3/7/2017 6:30:00 AM/Categories: Popular Posts, General News, Today's Top 5, People in Ag
By Larry Evans
If I were to say to you that every family business, including a ranching operation, could be on a downward track without proper succession planning, would you believe me?
Many of you won’t, but those of you that doubt my statement are providing support for continuing the old adage about a family business: The first generation is entrepreneurial and creates a family business; the second generation, not having the same entrepreneurial drive as the first, maintains the family business; and, the third generation is so far removed from why and how it was created that they lose the family business.
A Comprehensive Approach
Succession planning has usually been accomplished by passing the family business down to the first-born son. But, today, while the result may still be the same, succession planning requires a more comprehensive approach that considers the management, ownership and taxes of a family business. And, succession planning typically comes wrapped in emotion.
It’s understandable to not want to deal with the emotions of patriarch or matriarch deaths, feelings of sibling favoritism or rivalry, family members changing lifestyles, defining what is “fair” and absenteeism. But it creates succession planning gridlock, and nothing gets done. Being able to have an honest and open family discussion is a key element to successful succession planning. Personal feelings, ambitions and goals of the individual family members should be considered, but put aside, for the common good of the family. Understanding and dealing with emotional issues is the cornerstone of starting and moving forward with a succession plan for a family business.
When you think about the information that would be helpful to reference in a family succession planning meeting, consider the following:
1. What are the current roles of family members in the daily family business operations?
Analyzing the current roles in a family business provides an opportunity to determine if there are other roles that need be filled and if those occupying the current roles are functioning effectively. The analysis will also highlight the issues related to a back-up person. If no back-up person is currently available, it should be a priority to find or develop back-up individuals.
2. What talents do individual family members possess to operate the family business?
Not everyone in a family has the same talents and not all will be capable of running a family business. However, some that do have the necessary talents can be ignored or dismissed based on emotion rather than an objective evaluation. An unbiased evaluation of talent will demonstrate where a family business would be well advised to use a new person in a current role, or encourage a family member to develop knowledge and experience to fill talent gaps anticipated to be needed now and in the future.
3. How is information about the family business currently communicated within the family?
Bad things begin to happen when family business communications are non-existent or begin to dry up. This is particularly true when the primary leader in a family business knows things are not going great, but wants to shelter the family from the problem until it can be worked out. The trouble is that most of the time when the problem is discovered by the other family members, the opportunity to lessen or eliminate the problem have usually been decreased. The more individual family members rely on the family business for their basic living needs, the better the communication about the family business should be. Establishing clear and regular communication opportunities will enhance the ability for the family business to withstand the bad things and relish the good.
4. What role do external advisors play in the family business operation?
External advisors should be good listeners and fill the roles family members can’t or don’t feel comfortable doing. Yes, it is an additional cost, but if used correctly, an external advisor should provide or save more dollars than they cost. Defining where external advisors are currently used and accessing their added value will allow the family the opportunity to determine if they are using the correct external advisor and if others should be added to accomplish the goals of the family business.
5. Are good business practices adhered to and expected in the family business operation?
Size is the basic difference between a family business and a large public company. Both are interested in making a profit, providing growth opportunities and surviving. As a result, a family business should emulate the way a large company handles business governance. Using budgets, creating business plans, understanding cash flow and debt, making decisions based on research, retaining good workers and using a group as a board to help with operational oversight are examples of how a family business can anticipate and handle most business events.
6. Are risk management issues considered in the family business operation?
Proper risk management includes having the right type and amount of insurance in place to protect the family business and key members responsible for the family business. But, it also includes making informed business decisions that do not place the family business in harm’s way. Creating excessive debt for higher risk operations, moving outside core business operations and overly aggressive expansion can produce risk management issues for a family business and should not be made without proper review and discussion, which should include external advisors’ comments.
And, the more emotion present, the greater is the need for someone outside the family to act as the meeting facilitator.
A Trusted Advisor Can Help
As a trusted advisor acting as a facilitator, Eide Bailly has been instrumental in helping to relieve the emotional aspects of family meetings while addressing the technical elements of taxation that are anticipated as a result of the succession planning efforts. We confront the difficult issues of fairness and perceived rights. Fairness may not always equate to equal and perceived rights do not always equate to reality when viewed in the best interest of the family business.
An external advisor’s role in a typical succession planning engagement includes:
• Facilitating family communications at all levels and mitigating the emotional stress of potential change decisions.
• Reviewing the business operations to gain an understanding of what and how things are done, and by whom.
Financial documents are reviewed, including the balance sheet and income statements. If documents are not available, the external advisor assists in the development of such information.
• Helping the family develop a business plan for the future, including management and ownership changes to accomplish the business plan.
• Assisting with business plan implementation and continued monitoring. And, it should be noted that a business plan is not a static document. Future changes, caused by changes within or outside family control, will need to be considered and the business plan modified accordingly.
It is important to clarify that management and ownership don’t need to be vested in the same family member. To achieve a continuous family business and its defined goals, good business governance requires a critical and objective evaluation of family members, including education and prior work experience, when selecting future management. But, when deciding future ownership, a different set of criteria will be needed.
Ownership imparts value to family members, but also imparts authority to make decisions that will affect other family members. It is the authority to make decisions that should be of concern when developing a family business succession plan. The succession plan may be designed to provide equal value, but not equal decision authority. Decision authority should be based on ability to govern, not family member ranking. This can be accomplished by the use of voting vs. non-voting stock or different classes of evidenced ownership with different levels of voting authority when structuring the on-going family business entity.
But eventually, succession planning will need to deal with the resultant taxes and the calculation of the cash flow available to meet the needs of the members of the family business as the succession plan is adopted. Taxes will be dependent on the structuring required to achieve the desired succession plan, which will involve appraisals, available discounts, control issues and health issues of the family business and family members. It may also be advisable to transition into the complete succession plan, in which case, the resultant taxes and available cash flow will need to be calculated over a longer timeline.
Plan Now Not Later
Through our experience, the ability of a succession plan to better assure the future viability of a family business is enhanced by adoption of the succession plan at the earliest possible date—before there is an event, typically a death, that necessitates something be done quickly, usually without an appropriate thought process.
If you are responsible for a family business and have not developed a succession plan, it is truly your responsibility to face the emotional aspects and create the opportunity for the family to openly discuss
the future of that business before it’s too late. Otherwise, an environment for family distrust, dissension, hurt feelings and, ultimately, loss of the family business is the likely outcome.
If you need help getting started on succession planning for your family business, professionals at Eide Bailly know the appropriate steps to take and can help you deal with the emotions, both yours and the family’s, as you work through the process.
Matt Schafer, CPA
3/7/2017 5:52 PM
I have a poem about the giving back of a lease! I don't think any amount of planning works unless there are no others to give it to! Take away the appreciation and worth of the operator and you have lost the farm even if you haven't! Whenever the land becomes more important than the people working the land, you have also lost any graceful succession! Yup, I have been there, done that!
Since 2000, pulse crops planted acres have increased by over 1,000% in the Montana/North Dakota region. The wheat–pulse crop price ratio may be increasingly important to informing producers’ planting decisions.
A federal judge issued a nationwide injunction Thursday against the Trump administration for delaying the Obama-era Waters of the United States rule.