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Can we agree transition happens?

Kevin Spafford for Progressive Dairyman Published on 09 March 2017

For John, the focus was never about just making money. What started as a desire for independence quickly became a quest for sustainability and long-term success. John readily admits, “Nothing great is ever accomplished as a solo affair.”

So, from the very beginning, he and his brothers started with some very big ideals. Pooling their resources and operating as a single business unit was central to their success. It reinforced the value of critical mass and the worth of sharing capabilities among a team of leaders.

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Going from a simple farming operation to a full-scale food processing company was no small task. For John and his wife, Sara, it was all about building a viable operation and living the kind of lifestyle they dreamed about.

Now, 30 years later, with their children involved and a multifaceted business to manage, they realize it will take an extraordinary effort and specialized planning to pass their interests in the operation to the next generation as a going [read: growing] concern.

When John and Sara came to me, they had some very specific goals to meet, including:

  1. Create a retirement option that allows them to continue enjoying the lifestyle they’ve come to appreciate

  2. Control the land assets for their benefit and then transition ownership to their lineal descendants

  3. Design an ownership and management transition plan for passing the operation to the next generation

  4. Provide equitable benefits for all of their children and leave a meaningful legacy for their grandchildren

  5. Mitigate or eliminate their exposure to the estate tax and other transfer obligations

A comprehensive succession plan is comprised of four separate yet interrelated building blocks: financial security, ownership transition, leadership structure and the estate plan. Due to their situation, it was very important to start with an analysis of John and Sara’s financial security.

Logic dictates that until someone is reasonably comfortable with their financial situation, and the means of support for the rest of their lives, they won’t be willing to make the decisions and take the actions necessary for succession.

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On the flip side, once the proprietors are financially confident and certain they may continue to enjoy the fruits of their labor, most leaders are ready to step back and guide the next generation in a gradual transition of ownership and management responsibilities.

In this case, John and Sara had plenty of life insurance and many of the requisite legal agreements necessary for running a successful business. However, they were woefully unprepared for retirement. Like most entrepreneurs, John and the other leaders had focused on business growth and had re-invested every dime of profit back into the operation.

They leveraged current holding to acquire more land and never really considered paying themselves first. In a quest for equity growth, John and the others did not think about how, when or even if they may “cash out” of the operation and slow down someday.

Using a comprehensive and coordinated approach, John and Sara learned about personal money management and the idea of ensuring their own financial security before continuing to push for more growth. As a first step, we established a plan to sell John’s interest in the operating entity to the next generation at fair market value less the partial-interest discounts.

Then, with the help of their attorney, we established a sale to an asset protection trust which was designed specifically to provide income for John and Sara, permanently transfer the land to the trust and reduce their exposure to estate tax, all while allowing them to maintain control.

With the right combination of tools and techniques, John and Sara now have a secure retirement. They’ve sold the operation to the next generation, secured the land as a family legacy for their descendants and substantially reduced their exposure to the estate tax.

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Succession planning and wealth management, they learned, are not just about money. The process is about making good decisions and planning for the future. Most people appreciate a comprehensive and coordinated approach to succession planning. They want a plan designed to help them achieve their goals and create a lasting legacy.

Your situation may vary; though true, this story is for illustrative purposes only and designed to encourage family farmers, ranchers and agribusiness owners to plan for succession. To address the primary issues in succession, I recommend you follow a defined planning process.

The Comprehensive Succession Solution is a four-part model, designed to provide financial security and create a lasting legacy. The Comprehensive Succession Solution includes:

1. Financial plan – Providing financial security for the owners and dependent family members

  • Create retirement choices
  • Diversify investments
  • Manage debt
  • Maintain lifestyle

2. Ownership transition – Combining financial, tax and estate planning strategies to design the most effective transfer of family business ownership to the next generation

  • Choose entity structure
  • Explore financing options
  • Mitigate taxes on sale or transfer
  • Negotiate buy-sell provisions

3. Leadership structure – Structuring the business and preparing family business leaders to manage the operation

  • Adopt management structure
  • Define roles and responsibilities
  • Agree on compensation and benefits
  • Assess readiness; hire to start

4. Estate plan – Planning to efficiently and effectively transition the estate due to premature death

  • Eliminate estate tax
  • Minimize transfer costs
  • Make equitable distributions
  • Provide income replacement  end mark

Kevin Spafford, author of Legacy by Design, Succession Planning for Agribusiness Owners, is a wealth manager with Ryan Wealth Management in Yuba City, California. Email Kevin Spafford. or (530) 671-2100.

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