It starts with a notion which becomes a dream that, if strong enough, leads to action. Every enterprise was once an idea. As a family-business owner, you know the motivating power of desire. At some point, you stepped beyond the comforts of a corporate job. You were determined to make the world a better place for your customers, your family and yourself. For most entrepreneurs, the dream is predicated on some combination of financial reward, personal satisfaction, professional achievement and unrealized opportunity.
From our client base, we’ve seen that farming is the quintessential family business. The agricultural-industrial complex is a seedbed for family enterprise. Agripreneurs are the standard bearers of the American vision. They dream and then become. For most family-business owners, ownership and equity value are the basis of financial security. Whether you till the soil, supply farmers or sell the finished product, preserving the family-business, growing the operation and passing it to a wellprepared next generation is, no doubt, a part of your dream.
Cause to reflect. Recently, I came across a survey I had tucked away for future reading. The survey, called “Family to Family: Laird Norton Tyee Family business Survey 2007,” suggests that we may be failing on many fronts: from demographics to planning, leadership to financial security. As I reviewed the results, I began to examine my own assumptions and reflect on the opportunities we may have to correct course.
From this survey, we learn that:
- 60% of all majority shareowners in family-businesses were age 55 or older in 2007, and nearly 30% were over 65.
- Fewer than 30% of respondents had a written succession plan.
- Fewer than 40% had a successor in line and were preparing for transition.
- A startling 64% of respondents did not require family members entering the business to have the qualifications or experience necessary to be successful.
- 25% of respondents said the next generation is not competent to move into a leadership position.
- 93% of respondents had little or no income diversification.
Given the depth and breadth of information available, the outreach by the Farm Journal Legacy Project and any number of other resources, neglecting to plan is indefensible. We know that most family-owned businesses will fail in the transition from one generation to the next. In fact, 70% will fail in the transition from first to second generation. Of those that survive, 90% will fail to transition to a third generation. And, of the meager few remaining, 96% will not make it to a fourth.
All of our research points to three broad areas of failure, and the statistics support our hypothesis.
- Incompatible estate tax planning. Legal maneuvers that are designed to minimize the estate tax don’t necessarily protect the integrity of the operation.
- Most family operations are insufficiently capitalized to weather the challenges of a generational transfer. They are wholly unprepared for the setbacks, mistakes and extra costs that are a natural part of a new owner’s learning curve.
- Most family-businesses fail to prepare the next generation for leadership. As a learned skill, leadership capabilities must be developed over time, using education, experience, mentors and gradually increasing responsibilities.
Define your goals. A comprehensive plan for generational transfer should include provisions for an ownership transition, spelling out the who, when and how. It should include provisions for financial security, including each family member’s financial resources, retirement budget, buyout scenario and capital for the transition; a leadership development plan for each leadership candidate; an education, experience and mentor-based development plan; and provisions to mitigate the estate tax no matter how the government chooses to apply its terms and conditions.
Start with the Goals Clarification Worksheet at www.farmjournallegacyproject.com/tools
. Consider what you want to accomplish, answer the questions and begin to formalize your goals. Most family-business owners and participating family members can agree on clearly defined goals for maintainingoperational integrity, providing financial security and preparing a next generation to lead the organization.
Success is determined by the decisions you make and the actions you take. Begin now to create a better future. Kevin Spafford serves as Farm Journal Media’s succession planning expert. His firm, Legacy by Design, guides agribusiness owners through thesuccession planning process. Send questions to Legacy by Design, 2550 Lakewest Drive, Suite 10, Chico, CA 95928, (877) 523-7411 or email@example.com