involvement and ambivalence; the private language of relatives; mutual awareness and privacy; and the symbolic meaning of the family company. As an example of bivalence, Davis and Tagiuri suggest that the advantages of simultaneous roles (relatives, owners and managers) are loyalty and centralized (and therefore efficient) decision-making; the disadvantages are that norms for family behavior (the development of unity and consensus) can be in direct opposition to the norms for business (competitiveness). In addition, " family considerations can easily intrude on business decisions and vise [sic] versa" (p. 65). It is in the area of overlap between the family and the business that family resource management theory and research can be most useful.

- Family Resource Management:-

The study of the development and allocation of resources to meet family goals has a long history in home economics (Key & Firebaugh, 1989; Liston, 1993). Key and Firebaugh (1989) trace the development of the field of family resource management, from its early 20th century emphasis on ". . . domestic economy and methods of simplifying household work" (p. 13). They suggest the first theoretical underpinnings of the field were solidly based in microeconomic theory, a foundation that continues to the present for family economists. Family resource management scholars, on the other hand, began to look toward other disciplines in the 1960s and 1970s for their theoretical base. When they looked toward sociology, they found systems theory (Buckley, 1967), which they applied to managerial behavior (Knoll, 1963; Maloch & Deacon, 1966). Key and Firebaugh (1989) note that, to date, ". . . the potential of the systems framework in addressing the complexities of family resource management allocation behavior is as yet unmet" (p. 15), largely because researchers and practitioners have failed to translate abstract systems concepts and relationships into operational definitions and testable hypotheses. In spite of its limitations, however, the systems framework remains the major theoretical base for the examination of resource development and allocation in family households.

The family is viewed as a social system that transforms the energy, information, and matter that enter the system into outcomes that the family desires. The process of transformation, at the heart of the model, is one of planning the use of the human and material resources available to the family to achieve its goals. Key sub processes are decision-making and communication, which permeate goal setting, resource assessment, planning, implementation, and evaluation.

The management of resources to achieve family goals has been viewed as a more or less linear process: the family sets goals, assesses its resources, then plans the use of these resources, implements the plans, and evaluates the outcomes (Cushman, 1945; Goodyear

& Klohr, 1954; Gross & Crandall, 1963; Gross, Crandall & Knoll, 1973; 1980: Nickell & Dorsey, 1942; 1950; 1959; 1967; Nickell, Rice & Tucker, 1976; Paolucci, et al. 1977). The family's goals, developed through consensus-building, were viewed as a product of its values.

It was not until the work by Ruth E. Deacon and Francille M. Firebaugh (Maloch & Deacon, 1966; Deacon & Firebaugh, 1975; 1981; 1988) that events were included in a model of family resource management. In the Deacon and Firebaugh model, the family is viewed as a decision-making unit that uses its human and material resources to meet its demands. According to Deacon and Firebaugh, demands are of two types, goals and events. As in earlier views of family resource management, goals are viewed as specific objectives that have their source in the family's value structure. The family's goal complex (Edwards, 1970) encompasses the aspects of individual and family life, often termed "domains" (Campbell, Converse & Rodgers, 1976; Douthitt, MacDonald & Mullis, 1992; Lavee & Olson, 1991; Mastekaasa, 1984; Mookherjee, 1992; Pavot & Diener, 1993) important to that family. Events, on the other hand, are " . . . pertinent unexpected or low-probability occurrences that require action" (Deacon & Firebaugh, 1988:49).

Perhaps because of potential confusion with the use of the term, "demand," in economic literature, Stafford and Avery (1993) use the term, "outcome requirements" instead of demands. They suggest that events are not outcome requirements in and of themselves. "If events enter directly rather than serving as a stimulus to goal formation, events must present self-evident goals" (p. 19).

Explicit in the Deacon and Firebaugh model is the idea that meeting goals and responding to events requires the expenditure of the family's human and material resources. Implicit in the model is the idea that there is always tension between goals and events. The main function of resource management is to respond to negative events in a way that still permits the attainment or maintenance of family goals. In other words, the family tries to keep the things that happen to them from affecting their achievement of the things they want.

Deacon and Firebaugh further suggest that the family achieves its goals or responds to events through planning the use of its resources and implementing the plans. Included in planning are two processes, standard setting, defined as the establishment of criteria by which to judge future states, products, or services, and action sequencing, an ordering of activities to be completed. Avery and Stafford (1991) have extended the idea of action sequencing to include scheduling, defined as positioning the actions in a real-time framework.

- Families and Businesses: Ongoing Adaptation :-

In troubled economic times, the family business survives, perhaps not because it is a good business, but because of the family (Keough & Forbes, 1991). Studies of family businesses have not offered satisfactory explanations for why this phenomenon occurs.

Hypotheses based on bivalent attributes of a family business and theories of family resource management and household adjustment and adaptation suggest that one of the reasons for survival of the business may be found in the fact that the blurring of the line between the family and the business may permit a sharing of resources in ways that are not possible in other settings. This statement would be especially true for home-based family businesses, where not only energy, skills, time, money, and durable goods could flow in both directions between the business and the family, but those flows take place within the same physical setting.

If the model of adjustment and adaptation is extended to include business responses, clearly one of the ways to develop the additional resources needed to survive an economic downturn is to dip into the family's economic resources: using savings, liquidating investments, to provide needed capital for the business. In the same fashion, under times of pressure, the family's human resources could be called upon.

Evidence of the latter is found in an analysis of data from a nine-state study of households in which someone generated income working at home (Winter, Puspitawati, Heck & Stafford,1993). When the demands of the home-based work were excessive, almost half of the households (47%) enlisted the aid of family and friends to help out. Davis and Tagiuri (1982) suggest that, because of simultaneous roles, such labor might be of higher quality than that provided by temporary employees hired during times of pressure. Results of that study also showed the shifting of family responsibilities to find more time for the business: reducing housecleaning time (62%), cutting down on social activities (57%), reducing time spent with the family (55%), and eating out or bringing food in (55%).

To date, there is little research suggesting the adaptive behaviors that flow in the opposite direction. How do resources flow from the business to the family? Is the flow only in the profits that are used as the means through which families meet their instrumental needs? One potential is for the sharing of durable goods. Results of a study of 899 families in which someone generated income working at home showed that more than 70 percent of the households used the same vehicle for both work and family, although it is not possible to ascertain whether the vehicle was a business vehicle used by the family or vice versa (Heck, Walker & Furry, 1995). Clearly, there is the potential for sharing other durable goods. Is the computer purchased for the business used for homework assignments and family accounts? Is the telephone line shared by family and business? Shared durables probably represent subsidies to the family from the business rather than vice versa, because, for tax purposes, the business is likely to own the items rather than the family. Are these exchanges adjustments, the meeting of needs in a routine way, or are they adaptation? One would suspect the former; the use of business durables by the family when they are not needed for the business is probably standard practice for many business-owning families.

Largely unexamined is the flow of human resources between business and family. A study comparing management practices reported in the household to those used in the business (Heck, Winter & Stafford, 1992) among home-based workers showed that

individuals managing both the household and the business managed the two arenas differently, with reported business practices more closely conforming to the management model than reported household practices. There is some evidence, reported previously, of the adaptations made by the family to cope with pressures from the business. Does pressure (expected or unexpected) from the family draw human resources from the business? Will the business manager stay home to care for a sick child or other family crisis? Research that would answer such questions would help complete the picture of family adjustment and adaptation and business adjustment and adaptation.

- The Current and Future Needs to Advance the Field and Study of Family Business

Many pressing needs are apparent and vitally linked to the advancement of the field through professional development, teaching, outreach, research, and practice. The needs are as follows:

1. support for on-going regular governance meetings, annual conferences, and other organizational activities such as newsletters, publications, awards programs, etc.,

2. development and sustainment of an university-based clearinghouse for information how to start a family business program including the development of a "best practices" notebook,

3. establishment of an exchanging mechanism for teaching programs and curriculum including syllabi, course projects, modules, and case development,

4. enhancement of the field by increasing the amount and quality of applied research, and

5. important research topics include the study of: family firms within minority subpopulations, the differences of family firms between the large scale versus micro enterprises, the dynamics of change over the life course of the family firm, growth rates of family owned firms, problems of strategic regeneration in the family firm, and the nature of the strategies used to grow.

Three Problems Facing Family Businesses:

Have you yet faced problems in hiring or keeping key employees who are not family members? Because they're outsiders you don't want to offer them stock, and therefore face a competitive disadvantage compared with firms that offer stock options and stock ownership. This article summarizes two valuable benefits that can help: Deferred Compensation Plans and Phantom Stock Options.

Deferred Compensation Plans:-

Sometimes referred to as “salary continuation” plans, deferred compensation plans (DCPs) are of great value in structuring incentive programs for key employees. From the business owners' perspective DCPs are attractive for these reasons:

The owners can select specific employee(s) for participation. The owners can decide how much to allocate for costs of the plan(s), and

attractive funding strategies are available. There are no IRS limits on amounts contributed for participants, and different

participants can have different plan designs. Vesting and forfeiture provisions become the golden handcuffs that help retain the

key person(s). When DCPs are personalized for the specific circumstances and priorities of key

employees the plans are highly valued by them-for both economic and “personal recognition” reasons.

DCPs are almost entirely free of governmental regulation.

To the participating employee(s), deferred compensation plans are valued:

The heavy personal income taxes that would be due on any increased current compensation are postponed until benefits are received; at that time the tax bite may be less.

Whatever combination of retirement, survivor, and disability benefits the plan provides will be tailored to individual needs and priorities.

Key employees feel appreciated and recognized for their value to the employer.

How DCPs Work:-

The design of any particular DCP is tailor-made. A typical DCP provides the selected key employee with a set dollar amount (or percentage of final salary) per year for a set number of years after retirement--salary continuation. Often, provisions are also included for pre-retirement death or disability benefits. The business can control its costs by insuring all or part of its obligations under the DCP.Each DCP is designed with appropriate vesting/forfeiture provisions that make sure the participant has a very strong incentive to stay with the employer for the specified time period. This makes for the “Golden Handcuffs” concept.

One major attraction to participants in such plans is the benefit flexibility. For example, with a relatively young participant who has significant family responsibilities, a substantial survivors' benefit provision may be especially appreciated. For an older participant with few or no family concerns, the DCP could emphasize retirement income and/or disability income.

Non-qualified deferred compensation plans often are the benefit of choice to supplement qualified plan benefits.

…Companies use [DCPs] for a variety of reasons. The principal one is to allow a select group of executives to defer income beyond the limits imposed by Congress on qualified plans. (Journal of Accountancy, February 1998, page 47)

Phantom Stock Option Plans:-

The term phantom stock options refers to the fact that the options granted to key people are not based on actual stock shares. They are actually only rights to the appreciation in value of a certain number of shares of the employer's stock over a designated time period. Thus they allow the participant to profit from the company's growing value, without actually owning or controlling shares of stock.

How Phantom Stock Plans Work:-

Key steps in setting up a phantom stock plan include the following:

A written agreement and a corporate resolution are drawn up. The key employee is credited with “shares.” The employer establishes a “share account” for the participant. A bookkeeping entry is made to that account each time shares are granted to the

participant. Each year the employee becomes vested in shares in accordance with the written

agreement. Valuation of the “shares” is based on a simple standard such as the current book

value of actual company stock. As the value of the company stock rises, so does the value of the participant's

phantom shares. The employer can fund phantom stock plans using the same methods as in a

deferred compensation plan, thus helping to control plan costs.

From the employer's viewpoint, the attractions of such a plan include these features:

No government regulation No anti-discrimination testing such as required in qualified plans Phantom stock becomes the golden handcuffs which retain key people and

encourage productivity Employer is free to pick as few or as many participants as needed, with complete

flexibility for each participant's plan design Tax deductions for benefits paid out to participants.

From the employee's viewpoint, the attractions of phantom stock plans include the following:

No current income tax to pay No cash outlay to purchase shares of stock Accumulation of wealth

Death and disability benefits may be included.

Conclusions:- The purpose of this paper is to suggest places where the business and family intersect, and to draw conclusions, based on existing research and theory, about the implications of those intersections. The understanding and application of the processes by which families develop and allocate their resources as they adjust and adapt to changing conditions offer a largely untapped source of hypotheses about how families who have a controlling interest in a business mesh their family and business lives.