5 Steps to a Succession Plan

Owners have to ask the question, ‘Who do you want to be after farming?' ( Farm Journal )

Transferring the farm business from one generation to the next is one of the most important processes a business will go through. And it’s not easy—when transitioning a family business, emotions get in the way.

“Owners often get stuck and avoid action when it comes to succession planning because of the uncomfortable decisions they need to make and the issues they must confront in this impending process,” says Chris Yonker, executive performance coach. “Fear is the main driver here. Often we fear what people will think and say, we fear the impact on the business itself, we fear how the culture of the company will be affected and we fear how people may behave.”

Beyond fear, Yonker identifies two additional reasons that cause challenges while developing a family succession plan: avoidance and a lack of vision and value alignment. “Without making a decision, owners of family businesses often end up reacting to an event or situation and are forced to have to do something,” he says.

Families can take action with a three step process, Yonker says. First, create a common vision. Next, dismantle family paradigms. “Improve and protect the integrity of the family by removing obstacles and healing where needed,” Yonker says.

The third stage is building a plan for the future.

“Whatever the succession plan, the most important part is to actually write it down in a formal document,” says Nicole Bettinger, a consultant with the Family Business Consulting Group. “Once it’s developed, have an adviser look at it and have all family members review.”

When starting your plan, Bettinger says owners should ask these questions to build a basis for the plan contents:

  • What do we think the future of our business looks like?
  • Would we like our children to work here?”
  • Ideally, what/who do we see as a possible future ownership group?
  • What effect would continued family ownership have on the health and harmony of our family?

“Answering these questions, and more, will help you think about your succession plan and what is important to you,” Bettinger says. Here are five essential topics of a succession plan:

1. Business planning

  • Parts of the business plan should include the specific revenue and expense aspects of the operation. This should also look at the future of the business, including how it could potentially evolve over time. Outline the corporate culture as well. If a company culture isn’t defined, Bettinger says to document what you feel the culture is today and how you would want it to evolve over time.

2. Personal finance

  • This should outline what the owner needs for retirement. Exiting owners should track financials for a period to see what they are spending so they know how much they will need after retirement. “It will be easier for owners to let go of the operation if they know they are able to maintain a certain lifestyle they desire,” Bettinger says. “Owners have to ask the question, ‘Who do you want to be after farming?’ They need to see themselves as independent from the farm once they leave.”

3. Management succession

  • How the farm business will continue operating smoothly should be in this portion of the plan. This should outline subjects such as who makes day to day decisions on the farm, how communication channels work, who reports to whom and so forth. “The detail in this portion of the plan is important, even if the owners are still going to be around,” Bettinger says. “It’s as much for the owners as it is for employees so they know how to work once the transition takes place.”

4. Ownership succession 

  • This includes who owns which parts of the operation and details the requirements of ownership. Should owners have work experience outside the farm? Is a formal education a requirement? Should they have worked on the farm previously? “One part often forgotten in this part of the plan is how owners can exit the business if they want to leave,” Bettinger says. “This is especially important if multiple siblings are part of the ownership group.”

5. Estate planning

  • Bettinger says to write up an estate plan well in advance of anything happening to the owners, so it doesn’t delay the transition process if something unfortunate does happen. “It can be easy to let the estate planning process take over (the succession planning process) in the haste of just getting the forms filled out,” Bettinger says. “Take your time and make sure this is done right.”

While the current tax code raises the estate tax exemption level to $11 million per married couple, it could change in the future. Bettinger says farmers should have a plan to address the possibility estate tax laws could change with a new administration.

Taking emotion out of the planning process is a critical step, Bettinger says. “Succession planning is a process, not a one-time event,” she emphasizes. “Make decisions based on principles, not emotion.”

 

Note: This story appears in the February 2018 magazine issue of Dairy Herd Management.

 
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