Time To Plan…

More and more frequently, Tom was saying he’d had enough. He wasn’t one to complain, but at 67 years old he was getting tired. Though he loved the family business and everybody around him knew it; the worry lines on his face were a bit more pronounced each day. He wouldn’t speak in retirement terms, but the message was becoming clear. If he could step back while staying involved and keep working while shouldering less responsibility, it might be fun again.

He built the operation from scratch after he and his brother went their separate ways almost 35 years ago. With his daughter working in the operation full-time and his son wanting to join the business soon, now might be a good time to consider planning for the future. But how does a person start the planning process? Who can help? And, when is the right time? In other words, how does a hard-charging family business owner know when it’s time to plan for succession?

If, like Tom, you’re questioning whether you need an estate plan for transition, now may be a great time to consider your goals and focus on the results you hope to achieve. Succession is the natural next step for a growing operation. A comprehensive succession plan includes four planning parts that are integral to each other, including plans for your financial security, an ownership transition, leadership development, and the estate tax.

I suggested Tom review the questions below and self-discover if he’s ready for succession.

  1. Is maintaining family ownership of the farm/family business important?
    For business and farm owners the operation may represent significant wealth, yet most appreciate that the value of owning and operating the family business goes far beyond dollar signs on a balance sheet. Their occupation represents lifestyle, traditions, values, independence, and opportunities for the next generation.

  2. Can the current operation support additional families?
    The current operation will pay and support only a finite number of families. What are the plans for growth and development? Do you have a written business plan, and is the next generation participating in a professional development program to help expand operations?

  3. Is the operation run like a business with standard operating procedures and a formal management structure?
    To grow beyond a lifestyle business, management must be prepared to operate within a formalized business structure. They must employ standard operating procedures and utilize written tools (like employee handbooks, defined compensation schedules, and hiring guidelines) for all new hires—including family members.

  4. Does the family have shared succession intentions, even if not in a written format?
    As you and the family talk, does the discussion include spouses, active and soon-to-be-active family members? Does everyone hear the same message, and do they have the opportunity to question your intentions and make suggestions?

  5. Can the owner(s) retire without converting ownership equity to cash?
    At some point you will want to walk away, so your financial security is critical. As the succession discussion unfolds, explore ongoing obligations, income/expenses for retirement, etc. What can you do today to prepare financially for tomorrow?

  6. Do all active family members share a common goal for operational growth and development?
    Complementary differences in execution, management, and personality create a strong management team. But active owners, both present and future, should see a common vision and work toward shared goals for the future of the operation.

  7. Does the next generation have a strong work ethic?
    Not; does the next generation work as hard as you? Instead; do they work hard enough to overcome the inertia of a down economy? Can they balance budgets, work on thin margins and allocate limited resources for good outcomes?

  8. Can the current generation mentor the next generation to manage the operation?
    Mentoring is the most important responsibility you’ll ever have in your professional life. Mentoring is a position of leader, teacher, confidant, and role model. It’s built on trust, personal attention, and clear understanding. Mentoring will be the single biggest challenge and the most gratifying experience of your career.

  9. Can the senior generation allow the next generation to make mistakes and learn from experience?
    This is an absolute must. Compromise here and you undermine the developmental integrity, the decision-making ability, and resolve of the next generation. I often remind parents, “you allowed them to skin their knees when they learned to walk. They must learn new roles and responsibilities the same way.” Making mistakes and recovering from adversity is critical to growing competent managers.

  10. Does the family recognize and acknowledge the opposing objectives between active and inactive owners?
    Active owners and inactive heirs have opposing objectives. Active owners want to grow an operation; inactive heirs want the value of the operation exchanged for dollars in their pocket as quickly as possible.

A comprehensive plan is designed to mitigate the risk and minimize the uncertainty of passing the family business or farm to the next generation. It is the next step in growing a business bigger than itself. It is not a form of giving up or walking away, rather it’s a manner of development and renewal. Beyond financial security for the owners and their dependents, a comprehensive estate and succession planning process:

  • Mitigates taxes and maximizes equity for the retiring generation.
  • Protects ownership interests and family assets from divorce, creditors, and unscrupulous characters.
  • Encourages pride in growing a family legacy and creates opportunities for future generations.