The aging baby boomer generation is impacting the farm population as well as the non-farming population. This trend is generating increased interest by these aging farmers to begin to seriously consider developing a business succession plan for their farming business. Well over half of our consulting clients are seeking advice and counsel on developing business succession plans. Research has shown that only 3 of 10 family businesses will survive into the second generation and that number drops even more for the success of 3rd generation family businesses. There is an old adage in family business circles that granddad makes it, dad holds it together and the son loses it. However, in our 25 years of practice we have determined that with solid, no nonsense planning, a family can greatly increase its odds of having a successful business succession.

chart_of_success_vs_failure_into_the_2nd_generation

The keys to success for family businesses require solid planning, a no nonsense approach to managing the business, well defined family business boundaries and high standards and expectations for performance by all members of the family business. There can be no dead wood among the owner management team. Accepting poor or mediocre performance can drive a stake in the heart of the family business.

stages-for-succession-planning-1

The succession planning process involves 3 major stages. The first of these is the discovery or readiness process. The family needs to review key measures to ensure that the business is ready for succession. This involves a thorough analysis of the financial position and past performance.  An in-depth review of key financial measures such as owner equity, working capital, profitability, capital efficiency, and debt repayment capacity is critical to predicting the business’s ability to add owners. A study of the family readiness also includes looking at and evaluating the quality of the relationship between the senior generation and the successor generation. A discussion between the generations regarding goals, lifestyles, financial desires and acceptance of the business cultural values is also essential in determining the likelihood of there being long term success of the plan.

If this stage is skipped the result is quite often the lack of a solid foundation for the relationship between the generations. Also, it is important that any hidden agendas are discovered, discussed and a plan developed to resolve them. This is evidenced by the large number of family businesses where the people aren’t happy and fulfilled and the business isn’t financially successful. If it appears that the participants of the succession team agree that the people and the financial equation are in position for succession then a move to stage two can occur.

stages-for-succession-planning-2

Stage two is the plan development stage. Here the succession team does its who, what, where and when planning. The “who” identifies who is going to participate in the plan, both today and in the future. The “what” process discovers the core values of the business, the objectives of the succession, the mission statement of the “new” business and determines detailed job descriptions, organizational charts and personal development goals.

The “where” discussions determine the focus of the business, both now and after succession, and the geographical location of business activity. One of the most interesting things that I observe in today’s farm family business succession processes is the lack of proactive, visionary, progressive attitudes among the successor generation. This is a definite change from the young farmers of a generation ago. I will leave it up to the rural sociologists to analyze if this is actually true and why it might be.

The “when” determines the anticipated retirement dates for the senior generation members of the team. This is always an interesting discussion. One of our clients has a  family with numerous senior members and even more successor generation members. The seniors failed for years to make any concrete retirement plans as to dates and expectations. Then, in November, one of the senior members was forced to retire due to health reasons. That opened the spigot and within 12 months all members of the senior generation had decided that they wanted to retire. This put tremendous pressure on the family, the advisory team and the outside stakeholders. The story has a happy ending, at least to this chapter, all seniors are retired and the succession plan is implemented and ticking along.

This second phase also develops the criteria for successor generation members to join the business as employees and lays out the road to eventual ownership. There are three stages of development for the successor generation that seem to make sense and assist in the orderly and successful transition. The three stages are: Responsibility, Control and Ownership. So the natural sequence is to work as an employee to prove oneself as worthy to go onto the next step where the individual is advanced to a manager status. After experience and success as a manager, the individual can be considered for membership into the successor entity ownership group. Normally, there is an ordered process that includes a mentor, systematic evaluations and a consensus on joining the ownership group. This stage may also outline expectations for educational requirements, full time off farm work experience for a period of time, and a demonstrated value to the business.  This is the place where family/business boundaries need to be developed to ensure that business issues are handled in a business like fashion and family issues remain family issues. No farm in today’s economy can afford to have dead wood in its ownership ranks.

The key to having the above process work effectively is to have the entire group develop the plan and the implementation process jointly. The plan needs to have buy-in from all internal stakeholders, including all the members of both generations, the spouses and any other family members, including members of the family that are working off the farm.

There is much to be gained to have the plan developed 5 years prior to the first member on the successor generation coming on board. This gives adequate notice to all involved and thus allows for preparations.

stages-for-succession-planning-3

Stage three of the planning process is the implementation stage. The plan, now complete, needs to have wheels put under it, it needs a champion from the senior generation to ensure that all the detailed planning gets put into motion.

This is the stage where the process tends to breakdown, mainly from neglect. It is important to keep the plan in front of all stakeholders. A reasonable goal is to have at least one annual review of the plan and update any portion of it that needs attention.

As I learned as a bright, shiny 2nd Lt in the US Army a long time ago, “Proper Planning Prevents Poor Performance”.

mike_salisbury_directory_150x150