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Visit with any family ranch about
what plans are in place to pass the operation from one
generation to the next – and chances are they’ve been dancing
around the topic with very few details in place.
Instead, family members are likely
at a stalemate due to lack of communication, hard feelings and
lots of confusion.
How can families in these
scenarios move to the next step? Kevin Spafford is a
California-based financial planner who specializes in succession
planning among agricultural businesses through his firm Legacy
By Design. Spafford has also authored a book by the same name
and is a regularly featured speaker on the ins and outs of
succession planning.
Through his Leave a Legacy blog for Farm Journal Media, Spafford
addresses many of the issues important to successful succession
planning. Here, is a round-up of the steps Spafford highlights
via his blog for transitioning a family business from one
generation to the next:
Take Action
Spafford comments that the stalemate scenario is a familiar
one. He says procrastination, confusion and the emotional
dynamic are often the causes for lack of action among families.
For instance, Spafford points out, “The language of succession
is just different enough to be baffling, and no one wants to be
in a situation that is uncomfortable. A confused mind always
says no.”
But Spafford encourages families
to get past these roadblocks and take action toward planning
their future.
In his book, Legacy by Design:
Succession Planning for Agribusiness Owners, Spafford says,
“Every action is preceded by a decision to act by design or by
default. Some people refer to this concept as proactive versus
reactive management. You can act to avert crises or you can
react to the demands of a given situation.
He goes on to says,
“Unfortunately, many people live by default. They are
constantly predicating their actions on the crisis of the
moment… As a successful business person, you must avoid crisis
management. You are most successful when your purpose is focused
and you know exactly what outcome you want to achieve.”
To that end, he adds,
“Comprehensive succession planning is always a collaborative
effort. You must involve multiple generations, a variety of
professionals, and your loyal employees.”
As such, Spafford acknowledges
that succession is a difficult process. He says, “Succession is
not a function of money, it is not achieved through the force of
will, it is not a right of passage and it’s certainly not a
birthright. Succession is rare. Less than 30% of first
generation businesses will pass to a second, and only about 10%
may pass to a third.”
He adds, “Succession – successfully following in sequence, and
passing the operation as a going concern from one generation to
the next – is only achieved when pursued as a goal in and of
itself.”
As part of that process, Spafford
suggests succession must:
Be written and clearly defined
Be supported with positive action
Be a concerted effort
Include all active family members
Involve all loyal employees
Be measurable
Be passionately supported by the patriarch/matriarch
Moving Forward
So, how can ranch families move into the future with a
transition plan in place? Spafford shares the following tactics
that can be beneficial to the process.
Start communicating.
Spafford – along with most
succession planning experts – say the best way to resolve or
minimize conflict is to keep all involved communicating and
informed.
Regular family meetings tend to
be the best means for doing this. These meetings should have an
agenda, be structured and follow the rules and courtesy expected
in any business environment. If necessary a professional
facilitator or mediator could be used in early meetings, with
facilitation eventually rotating among family members.
Of this process Spafford says,
“Once families begin a new era of respectful and
open communication, they report an increased appreciation for
each other and a renewed love for their work.”
Determine the vision.
Once family members are communicating, the next essential step
is to agree on a shared vision for the family operation. Not
everyone will have the same vision; so this process will likely
require some compromise and consensus building.
Spafford says, “It’s well worth
the effort to explore your vision for the business and set it to
paper as a fundamental element of your business model.”
He suggests considering these
questions as you form your vision statement:
What values will be promoted by the actions, management,
systems, and appearance of your farm or agribusiness?
How do you want to be perceived
by your customers?
How do you want your employees to
treat your customers?
For what particular specialties
would you like to be known (both products and services)?
Have a “working” business plan.
Essential to the succession
process is a detailed business plan that outlines the goals of
the operation and lays the roadmap of how the “vision” will be
achieved, while also setting the stage and timeframe for the
transition from one generation to the next to take place.
That said, Spafford emphasizes that there is a fine line in
implementing the plan. He says on one hand, a plan must be
flexible enough to adjust to changing conditions, shifting
resources, variations in consumption trends, regulatory
initiatives, and evolving abilities.
On the other hand, the plan shouldn’t be revised so much – or
totally ignored – to the extent that the long-term perspective
is lost.
He says, “Annual updates should
reflect changes in goals, the business, and the people
involved.”
Define roles.
Along with the business plan development, establish the roles
and responsibilities of those involved in the family operation.
Spafford suggests this should also include identifying the
successor – be it a family member, trusted employee, or
promising outside candidate.
Spafford says this definition of roles helps to create
competence and encourages accountability among people. He says,
“Management, or leadership, in the family operation is no
different than any other organization. There must be a workable
structure in place to allow for discretion within each role,
accountability for each position, interdependence based on the
team, and methods for grievance, governance and growth.
Work with a professional “team.”
Along with the vision and
business planning aspects, estate planning must also be
considered. This entails the legal details to ensure that the
ranch or agribusiness passes to heirs unencumbered by debt that
may threaten the economic viability of the business. As well,
retirement planning to allow for financial independence for the
retiring generation must also be considered.
For this process a team of
trusted professionals will need to be included. Spafford says,
“Discuss succession planning with your current advisors, CPA,
attorney, financial professional, or retain a specialist. Keep
in mind action is your ally, and procrastination is your
opponent.”
Recognize that more than assets
must be transferred.
A common mistake in succession
planning is doing all the proper paperwork to legally transfer
the ranch from one generation to the next, but then failing to
transfer the control; the decision making abilities; the
leadership role.
Spafford sums this up by saying,
“Succession planning is not just about passing the business
entity to the next generation; it’s about transferring the
spirit and the intellectual capital of the entrepreneur to
tomorrow’s business leaders. It is about exit planning with
grace, ensuring that the business will continue to grow and
prosper as the business owner plans for retirement or the next
venture in his/her vocational life.”
Specifically, Spafford suggests a
written plan should be developed to help both owner and the
successor to understand what is required, how the training will
be conducted and provide documentation of progress.
Spafford says, “Tomorrow’s leader
is developed today. Start on the training now – so that the new
manager will be fully prepared to step in when you are ready to
reduce your own involvement in the day-to-day operations.”
In the end, Spafford says the
work to develop a comprehensive succession plan should
ultimately position your business and your family for long-term
success. He concludes, “The ultimate goal is a lasting legacy.”
For more information about
Spafford’s services and his blog visit www.legacy-by-design.com
or call 877-523-7411.
Equitable vs. Equal
Kevin Spafford, a succession planning specialist and author,
acknowledges that splitting a family business as inheritance
among children, can be tricky. He says, “Most parents take pride
in treating their kids equally, yet when it comes to succession
of a family agribusiness, that may not be the best path.”
Spafford continues, “If all of
your children are passive (not actively involved in the
business), it may indeed be possible to equally divide
ownership. With the kids as shareholders to a corporation,
operational responsibilities would be handled by a third-party
manager. “
But he points out that if, however, some of the children are
active in the business and others are passive, consider how
transferring ownership shares to passive children may adversely
affect the family and the business:
Even under the best of
circumstances, passive children may complicate the
decision-making process of the business.
Passive children hold a
non-liquid asset, which provides no forseeable benefit to the
lifestyle of their own households.
Active children have made
personal contributions of sweat equity, have foregone more
lucrative opportunities elsewhere, and have made do with minimal
income when necessary.
Factor in spouses and
grandchildren (both active and passive), and things can really
get sticky.
Thus, Spafford says, “In a
comprehensive succession plan, the goal should be equitable
rather than equal transfers. With an equitable transfer, each
child is given a share of the family wealth in a form that is
appropriate to that individual.”
He concludes, “Think
multidimensional. By considering the health and strength of the
family business, you will also help to reduce conflict among
family members.” |
