Harvesting Family Harmony
04/15/17 | WealthCounsel Quarterly | Louis S. Shuntich, JD
Over the next 20 years, 70 percent of farmland will transfer to the next generation,[1] but it is estimated only 30 percent will stay as family farms[2]. When asked why there is such a poor success rate at keeping farms in the family, an elder rancher put it plainly: “Our technical and business skills are fine; it’s our people skills that need help!”[3] Ranchers and farmers are telling us that their weakest link in succession planning is not technology or information, but human relationship management.
Essential Communication
In succession planning, there is a close relationship between how well a family communicates and its probability of success. Healthy family businesses share decision-making and have excellent communication skills. But many family members are reluctant to communicate openly because they fear change or associate communication with conflict or a threat to their control. It is critical to discover the expectations of all family members so that each individual can consider and communicate what they would like to see happen regarding the future ownership and management of the business.
Mission Statement/Family Meetings
A necessary outgrowth of this communication is the creation of a mission statement that outlines the purpose of the enterprise and summarizes what is done, who it is done for, and how the organization conducts itself.[4] While this kind of abstract thinking is difficult, it can be effectively accomplished through family meetings that bring the stakeholders together to discuss important issues. To be effective, these meetings must be well structured. Each meeting should have an agenda distributed in advance so that each participant has a chance to prepare for the meeting. Attendees should come prepared and willing to listen while sharing information openly with each other.
Overlapping/Conflicting Systems
There are three overlapping and sometimes conflicting systems at work in a family business: the management system, the ownership system, and the family system. The management system is focused on the daily activities of the business, such as production and marketing. The ownership system is concerned with returns to current and future investors. The family system is concerned with maintaining family harmony in terms of unity and personal relationships that involve emotional feelings and generational authority.[5]
One of the great risks to an effective succession plan is having business conversations framed as parent-child exchanges. This confuses the family system with the management system. For example, by putting his blood, sweat, and tears into the operation, a father’s personal identity and self-worth are inextricably tied to controlling the business operation. If the father always presents himself as the boss in the family business, the adult child will likely feel like the hired help with no say in decision-making. When the father is not willing to relinquish control, the adult child may lose his motivation to stay in the family operation and find employment elsewhere.
The solution in such cases may be for the parent to let go of responsibility at a rate they can live with, and the child can handle considering the child’s skill and experience. Children who perceive themselves as having significant influence in decision-making are twice as likely to stay with the farm as children who do not.[6] In this respect, the father should understand that there is a window of opportunity for the heir apparent to take over. Otherwise, the heir may miss the chance to pursue other opportunities in life.
Don’t Gossip
Positive feelings family members have toward each other also contribute to family harmony and create a basis for agreement on the succession plan. Family members should avoid gossiping about each other, which can lead to misunderstandings and conflict. In other words, “if you can’t tell that person face-to-face what you are thinking, then don’t tell anyone else.”[7] Avoiding gossip helps with family trust and leads to mutual understanding about the appropriate behavior of family members in developing a succession plan.
Avoid Grudges
If family members experience conflict, they should not carry grudges. They should get it out in the open and discuss it in a positive manner, respectfully explaining their views, and then moving on. This will enable them to avoid turning a disagreement into a family fight that will end their relationship and any hopes for an amicable succession plan. This brings to mind the old adage to pick your fights carefully or, better yet, don’t fight.
Selecting Leaders
A most significant part of any succession plan is determining who takes leadership in the next generation. Succession plan leaders should have an assertive, decisive nature. They should also be free of personal defects that would impede their ability to lead the family business to success by making decisions that will be in the best interest of the business.
The parent should develop an understanding of whether any particular candidate has the necessary qualities by testing them with farm or ranch responsibilities. This can be accomplished by giving the candidates duties to determine who can best handle them. The parent should not leave it to the candidates to decide among themselves who is best suited to lead. Doing so often results in fights that destroy the family. Instead, the parent must look at the situation and determine who will lead. The candidates may not like the result, but they are used to taking orders from the parent and are quicker to forgive the parent than each other for a decision they don’t like.
Fair vs Equal
Next, what is to be done for those who get no leadership position on the farm or ranch? This is one of the most difficult issues parents face in terms of whether to treat them fairly or equally. Equal treatment eliminates the fear that one child is favored over any other and is a safe position to take, but that may not be possible if the business is to be handed down as a viable entity. A fair arrangement may not be equal. Factors to be considered include: [8]
• The value of family non-business assets;
• The importance of passing down the business completely intact;
• What has already been given to family members;
• What various family members have already contributed to the business; and
• What opportunities various family members have already given up for the business.
In order to pass the business entity completely intact, the inheritance going to children who will not participate in the farm should come from assets that are not central to the farm or ranch operation. It is not usually a good idea to give the nonparticipating children a passive interest in the farming operation. This is complicated because farm-participating children often want to see capital reinvested in the operation, while nonparticipating children will want to see cash. The active children will need freedom of operation to succeed. Like any closely held business, a farm or ranch only pays income to those actively involved in the operation. Unlike publicly held companies, farms do not pay dividends to passive owners. Worse yet, passive owners would still be involved in issues of tax reporting, financial statements, and banking issues for which they receive nothing in return, which is a prescription for family resentment and animosity. A common way of satisfying the demands of the nonparticipating children is through the purchase of life insurance.
Conclusion
Farmers and ranchers spend their lives nurturing crops and animals while maintaining their properties. They often fail to realize the importance of nurturing and maintaining family harmony for succession planning purposes. To be effective, planners engaged in succession planning must include instruction and coaching on how to build and maintain family harmony as a part of the succession planning process. The following is a short checklist of steps that should be followed by clients to help them through the planning process:
• Schedule a family meeting
• Define goals and objectives
• Identify possible successors
• Set a timeline for succession
• Get buy-in from family members
• Arrange a meeting with professional advisors including an attorney, CPA, valuation expert, financial planner, and life insurance advisor
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[1] 2012 Census of Agriculture, Preliminary Report Highlights, agcensus.usda.gov.Publications/2012/Preliminary_Report/Highlights.pdf
[2] http://findarticles.com/p/articles/mi_m1TOL/is_9/ai_n25102493/, (03/2011)
[3] Journal of Extension, Robert J. Fetsch, Extension Specialist, Human Development & Family Studies, Colorado State University Cooperative Extension, Fort Collins, Colorado, www.joe.org
[4] Successful Family Business Transitions, Rodney Jones, Prepared for the 2005 Agricultural Lenders Conference, Manhattan, KS, September 2005
[5] Supra 2.
[6] Some Do’s and Don’ts for Successful, Farm and Ranch Family Estate Trans, Extension Journal, Inc. ISSN 1077-5315, http//www.joe.org/joe/1999june/iw2.php
[7] “Midwest Producer”, Seven most common mistakes that lead to family farming failures, February 8, 2012, Ron Hanson, professor of Agribusiness, University of Nebraska-Lincoln
[8] Supra 2.
