Tips for a Successful Succession
July 1, 2009 When passing the family business down from one generation to the next, there’s more to it than just balance sheets and financial statements. The transition can take an emotional toll on everyone involved, and that’s never been more true than during tough economic times.
“We often hear that good economic times cover up poor decisions, which get uncovered under the stress of tougher circumstances,” says Cole Ehmke,
Extension specialist in personal finance and ag entrepreneurship at the University of Wyoming. “It is times of stress that motivate people to have some of the conversations and make some of the decisions they’ve put off. A focal point of estate planning is the people who will benefit from the plan and from your efforts and legacy. It is about getting the most out of your work while you are alive and providing for family and loved ones after your death.”
Ehmke also notes that a smooth transition means retooling short-term personal and business budgets and focusing on the long term. “Rethinking plans calls for enhanced planning. Otherwise we can actually multiply the effect of the financial hardship many times over,” he says.
Assess Your Resources
No matter the economic situation, when developing an estate plan, it’s critical to begin with a good assessment of your resources, and then set up long-term objectives, says Ehmke. An estate plan is just one component of a larger succession plan.
“If you intend to pass on the farm as a group of assets, an estate plan that distributes specific farm assets to specific people at specific points in time is what you need. But if you want to pass on the operation as a business with a good chance at making it, then you’ll need more — a succession plan,” says Ehmke.
He suggests beginning by answering the following questions:
• Is the operation financially viable? You don’t want the junior generation of management to be saddled with something that didn’t have much of a chance to make it from the start.
• Who will be the successor, and how are you going to train that person and transfer management and ownership over time?
• What are the goals of the operation? The end thought is about where the operation is headed. Is the successor someone who can buy into that view and has the skills and abilities to carry it forward?
• What will the senior generation do as they transition out? Have they thought about how much income they’ll need and whether the operation can fund
both their retirement and a new owner/manager’s life?
The best bet is for stakeholders to consider all these questions and use them to develop goals. “Good goals are SMART — they are specific, measurable, achievable, rewarding, and timed,” says Ehmke. “As a process, it could take five or 10 years to carry out as people are trained, responsibility is transferred, assets are organized, and as the strategic situation evolves.”
Family Matters
Ron Hanson, Neal E. Harlan Professor of Agribusiness in the Department of Agricultural Economics at the University of Nebraska-Lincoln, says emotions can play a big part in determining the success of a business transition, and family matters can cause both headaches and heartache. “There are a lot of emotional feelings, as well as personal stress involved with the entire family when passing a family business operation on to the next generation,” he says.
The main reason for failures in transferring business ownership or management is that those involved tend to avoid discussing the “what ifs,” he adds. A lot of families will make the mistake of pretending the “what if” scenarios won’t happen to them. “These families fail to have a strategic plan for passing on ownership to the next generation. Many times, nothing has even been put in writing,” he says. Assuming that everything will simply take care of itself is an invitation for failure and family conflict.
There is also the question of who is actually “family.” Are only blood relatives included in the business decisions, or are in-laws included, too? It’s an
important question not to be overlooked, Hanson says, and it needs to be discussed in advance.
In fact, one of the most vital components to developing a successful estate plan is communication early on, according to Ehmke. “Communication now helps build a shared vision of what life in the family and the operation of the business will be like longer term,” he says. “The family needs to realize what this vision is and take ownership so that everyone understands that the plan is for the best of the family as a whole.”