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Don't Fail to Plan for the Long Term
By Kevin Spafford, for Farm Progress Magazines
The callused hands, denim attire, and ‘iron themed’ ball cap don’t belie your role as one of the 22 million small business owners foundational to America’s economic success.
America’s small business community is “the third largest economy in the world, represents a total buying power of $2 trillion, and has generated 66% of all new jobs since the 1970s,” according to the 2015 MassMutual Business Owner Perspectives Study. “Business owners,” the report says, “are the engine that drives the U.S. economy.”
The study was designed to learn how owners think about and react to the following business issues:
- Retaining loyal employees.
- Knowing and understanding business valuation.
- Protecting the operation from death/disability.
- Choosing and preparing a successor.
- Transitioning ownership.
- Mitigating the estate tax.
If confidence, especially regarding day-to-day business decisions, is a strength for most business owners, planning for the long-term may be the antithesis. The study says, business owners are “either not ready or too busy to address all of the core pillars [issues, listed above]. At the same time, business owners feel they need to protect their businesses and families, but aren’t confident in addressing the core pillars on their own and don’t always know where to turn for help.”
From my professional perspective, I’ve noted three necessary, yet rarely addressed issues to highlight from the study. The first is protecting the owner, the family, and the farm from the death or disability of the owner[s]. From the report, “Disability is slightly more of a concern than death (44% versus 42%, respectively), which is a shift from MassMutual’s prior research.”
The study does point out that death/disability of an owner is “not very top of mind, with 55% [of respondents] saying they rarely or never think about the effect of disability and 59% saying they rarely or never think about the effect of death.” And, given that only 44% [of respondents] have a buy-sell agreement, it’s not a stretch to see many businesses are unprepared and completely unprotected if a disaster strikes---which leads naturally to my second area of concern, choosing a successor and memorializing that choice with a well-drafted buy-sell agreement.
“A buy-sell agreement should be designed,” the report states, “to protect the business from the five D’s – death, disability, divorce, departure and disqualification. When properly executed, a buy-sell agreement can help ensure the continuity of the business when ownership needs to change hands for any reason. It is a legally binding agreement that requires one party to sell and another party to buy ownership interest in a business when a triggering event occurs,” such as mentioned above.
However the bigger issue may be, “choosing the right successor.” The study suggests the following “tips for properly preparing an individual for taking over the business”:
- “Encourage gaining experience outside the business.” The report says, “Successor candidates should ideally spend 3-5 years gaining work experience outside the business. This fosters new skills, fresh ideas and self-confidence. It also helps determine if taking over the business is truly the best course of action for the chosen successor and allows them to take over the business by choice rather than a sense of entitlement or fear of failure.”
- “Implement a successor development plan.” I can’t emphasis enough the importance of professional development for next generation farming professionals. From the study, “This is a written career path for the successor to follow. It begins with an assessment of the successor’s current skills and interests and defines what additional experience, education, and training must be achieved.”
- “Coordinate the succession plan with family members and key managers.” Beyond regular communications, the report suggests, “Have them participate as appropriate in structuring the succession plan and make sure they fully understand its impact on them.” All must, “understand that there is a rigorous process of successor development and selection---not nepotism, that will determine the next leader of the business.”
- “Recommend utilizing a mentor outside the family/business.” Family relationships can frustrate the process. Each successor should, as the report says, “find and utilize a mentor outside the business to act as a coach, advisor, and educator. This might be a trusted person within the industry but not affiliated with the company.”
In considering this study, the concern is not what owners think, but rather how they react to these shortcomings. In addition to my highlights, next month I’ll suggest actions you can take to overcome these issues. In the meantime, if you’re interested in more detail, you may review the study here.
Published as "Don't Fail to Plan for the Long Term", by Kevin Spafford for "Farm Progress Magazines", November 2015.
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