Succession Planning

The business and family farm succession process involves the following stages:

1.  Determine whether succession within the family is appropriate

2.  Developing your succession plan

3.  Monitor the implementation of the plan, and making changes as necessary

4.  Coordinating your succession plan with personal tax planning for retirement and the       distribution of your estate.

Each of these steps is equally important. For example, excellent succession plans can be ineffective if they are not properly implemented and sophisticated estate plans can become ineffective if they are not coordinated with a business owner’s plan for succession.

Succession planning is a process. The success of the process will depend on a number of factors, including: a desire to make it work, healthy family relationships, and trust, honesty and openness among family members.

1. Is succession within the family appropriate?

Determining whether succession to a family member is appropriate is not always straightforward.

Business owners often have a plan in their own mind – take the case where one of the children has been active and effective in the business. In such a situation it may seem obvious to you what’s going to happen – that child will succeed you. But the goals and objectives of the child may not be in harmony with this plan. Alternatively, some children may be overlooked as a successor because their views and general outlook on business issues differs greatly from that of the founder (due to human nature, we often relate better to people who share the same style and values).

Therefore, the first step is to address these two questions:

A.  Are my children interested in succeeding me?

Have you actually asked your child whether he or she wants to succeed you? And if you have, are you sure he or she was truthful in his or her response (knowing how strongly you feel about the business or farm)? Objectivity in terms of assessing your child’s ability to run the business is also important.

When assessing a child’s interest in any business, it’s difficult to be objective. You have devoted a great deal of time and resources to developing the farm or business and, quite naturally, you should be proud of what you have achieved. Chances are your feelings toward the farm or business are obvious to other members of your family, which creates potential problems for some business owners.

Many business owners find it difficult to accept that a child does not share his or her interest and passion in the business, and the child may find it difficult to communicate that they really are not interested in succeeding them in the business.

B.  Are my children capable of running the business or farm when I retire?

Succession will only work if your business is passed on to a child who has the skill to run it. Where there is one obvious interested candidate, the process is more straightforward – you can focus on evaluating that family member’s abilities.

The process gets far more complicated and difficult when more than one child is interested in, and capable of, taking over. The farm or business may be limited by the size and profitability of the operation – could your farming business support two or more families?

Having to choose among children successors is one of the main reasons many business owners do not deal with the issue of succession. As parents, we try to treat all children fairly, which usually means treating them as equals. However, when it comes to succession, the reality is you will likely have to pick one child to be your successor.  Can you rate the strengths and weaknesses of your children?

C.  Will Shared Leadership Work?

If you cannot hand your business or farm to just one of your children, what are your options for shared ownership and leadership.?

1. Family “partnerships” – Family partnerships can work if each child is a full partner and the partnership agreement states that complete consensus is required for all important decisions. This alternative works best when children see each other as equals and there is a strong desire among them for succession of the business within the family.

2. First among equals – one child has more control over most day-to-day decisions, but important, fundamental changes are decided on by the group. In this situation, the boundaries of the leader’s responsibilities should be clearly defined and disclosed to all.

The success of either arrangement depends on shared vision and a strong enough bond among the children that will allow for successful teamwork. The children will need to adopt a balanced approach to building consensus, as very few business partners will agree on everything.

D.  What Happens if you Can’t Identify a Successor?

After consideration, you may decide family succession just won’t work:

•None of your children are either interested or capable.

•A child has the potential to succeed you, but is not yet ready.

•You have children who are equally interested and capable, but selecting one child over another is not worth the risk of damage to your family.

There are two alternatives to passing the business on to a family member

a. Sell the farm or business realize the value of the farming or business assets.

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b. Divide the farm or business if you have a large enough operation.  This is an excellent option, if the smaller separate operations will support each successor’s family.  This could have serious tax consequences, so a tax professional should be consulted.

2.  Succession plan development and implementation

The next step is to develop a plan, and begin its implementation. Given that a succession plan should be tailored to the unique characteristics of both your family and your business, every succession plan will be different.

A.  Identify your successor and his or her role,

B.  Transition your successor aboard,

C   Accept the necessity of a succession plan,

D.  Keep the succession plan as open as possible,

E.  Establish a clear timetable for the process,

F.  Develop a clear business plan that extends beyond your retirement,

G.  Retain key non-family employees, if any, and

H.  Realize that fairness is not the same thing as equality.

A.  Identify your successor and his or her role

To be successful, your plan should identify who will succeed you and what their role will be.  It is easier to effectively transfer control of the business if family members  understand their current and future roles.

B.  Transition your successor

The goal is assuring the successor will be ready to take control when the time comes.

• Allow your successor to participate in business decisions.  In the beginning, you will maintain control over major business decisions. As time goes on, you should allow your successor to be more involved, passing on more responsibility for important decisions.

• Meeting key contacts – Allow your successor to see how you manage relationships with important customers, suppliers and other key business contacts.

• Allow your successor to work in different areas of the business .The best way to learn about the business is to be directly involved in different areas of it.

• Gradually allow your successor to assume your duties.  Once your successor has a good knowledge of the business and has been involved in decision-making, the next step is to gradually pass on your responsibilities.

C.  Accept the necessity of a succession plan.  This is a plan for change – therefore the owner must accept that there will be major changes as the plan proceeds.

D.  Establish a clear timetable for the process. Definite dates should be set for the following events:

•retirement of the business owner,

•transfer of ownership, and

•transfer of voting control

E.  Develop a clear business plan that extends beyond your retirement.  Involving your successor in the development of the plan will be a valuable learning experience for him or her. Though your successor may take the business in a different direction in the future, a detailed business plan will get him or her off to a good start.

F.  Retain key non-family employees.   Key employees may feel they are working for you rather than for the business.  It is important that key employees have respect for your intended successor. Though this respect will have to be earned over time, it can actually be won or lost before the succession process begins.

G.  Realize that fairness is not synonymous with equality.  Treating your children fairly does not necessarily mean your children should be treated equally.