“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.