The importance of a clear succession plan

In previous articles, we’ve explored the importance of planning, and why every operation needs two separate succession plans. But even operations that have plans in place sometimes fail to transfer to the next generation. Why is that?

For decades, the conventional wisdom held that succession plans failed because of economic or environmental reasons:

• Taxes, particularly estate taxes.

• The challenge of providing a “fair” inheritance to all the children – those in the operation and those off-farm.

• Poor financial management.

• Too much leverage, coupled with a bad crop, or an ill-timed decision to “diversify” into new crops like hemp or barley.

An MIT/Johns Hopkins study determined that 60 percent of failed succession plans were due to a breakdown of trust and communications within the family. Another 25 percent of the failures were caused by failure to prepare heirs to lead the business, while 12 percent were due to a failure of mission or vision. Only three percent of the failures were due to a poorly designed plan. (Source: Williams and Preisser Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values).

We’ve witnessed trust and communication issues with the clients we serve. Perhaps you have as well? Maybe even in your own family or a neighboring farm?

• Dad is a stoic individual, and not a particularly good communicator. He’s happier in the cab of his combine than in a meeting.

• Clients’ children have told us, “We’re frustrated. Dad won’t tell us ‘The Plan’. Or even if there is a plan! When will he step aside or scale back and give us a chance? When will he feel we will be ready? What do we have to do to get there? Which of us will run the operation when he’s gone? What will the other siblings’ roles be?”

• We’ve also seen sibling rivalry and friction, sometimes stemming from perceived slights dating back to high school. Occasionally, there is a perception that one of the children is getting preferential treatment. Dad’s always managed to keep a lid on the pot, but will it boil over when he’s longer at the helm?

• Sometimes the kids are fine, but it’s their spouses who stir the spot. We’ve seen situations where a son-in-law or daughter-in-law who didn’t grow up in a farm family has understandable concern about their future financial security. (Not knowing what “The Plan” is can cause fear and resentment). And we’ve also seen situations where that spouse was determined to make trouble “just because” they’re unhappy.

• Occasionally these concerns are insurmountable, but more often good communication can settle things down. However, these can be emotionally-charged conversations, and may require an impartial facilitator/moderator who doesn’t share your last name.

The second leading cause of succession failures is failing to prepare heirs to lead the business. Have you established clear expectations for the next generation? Educational requirements prior to joining the operation, and also ongoing professional development and membership in regional or national farming associations? Does the next generation clearly understand that advancing in your operation requires work and achieving objective benchmarks? Has the senior generation identified and trained the children who will take over each role? Agronomist, irrigation/fertigation, field manager, shop manager, storages, trucking and logistics, marketing and financial oversight?

The third leading issue is a failure of mission or vision. While you might think the kids who grew up on the farm (and the spouses they married) would all share a common vision, that’s not always the case. When important questions come up – buying or selling acreage, adding irrigation, adding a new crop, maybe even dabbling in solar – what is the agreed upon decision making process? Having a mission and vision statement in place allows you to turn to that for direction when the inevitable conflicts surface.

It may be much easier to develop that mission and vision statement and define the process for decision making when your family members are objective, rather than trying to build consensus when emotions and tempers are running high. How does your family deal with conflict and big decisions? Does everyone get a vote? Is there a designated family member who makes those big decisions and either get applauded or blamed for the outcome? Or have you brought in a non-family CEO to make the tough calls?

Putting a well-thought-out plan in place when times are good, can save the operation – and the family relationships – in challenging times.

Copyright 2023, Agribusiness Succession Advisors, LLC. All rights reserved. Securities offered through Osaic FA, Inc., member FINRA/SIPC. Investment advisory services ofered through Sagemark Consulting, a marketing name for Osaic FA, Inc. Osaic FA is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic FA. CRN-5846746-073123

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