How to Know When It's Time

Dec 11th 2009, Legacy By Design

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Kevin Spafford

Q. Our family operation is in the heart of Iowa corn country. My brother and I are third generation farmers and our kids represent the fourth. As partners we’ve been talking about how to keep the farm in the family, and we read your column regularly for ideas.

Our oldest sons are eleven months apart. Both of them have been dedicated to growing the operation since college, five and six years ago. My daughter is also interested in joining the family operation when she graduates next June. 

Though succession planning sounds like the right thing to do, we’re not ready to quit.

We don’t think the boys are ready for the management responsibility; we farm 7200 acres and have four employees. How do we know when it’s time to seriously consider succession planning?

A. Thank you for asking. Many people wrestle with the ‘when’ and ‘how’ of succession planning. A comprehensive plan is designed to mitigate the risk and minimize the uncertainty of passing the farm to the next generation. It is a next step in growing a business bigger than self. It is not a form of giving-up or walking away, rather it’s a manner of development and renewal. It provides the current generation the opportunity and the obligation to prepare the next generation for a leadership role. It encourages pride in growing a family legacy, and it forces an operational structure to what otherwise maybe a lifestyle operation.

Most people start with a small operation, or inherit a going concern, with hardly a thought beyond current obligations and projected income. As the operation grows and becomes more complex they may see a need for a more detailed business plan. Yet, a succession plan doesn’t usually become an urgent concern until they witness a neighbor fight through the uncertainty, and risk his entire career on the decisions of a grieving parent.

Succession is the natural next step in a growing operation. A comprehensive succession plan will include four basic elements, 1) Ownership Transition, 2) Leadership Development, 3) Estate Plan and 4) Financial Security. Often the secret to good interaction and a positive learning experience for teacher/student, mentor/protégé or parent/child is a good question. Review the questions below with your brother. Are you ready for succession?

1.    Is maintaining family ownership of the farm/agribusiness is important?

For farm families the operation may represent significant wealth, yet most appreciate that the value of owning and operating the farming operation goes far beyond dollar signs on a balance sheet. The farm may represent lifestyle, traditions, values, independence, opportunity and family legacy.  

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 leadership development program?  

3.    Is the operation run like a business with standard operating procedures and a management structure?

To grow beyond lifestyle farming, management must be prepared to operate within a formalized business structure. They must employ standard operating procedures, and utilize tools like employee handbooks – with 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 your brother talk, does the discussion include your spouses and the three active and soon-to-be-active children in the family? 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 and your brother will walk away, so financial security is critical. As the succession discussion unfolds, explore on-going obligations, income / expenses for retirement (or the next venture in your vocational life), 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 the active owners, present and future, must see the same scene as they look out on the horizon of the future.  

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? And, can they work through the trials of too much debt, and will they compensate for challenging employees?  

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 vocational 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 satisfying experience in your professional life. 

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 disaster are critical to growing competent managers.  

10. Does the family recognize and acknowledges the opposing objectives between active and inactive owners?

Active owners and inactive heirs have diametrically opposed objectives. Active owners want to grow an operation; inactive heirs want the value of the operation exchanged for dollars---usually immediately.

 

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