The National Agriculture Law Center has reported that approximately 90% of agricultural operations do not survive the transition to the next generation. I have to say- that statistic is a bit alarming. The primary reason for this is poor succession planning. Estate planning is just one part of workable succession plan. Estate planning focuses on asset distribution while succession planning delves into the continuation of the family business to the next generation. Succession planning requires a farm or ranch family to really look at its business plan and determine a workable transition.
Here are some of the issues a family should consider:
Goals/Concerns. The first step in developing a feasible succession plan is to consider what the primarily goals and concerns are for the agri-business. Perhaps the major goal is to avoid estate/death tax. Or perhaps it is to make sure that all the children are treated equally. It is important for a family to first think about their major goals and concerns when passing down the family business to the next generation.
Management. If a family business will successfully continue into the next generation, it is especially important that families build the management skills of the younger generation. A family should use every possible opportunity to strengthen the skills of the potential successors by getting them involved in the day-to-day management decisions and the business aspect of the farm or ranch including but not limited to finances, legal decisions, human resources, technology and marketing. Along those same lines, a family should consider a phased retirement program gradually reducing the management responsibility of the older generation.
Power & Personality Dynamics. When analyzing various succession options, a family should consider possible power struggles and personality dynamics. “Power” can come in business shares, (perceived) success, skills, education, and even popularity –either within the family unit or in the community. Additionally, families must consider the personality dynamics within the family unit. To illustrate, one should consider whether particular family members can work together to co-manage a family business.
Maneuvering Through Unexpected “Hiccups.” You know the saying –“I plan. God Laughs.” (ain’t that the truth…). Life rarely goes “as planned” and a quality succession plan needs to assist a farm or ranch family in surviving these “hiccups” in life. Examples may include premature retirement/death, divorce, lawsuits, or a breakdown in a relationship. Can your family farm/ranch survive these hiccups?
Consider the Fears of Minority Shareholders. A family should consider a proper exit strategy for the minority shareholders so they do not feel they are locked into the family business. Additionally, a family should also consider giving them a right of first refusal in percentage interest. Finally, a farm/ranch should consider getting the business appraised so that minority shareholders feel like they are receiving a fair price for their ownership.
Looking for more information? I recently read this book regarding estate and succession planning by Neil E. Harl and highly recommend it. The National Agriculture Law Center also has a wealth of information here.
On a final note, proper communication is the key among farm and ranch families. Without open and honest communication, a family business cannot survive. I recommend having an annual conversation about succession planning. Like I said last year,holidays are a great time to talk about these issues because most of the family members will be home. Good luck and Happy Holidays!