Prepare now for the next generation
Did you know that as a farmer and business owner, there is only about a 40 percent chance your family business will successfully survive the transition from the first to the second generation. According to the Family Business Institute, only about 12 percent of businesses are passed on to the third generation successfully and beyond that it decreases to about 3 percent.
I’ve encountered countless business owners and farmers who have failed to prepare the next generation properly or to establish a solid succession plan to avoid catastrophe. While this article won’t be able to cover all of the things you should consider regarding proper business succession or transition planning, hopefully it will spark some thoughts.
Plans to Retire – I’ve seen too many farmers hold on for far too long, and when the unthinkable happens, the next generation isn’t properly trained to handle the affairs of the family business or step into that leadership role. I admire those who have such passion and dedication, but I do encourage you to begin the transition years before you actually plan to retire. This allows you to continue being involved in the day-to-day, providing oversight, and allowing your children to step into their prospective roles.
Family Meetings – This is an important element of planning. The first few meetings can often be awkward, but over time and with structure, the meetings become more valuable. In the early stages, the meetings can be devoted to simply educating the family on the history of the operation so they can see the value of what has been built through hard work and how it supports the family. As more meetings take place, you can expose the children to more sensitive information regarding your succession plan, financials, etc. If there is a need to have a difficult conversation regarding sensitive information, or perhaps implementing a new family policy, you can enlist your trusted advisor to either walk through the scenario in preparation of the meeting or invite them to help with the delivery of the message.
Identifying Leadership – What if the next generation isn’t interested in being involved in the family business, or maybe they’re just not fit for a leadership role? Getting your family involved in the business early can help you determine the probability of someday handing it over to the right person. To prevent the sense of entitlement with your children, you should put them through the same, rigorous screening process as you would an external candidate, and be careful not to promote them to a leadership position too soon simply because they’re family. If your children aren’t prime candidates to lead the family business in the future, consider extended family or an external candidate.
Above all else, start planning. As Benjamin Franklin once said, “By failing to prepare, you are preparing to fail.”
Planning is a process, not an event. Incorporate a will, trust, buy-sell agreement, or other legal documents that help define how you want everything handled when you retire, or if the unthinkable happens. A trusted advisor can help you identify gaps in your plan or options to minimize risks and improve the chances of success.
Andrea McKinney is the vice president and wealth management advisor with Central Trust Company.