After the uncertainty of a global pandemic that spanned many months and confusion over potential changes in tax policy, your succession plan has probably ground to a halt. Yet, the risks of simply doing nothing are tremendous. How can you get back on track with your succession plan? Focus on these three areas.
Contingency Plans
This is planning for getting hit by the proverbial beer truck. Your goal is to be able to explain, in simple terms, how your assets would flow if an owner died, says Dave Specht, director of the Global Family Business Institute at The Drucker School of Management. “Successful families put contingency plans in place, which is basically a ‘Plan B,’ in case everything doesn’t go according to the bigger plan,” he says. “On the management side, we need to look at the knowing-versus-doing gap between the people who currently make decisions and those who would fill in if that person were gone.”
Cash-Flow Plans
Calculate your economic farm unit (EFU), which is the amount of farm profit (after servicing debt) divided by the number of families, says Paul Neiffer, CPA with CLA. “If a family generates $300,000 of contribution margin each year and the amount of family compensation is $100,000, the operation has three EFUs,” he says. “If two or less families are involved, the EFU is manageable. If three families are involved, there is no room for a hiccup, and with more than three, the farm operation should expect to be under extreme stress.”
Communication Plans
Succession discussions are stressful. “We don’t want to talk about someone dying,” says Rena Striegel, president of Transition Point Business Advisors. “Even families who communicate well tend to have a hard time being open.” If you fall into this category, Striegel suggests working with a mediator or facilitator to help ease the tension and encourage honest dialogue. Communication is about creating expectations, Specht adds. “Ultimately everyone is creating an expectation about the future of the farm, and that expectation can be founded on reality, or it can just be made up in our minds,” he says. “I try to get farmers to realize it is better to set the expectation than for your kids to dream it up.”
Listen to a podcast episode of with Dave Specht on “The Farm CPA Podcast” with Paul Neiffer:
