I have had plenty of opportunity to observe both success and failure in family businesses. Here are some of the keys to success I've learned in my 38 years of practice.
First, train the second generation. If you don't, your business is more likely to fail. For example, a father shelters the members of the next generation and doesn't allow them to make decisions. Without experience, the second generation makes mistakes that can prove fatal to the business.
But don't confuse training with book learning. Formal education is good, and it gives family members an excellent base on which to build their management experience. However, real-life experience, or what pilots call "stick-time," is the best trainer. You don't learn how to "fly the business" until you have actual experience. You can read about management, but until you experience the decision-making process, you can't become an effective manager.
An internship with another operation is one of the best training opportunities available. About 53 percent of today's college graduates complete two internships or a cooperative education program by the time of their graduation. Thirty-one percent of all college graduates complete at least one internship. Follow the same rule-of-thumb for your dairy. Otherwise, the younger generation's experience will be defined by the older generation's world if they don't encounter management from another perspective. An internship on another operation creates a priceless opportunity.
Communicate succession plans
Second, be careful in selecting the family member to be the next-generation manager.
I recall a situation where the eldest son wanted to return to the farm. Unfortunately, there wasn't enough cash flow to allow the son to return. Ten years later, the scenario changed. The farm grew and the father was drawing Social Security. However, a younger son was given an opportunity to return home instead of the eldest son. The operation held together until the father was out of the picture, then family in-fighting caused the operation's liquidation.
Unfortunately, the father made decisions for both the family and the business without communicating with his family.
The father had definite reasons for his choice. His fault lay in failing to share those reasons. A series of family meetings with all of parties may have saved the business. The eldest son was already established in his career and likely did not want to return to the farm. However, the father didn't give his family the opportunity to accept or understand his decision, and the seeds of failure were sown.
Hand over the reins
Finally, resist the urge to run the operation forever. At some point in time, the next generation needs to be in charge.
Many non-farm business operations set a mandatory retirement age for executives. This allows the business to assimilate new management and provides an exit strategy for senior management. Yes, owners do have the right to manage their assets, but they also need to think about the future of the business. By being proactive and taking the necessary steps, the older generation can help the next generation succeed, which will keep the farm running for many years to come. A target date for retirement also allows mom and dad the opportunity to plan their retirement and gives the next generation a timetable to establish its future.
Remember, less than 10 percent of family-business operations survive their first generation creators. If you want to provide a successful operation for future generations, take the time to establish a succession plan for your family business.
Darrell L. Dunteman is a partner in Bonnett and Dunteman, Certified Public Accountants and Consultants in Bushnell, Ill. Dunteman also edits the Farm and Ranch Tax Letter, a monthly agricultural tax publication. Contact Dunteman at: firstname.lastname@example.org.