Preparing for transition
Four Tips to Help Farm Families Prepare for Transition
Over the years I have helped several clients with succession and retirement plans. Some have worked well and, unfortunately, some have not. The plans that didn’t work so well share four common elements. By exploring basic issues that pertain to succession, most people can make this transition easier on the family and the business itself.
Start planning early
Frequently I am asked, “How soon should we start to plan?” The easy answer is, “as soon as possible,” but that is easier said than done. The truth is that current owners need to have an honest conversation about how long they want to be in charge of day-to-day operations and continue working. They will need to discuss the timeframe of the transition — not only when it will start, but how long it will take to transfer responsibilities to the next owners.
Current owners also need to consider what they will do when they step out of the operations. Will they move to Mexico, or do they want to stay involved in some way? Defining the terms of retirement will form the foundation of the succession plan. This will influence how much money will be needed in retirement and when the owners will need it.
These conversations are also important to the next generation. Those who will be taking over the business need to be given time to learn how to run it. And like anyone new to a job, they will make mistakes. A defined transition can help the older generation accept the missteps without causing themselves a financial crisis. And the new generation can learn from their mistakes without sinking the business, and benefit from the support and experience of their predecessors.
Succession should be fair
Everyone wants to be fair, but when it comes to money and responsibility, a lot of family history often comes into play. Past arguments must be tactfully put to rest, and future dreams must be articulated and respectfully entertained. These discussions may take many months and they can be very emotional. But at the end of the process, it is important that everyone involved believes they have been treated fairly. However, this isn’t always possible. An objective third party can help facilitate difficult discussions about how to be equitable to everyone involved.
Determine the value of the business
In the early transition discussions, people tend to jump to the details about who needs to receive what, and what the tax strategy and payments will look like. However, these conversations are more productive when everyone has a shared set of facts regarding the business. So at some point in the planning process, an accurate valuation of the business must be done to document what a third party would pay so that everyone knows the true value of the business. This can help avoid bad feelings in the future, when one side may feel like they gave the business away, and the other side feels like they paid for the business twice: with sweat equity, and now in cash. There are excellent tools with which to pay the younger generation in ways that value their sweat equity, but using them requires planning.
Life, disability, and long-term care insurance are important tools to consider when planning for succession. These instruments can be put to a variety of uses including assisting with estate taxes, evening out inheritance, paying off debt, or providing income for a surviving spouse—all issues that need to be explored as planning the transition proceeds. It is important to understand why you have various types of insurance, and if they are no longer needed, how to get rid of them. Some insurance policies may still be worthwhile investment — but only as an investment. Again, these issues do not often have a simple yes or no answer — they require discussion.
How we can help
Addressing these four elements can really make a difficult transition easier on everyone involved. The business will also benefit from the stability that comes from developing and executing a coherent plan. The common thread in all of these situations is that it helps to separate emotion from business. A third party like an experienced attorney or CPA has the tools to help guide you through this process with an objective perspective.