“Where do I start?” is the million-dollar question when it comes to putting together a succession plan for any family business.
We’ll answer this question with seven themes of business transition as we continue our journey, breaking down the intimate details of ranch succession planning. We’ll also uncover the importance of aligning the many facets of family businesses with the people to perpetuate family operations.
1. Write a plan
“The first things I want to know when working with business owners are, ‘Is there a plan?’ and if so, ‘Where is it?’,” says Dave Specht, founder of Advising Generations LLC, and author of the new book, The Farm Whisperer — Secrets to Preserving and Perpetuating Farms.
While this seems very simplistic, a written document with directions to be carried out in the future is often overlooked.
“Sometimes when there is a document, only the senior generation knows about it,” Specht explains. “And when it is found and reviewed, the relationship statuses and involvement have changed since the document was created.”
Once this critical document of business guidelines is updated, it is time to bring an advisory team together to help execute the plan. According to Specht, it is essential that key advisors, such as bankers, accountants and insurance agents, work together to create a cohesive business plan.
“When an advisor works on his own, gaps are going to show up in the succession-planning process. Get your CPA, banker and any other professional help who is involved in putting the business plan together in the same room and collaborating,” Specht says. “For example, a well-meaning insurance professional sells them an insurance policy that will help cover estate taxes, or maybe create liquidity to give money to a non-operating child. But the way that the policy is owned may create more of an estate-tax issue for the farmer or rancher.
“So if that is not coordinated with the attorney on how assets should be owned, a bigger problem has been created. “
2. Critical communication
Plain and simple — open communication between the younger and senior generations is absolutely essential in the success of a family-business transition.
“There is a huge discomfort in not knowing how things would be taken care of if something unexpected happened,” Specht explains. “Everyone wants to know the same information, but no one wants to bring it up.
“The younger generation wants to know if they can count on the business being part of their future, supporting their family. The older generation doesn’t want to put added pressure on the younger generation to stay.”
One step Specht suggests family-business stakeholders should take is the implementation of family meetings. According to him, it’s best to keep meetings in a neutral space, like a non-home-based ranch office or community center, and limit the agenda to just a couple of items.
3. Develop leadership
Communication carries over into the day-to-day grind of keeping a family operation going, from the way the younger generation and senior generation handle work-related notes to laying out expectations and growth of individual roles.
“It’s important to find out if the senior generation is willing to delegate meaningful responsibility to the younger generation,” Specht explains. “Say I ask that in a question to the younger generation and then ask it to the senior generation, having them give me a score on a scale from 1 to 10 on how strongly they agree with the statement. When the scores come back with the younger generation at a 2 and the older generation at an 8 then we know there is a disconnect we need to address.
“A classic scenario is the younger generation wanting more responsibility in the business but the senior generation holding back because they don’t feel they are ready,” Specht adds. “The worst thing that can happen is either the younger generation gets frustrated and decides to leave, or the younger generation doesn’t receive proper guidance in a gradual transition and is set up for failure when it comes time for them to take over.”
While it’s not always easy, one of the best ways to pull off a generational transition is for the senior generation to gradually hand the reins over to the younger generation, giving them “just enough rope to choke, but not enough to hang themselves.” This allows the younger generation to learn from minor mistakes and handle crucial management decisions under the guidance of the senior generation.
4. Build trust
“Trust goes both ways,” says Dave Specht, founder of Advising Generations LLC, and author of the new book, The Farm Whisperer — Secrets to Preserving and Perpetuating Farms. “The next generation has to trust that the senior generation is going to allow them to grow, make meaningful decisions and develop the operation. On the flip side, the senior generation has to be able to trust the younger generation with their financial life, because in family business it is all tied together. The younger generation’s salary and the older generation’s retirement can all be dependent on the viability of the business. Without trust, the entire process breaks down.”
However, forging trust is a delicate matter. For younger generational-ranch stakeholders, Specht urges them to step up and start looking at the ranch as an owner, doing things as little as picking up trash and taking pride in the operation's appearance.
“They need to start doing things that they wouldn’t ordinarily do unless told to do so by their parents,” he says. “The younger generation needs to develop an attitude of ‘I’m going to become a steward instead of being told what to do in every aspect of improving the operation.’
“As for the senior generation, be focused on raising a generation of owners, rather than a generation of farm hands — that makes all the difference in the world,” he says.
Another way to build trust between generations is knowing the respect for the operation is shared. When working with family businesses, Specht assigns the younger generation to research the history and story of the family, and then present it to the ranch stakeholders.
“It has always been a positive exercise,” Specht says. “Watching the faces of the parents as their children tell their story is very rewarding. It also forces them to have conversations and build positive relationships as they talk to multiple generations in their family to learn the history.
“For the younger generation to be set up to verbalize the thankfulness they feel toward their parents and grandparents for the sacrifices and life work they put into building the family operation — that’s a powerful way to build trust.”
5. Personal resilience
Possibly one of the most telling traits in the future success of a family business is the amount of personal resilience the next generation possesses and their patterns in handling stressful situations, Specht says.
When they have something that is difficult, do they focus in and take care of business or retreat? Do they repeat the same mistakes multiple times? Are they willing to overcome obstacles? And if so, is it draining or exhilarating?
“It should not be assumed that everyone in the next generation should be an owner,” Specht explains. “For example, say you have two sons. One is very resilient and hardworking; the other is lazy and careless. If the lazy son is not held accountable, then the resilient son will be more apt to leave.”
In situations like this, Specht recommends the senior generation reverts back to drawn-out job descriptions to hold the second son accountable (as discussed in Part II: Compensation and Responsibilities). He urges owners to separate the multiple hats they wear between being a parent and being a business owner. In some cases, Specht’s clients have physically brought two hats with them for job reviews and put on one hat to talk to the younger generation about work performance, and then put on the other hat to talk to them as a parent.
But what happens when the lazy son is not held accountable and rides on the hard work of the resilient son?
“It’s up to the resilient son to decide if he is willing to operate as an equal partner to a less-contributing partner,” Specht says. “He needs to be open to his parents, but respect their wishes, being nonthreatening in deciding whether to stay or go.
“Another thing to consider is that the resilient son can offer to come in as more of a risk owner. It is a good filter because risk is something the lazy son will probably not be willing to step up to,” Specht suggests.
6. Retirement/investment planning
Just like there isn’t a single operation in the beef industry that operates exactly the same way in terms of day-to-day practices, there isn’t a single operation that has a retirement plan set up exactly the same.
Whether owners are planning on selling to the next generation, continuing to live on land or a different strategy entirely, a game plan for retirement needs to be formalized immediately.
“A very unpopular but crucial question to ask is if the senior generation wants to take on a diminished role in the operation at a certain point, allowing the younger generation to become the main managers,” Specht explains.
“It’s important for families to plan together to reach a conclusion on a specific timeframe in which the reins will be handed over. That way, the younger generation has a good perspective on how to gradually obtain the proper skills for the complete transfer.”
The second part of the equation is for the senior generation to figure out how much money they are going to need for retirement. Start by keeping track of all expenses, separating them into specific categories — such as groceries, health care, utilities, travel — to form a baseline.
“If owners have not already been doing this, I advise them to base it off of their recordings for at least three months,” Specht explains. “Then they need to start digging into questions such as: Where does the cash flow come from? Is it expected to come from the business practices of the next generation? How are you going to create the cash flow?”
7. Key non-family employees
Last, but not least, key non-family employees need to be considered by producers who rely on their loyal services. Specht says often it is non-family employees who have been on the operation for much of their careers who help hold everything together while the family completes the transition process.
“It’s essential to communicate with them what the future holds, because if they are unsure, they are not going to stick around,” Specht says. “The younger generation also needs to make an effort to build a strong personal and professional relationship with key non-family employees, because oftentimes, their loyalty is with the older generation.”
It is important that the younger generation views these vital employees as peers and not as the help, taking time to learn from them and earn their respect as they work their way up in the business.