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Succession planning is a process, not an event

PD Editor Karen Lee Published on 03 February 2011

With a low economy affecting interest rates and farm values, now is a good time to take care of planning the future of your business. Dan Rupar of Ruder Ware LLSC out of Wausau, Wisconsin, specializes in estate planning and business succession planning.

These plans are not only integral for intrafamily farm transfers, but also for two or more farmers establishing a joint operation, he says.

Only about 30 to 35 percent of family businesses make it to the second generation, and just 10 percent make it to the third generation. He adds that while 78 percent of families intend to pass their business to their children, only 34 percent have created a succession plan.

“Succession planning can be a struggle,” Rupar says. “It’s a lot of hard work and takes concentration. It is not something you can just do in your spare time.”

That said, the harder you work at it, the easier it can become. “Succession planning is a process, not an event,” he says.

When done right, by addressing both the succession of management and the succession of ownership, this process can act as a risk management tool for both business owners and successors.

However, succession of management and succession of ownership are two different things and can happen at any time independent of each other.

As with any good process, the foundation for succession planning must be laid first. This is opening the discussions between owners and potential successors.

“Laying the foundation prior to going into an attorney’s office is going to be more efficient and cost-saving, rather than using the lawyer as a counselor,” Rupar says.

Roadblocks to establishing these business relationships are often self-imposed and result in poor group dynamics. “Communication ends up being a big obstacle to getting anything done,” he says.

More often than not, it is because family communication is not kept separate from business communication. Family rivalries, personality differences, conflicting management styles, differing commitments of time and effort and disputes about compensation and benefits can all serve as roadblocks to establishing a good succession plan.

The delicate nature of human relationship has to do with trust. To allow trust in the planning process, Rupar recommends, “Be honest about what the problems are, anticipate relationship problems, be objective and don’t let small relationship issues become bigger than what they are.”

He suggests the following six principles be maintained in order to keep trust in the process:

1. The relationship must be based on the owners’ quality, compatible shared values and goals for the farm and as individuals.

The concept of “we” should overpower the concept of “I.” Is there mutual respect and concern for one another? Are actions consistent with words?

2. Differences in the owners’ styles of management and personalities may be the key to the farm’s success or a primary cause of conflict.

Do the owners’ skills and interests fit the needs of the farm? How do they fit together and is there a void that needs to be filled? Once set, everyone should respect management, as well as each person’s individual responsibilities, by staying within their position.

3. Potential rivalries must be recognized, evaluated and brought under control.

Sibling, spousal and owner rivalries need to be addressed. Determine who should be included in decision-making and how conflicts should be resolved.

4. Planning for the farm must also recognize the convergence, and often conflict, of family values versus business values.

Families have unconditional love, support and loyalty, and you cannot be fired from your family. However, a business must be based on results with job performance recorded and evaluated. Poor performance should not be overlooked in a business, as it can have a negative consequence for all involved.

5. Planning must recognize the need for consistent and adequate communication between owners and within the organization.

Poor communication skills erode trust and adversely impact relationships. It is not good to have a family member fail because you haven’t been honest with them.

6. The owners and successors must be committed to the full planning process. It is primary and necessary.

“You have to be committed. It takes a lot of time,” he says. “It is a process that can’t just be put in a drawer.”

The plan should be adjusted as time goes on. To best handle this, Rupar recommends adding it as a part of the business’ annual planning.

During the process, the parties involved need to identify individual goals, perform personal and partner assessments, establish a vision for the farm and outline core values. When that is finished, an agreement can be constructed keeping those items in mind.

A succession agreement may or may not include ownership, responsibility, contributions, management, compensation and distributions and classes of ownership.

Management and decision-making can be as flexible or rigid as the parties prefer. Powers and authority should be designed, so each person knows their boundaries.

Corporate formalities, such as meetings with agendas, are good to include in order to provide a forum for discussions. Deadlock provisions or a management agreement should also be included in the event an issue cannot be resolved.

Money is a common cause of conflict and disagreement. “It is something that is uncomfortable to talk about,” he says, but encourages producers to deal with it and have those discussions.

Determine the appropriate method of distributions for those at stake. Compensation is not usually addressed in a transfer agreement, he says, but it should be discussed. A separate agreement can be drafted to handle its structure.

As you consider transferring ownership, you should address who is a permitted transferee. Could they be spouses, children, owners, other businesses owned by owners or trusts? Would you consider ownership with limited voting rights?

Restricting methods of transfer and transfers to a third party should also be considered, as well as how ownership will be dealt with when disability, divorce or death occur.

Lastly, come to an agreement on the purchase price and terms. Keep current and future tax implications in mind when setting that price.

Farms are highly specialized businesses and, with the addition of family, can have a highly charged emotional atmosphere that doesn’t make ownership transfer easy. Employing succession planning can help you minimize future disagreements by minimizing surprises. PD

For more information on succession planning, contact Rupar at or (800) 477-8050 .

Karen Lee
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