Question: What do the following have in common?
- Your annual physical.
- A trip to the dentist.
- The annual mammogram.
- The annual colonoscopy after age 50.
- Updating your farm balance sheet.
- Saving for retirement.
- Working on the Business Succession Plan.
Answer: These are all tasks that are generally accepted as the right things to do; however, we all tend to put them off as long as possible.
Believe it or not, I rarely get asked the question in the title of this article. More commonly I hear the following phrase by a prospective client when discussing a business succession planning engagement:
“I know that I should have started this years ago…”
Why do we put these things off? Do we associate them all with ‘pain’? Or is it fear? A little of both, I think.
Regardless of the reason for putting it off, the answer to the question of when you should start, the answer is:
“The sooner that you start, the easier it will be.”
I should warn you now, however, if you are the type of person who is a ‘one and done’ type of planner, you are going to be very disappointed with how your business succession planning will go. The truth is your business succession plan will never be ‘done’. It’s a work in progress. You will update it as necessary, based on changes in the business, changes in the people in the business, and changes in the people outside of the business.
Getting Started – Rules of Thumb
So, you’ve decided to get started with your Business Succession Plan. Good for you! Let’s discuss some of my “Rules of Thumb” for Succession Planning.
Start with Identifying your Successor(s).
Ask yourself: “Who is best qualified to manage my business after I have stepped down?” Is there a clear answer to this question? Be objective. Is it one person, or more than one? Are there none? Is it a family member or an employee? The future success of the business will depend on, in part, to choosing the right successor(s) to manage the business.
Once you have identified the successor or successors to you in the management of the business, it’s time to start developing them. You must mentor them to understand not just the ‘what’ of managing the business, but also the ‘why’. Be open to questions. “Because this is the way that we’ve always done it” is not an acceptable response when asked ‘why’!
The successor(s) should be between the ages of 25 and 35 when starting to transfer
management responsibilities. I have observed that it takes time for ‘kids’ to become ‘adults.’ This age is different for everyone. I’ve known some incredibly mature 15-year old’s and some 50-year old’s whose behavior is best suited for the frat house. The age range of 25-35 seems to capture when most will have transitioned from the formal education years into ‘adulthood’.
The successor(s) should have demonstrated maturity and responsibility in their personal
lives as well as within the business. Since age is not the only measure of maturity (see my ‘frat house’ comment above), you should take an honest assessment of the maturity and responsibility level of your successor. Can they balance their checkbook? Do they have legal issues? Are they still living in your basement? Ask these and other objective questions to assess their readiness for more significant responsibilities in the business.
Family members in the business should work somewhere else for at least 2 years.
Why in the world would I let my son/daughter, etc. work for someone else? I need them here! There are some basic and important reasons why this is a good idea. First, you will enable the next generation to learn, which often involves making and correcting mistakes, on someone else’s dime. Second, they might pick up a few good ideas to bring home to improve your business. Finally, it will help to assure that they are truly committed to the family business when they choose to come back.
Start transferring management before starting to transfer ownership.
If you’ve followed the first three rules, then you have helped to eliminate some of the common issues related to failed business successions. However, there is still the risk that your successor is not the right choice, or they have a change of heart. As such, it is important for them to take the business for a ‘test drive’ before you hand over the keys. Allow your successor to gain confidence in their skills in managing the business before burdening them with the additional stress and challenges of ownership.
Allow 3-5 years for management transfer. The appropriate timeframe for transfer of management responsibilities will vary from business to business. Factors to consider will include the experience and prior training of the successor, the complexity of the business, and the future role of the succeeding generation. A period of ‘equal’ management responsibility is acceptable if you have a mechanism for settling disagreements.
Only those who depend on the business for their livelihoods and/or are involved in the
work or management of the business should own the business. This means that when the current owner of the farm has a combination of ‘on-farm’ and ‘non-farm’ heirs, a disproportionate amount of wealth will need to transfer to the ‘on farm’ heirs for the business to have the best chance of future success. Violation of this rule of thumb can at best lead to more complicated management of the business, and at worst destruction of the business. When a non-farm heir inherits a share of ownership in the family business, they represent an unfunded liability for the on-farm heirs, in that the on-farm heirs may find themselves needing to buy back the portion of the farm left to the non-farm heirs. In other instances, the non-farm heirs exert their influence on the on-farm heirs to make decisions that may not be in the long-term best interests of the business.
Communicate, Communicate, Communicate. If you remember only one point from this article, please remember this final point. The MOST important ingredient in a successful farm business succession plan is good communication. You simply cannot communicate too much! Discuss your thoughts with your heirs… both on-farm and off-farm. Ask for input. Talk to trusted advisors. Share your feelings about the future of the business. And when you’re done, do it again!