In his two latest columns, DTN's Farm Business Adviser Lance Woodbury addresses ways to overcome the obstacles that hinder a transition from one generation to the next in a family business (subscribers see his column "Five Steps to a Better Exit" on the Farm Business page). It's an emotional topic, since successful owners often have trouble unwinding from their life's work, emotionally and financially. Add to that the financial risks at stake with today's commodity markets, and there can be legitimate concerns about a successor's readiness to fly solo. Since Woodbury has counseled dozens of family business owners on how to make a successful hand off over the past 20 years, we wanted to continue the conversation here. Feel free to comment or pose more questions for Lance.
Taylor, DTN: Lance, in your recent column on a “better exit,” you offered several practical steps for the retiring generation to take in moving the transition conversation forward. And in a December column, you talked about some of the obstacles to the exit. Exiting appears to be really difficult in family businesses!
Woodbury, AgProgress: Marcia, some of the problems encountered with the exit are due to how it’s thought of in the first place. For example, people often confuse “estate planning” with “succession planning.” Estate planning, in my view, is the process of transitioning financial wealth to the next generation. Succession planning is a bit broader, and involves two or more generations together planning the vision, strategy, roles and goals of the organization. Estate planning is generally driven by the senior generation, whereas a succession plan requires more active involvement by the next generation. And while there are some very specific tools to be used in transitioning wealth in a family or ranch, the process of transferring the management of a business is much more dependent on the uniqueness and culture of that business. It requires a customized approach.
The confusion between estate and succession leads people to set unrealistic timelines, to think about the “finish line” when it is an ongoing process, to not involve family members in the right way, to focus on technical tools (trusts and tax strategies) instead of goals and principles of the transition, and to either not use advisers in the right way or focus too heavily on the cost of good advice. My suggestion is to have distinct and separate meetings on transitioning ownership and other meetings focused on planning the management transition. They will overlap some, but really require two different types of discussions.
Taylor, DTN: Lance, an oft-debated topic is how in-laws should be included in these meetings. What is your advice?
Woodbury, AgProgress: My suggestion, Marcia, is to include, in some fashion, anyone that can really throw a wrench in the process. For example, if your daughter who is working in the business has to think about buying the business due to your estate planning, or you want her to transition into the CEO or another leadership role, or through the estate plan she will end up being partners with her off-farm siblings, those are all significant life events about which she will likely talk to her spouse. It is probably worth including her spouse early in the conversations so he hears the information directly and can express his thoughts and opinions. My motto is to “err on the side of inclusion” as I know all too well what happens when there isn’t psychological ownership of the transition process. In a word…conflict!
Taylor, DTN: Lance, as you point out in your article, planning an exit seems like an overwhelming and all-consuming process. Is there an easy way to think about the areas that need to be transitioned?
Woodbury, AgProgress: Marcia, I encourage families to think about the transition in terms of three areas: Values that include the family’s guiding principles, family history and the implication for how current decisions are made in light of those values; management knowledge that involves the technical know-how needed to run the business, such as grain or livestock marketing, agronomy and financial operating knowledge; and relationships required to succeed, such as family and landowner relations, lender and vendor contacts, and employee-management skills. The family should ask the question: What’s needed in each area to make the transition successful?
EDITOR'S NOTE: See a retirement in your future but stymied by the six or seven-figure bill from deferred taxation? Register for DTN's upcoming webinar "How to Exit Ag Without Paying a Monster Tax Bill," with CliftonLarsonAllen ag CPAs and wealth adviser s Paul Neiffer and Nick Houle. Live event is Feb. 18 at 9:00 Central time, but recordings will be available afterwards. Register at https://dtn.webex.com/…
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