Top Five Considerations to Kick-Start Your Succession/Transition Plan

My top five considerations provide a snapshot of specific things to kick-start your succession plan.   Before we examine these considerations, let’s acknowledge that the word “succession” is being replaced with “transition”.  You might agree “transition” is a more user-friendly word.

“Succession” gives the impression that the present owner is being replaced (or displaced).  This thought doesn’t sound appealing or motivating to someone if this means being “put out to pasture”.  When “transition” is used instead, the immediate image represents a “change”.  Although change can be frightening in some regard, it can also be exciting.  New experiences may emerge while specific stresses can be passed on to other family members through the transition process.  Sharing knowledge and wisdom with the younger generations can be rewarding. Celebrating successes as a mentor can be motivating.        

Some common threads prevent many farm family businesses from developing their transition plans.  The reason may simply be that other important tasks take priority.  However, what could be more important than protecting you, your family, and farm business?   Here are five considerations worth pondering to kick-start your transition plan.

1.     Identify Your Mountains.

Your mountains are the challenges you run into when you attempt to conquer a task.  Undertaking “transition planning” is a journey. You are likely to encounter a few mountains even before you start this journey.  What mountains are on your list?   

·       Is it fear?  Are you afraid of approaching the subject with family members?  Do you anticipate confrontation which you would rather avoid? 

·       Are you concerned that you may not have a successor?

·       Does the entire transition process seem too complicated?

·       Are you unsure how to begin?

·       Do you believe you have plenty of time to deal with transition planning?

Once your challenges are identified, determine three possible solutions or strategies to tackle them. 

2. Appreciate “Time”.

Time is money. 

Forbes Magazine shared Ed Slott’s quote: 

“Time is the greatest money making asset any individual can possess.”

This is true.  You have time to create your wealth as well as to protect your wealth for your family and yourself.

Time is also your friend.  Time allows you to prepare for a crisis situation as well as explore various transition options: 

§  Have family members eventually take over your roles.

§  Work with a partner with the option of a potential merger. 

§  Sell your business to an outside buyer (third party). 

§  Hold a liquidation sale of your equipment, buildings, and real estate.   

Time provides ample opportunity to groom a successor or convince a successor that they should buy your business rather than start one.

Time allows your successor to develop their skills, learn the ropes so to speak, and arrange the financing required to buy your interest.

 If your first choice for a successor doesn’t work, you have time to look for others.

Time also permits you to “work” on the finances of your business, analyze your business, and if necessary, make improvements to showcase its value.

3. Do Your Homework.

Financial statements are important documents to confirm the current and past performance of your business.  Your Income and Cash Flow Statements reveal your business’ earning power as well as its potential value.  Your Balance Sheet and Net Worth Statement are beneficial in determining the tax liability and current market value of your assets.  

“Opening the books” to a third party or even your family shows whether you are being rewarded for your blood, sweat, and work.

If you are looking to increase productivity, another helpful process is a SWOT Analysis. This identifies your business’ strengths, weaknesses, opportunities, and threats. Then you can determine appropriate strategies to implement.  Typical questions are:

(S)  What do we do exceptionally well?

(W) What could we do better?

(O)  What opportunities do we know about, but have not addressed?

(T)  Are weaknesses likely to make us critically vulnerable?

Writing a Business Plan for a farm operation can be a useful lifeline to understanding why you do what you do in your business.  Key sections highlight your potential market, customers, products, and services, as well as mission and vision statements.  Probing what your business currently looks like and what you want your business to look like in the future can be helpful in making decisions.   Your Business Plan passes on powerful insight to potential successors.

4.    Build Bridges and Close Gaps. 

               

You don’t know what you don’t know so you may need to lean on your advisors for help with your transition plan. Simply put, “No man is an island entire of itself” which emphasizes the need to build bridges with experts to implement a successful transition. Your experts range from, but are not limited to, accountants, lawyers, lenders, investment advisors, insurance representatives, business coaches, and financial planners.  Collaborate with these experts. “Collaboration” is a great word since this means to work jointly on an activity especially to produce or create something.  Your creation is a thorough transition plan. 

Building bridges also occurs with family members. If you and your family are miles apart in your discussion on transitioning the business, consider closing the gap.  There’s no better time than now while you have time on your side. At the very least, start slowly  with conversations which feel safe.

Scheduling regular business meetings effectively keeps everyone informed about business affairs and actively seeks their input. Decisions which ensure the business survives and thrives are important to its success, creating a legacy for future generations.  Others should be knowledgeable and informed about the business’ practices to ensure the business survives an unexpected tragedy.  The principal business owner may suddenly become ill or injured.  The worst possible situation may be an unexpected death.            

Using everyone’s skills and talents also closes the inefficiency gap.  Ernesto Sirolli, author of the book Ripples from the Zambezi, shared three areas in business, referred to as the “Management Trinity”.  They are producing the goods or services for sale (which is the labour component), marketing the product, and managing the finances.  One person is generally skilled in two of the three areas.  Knowing your strengths and those of your family members will determine who is best equipped to oversee the management areas.    Sharing the responsibility with others who have strength in areas binds forces to create a win-win situation for the business.

Conversations which are respectful and honest are important for family who work side-by-side to build a successful business.  Without good communication skills, family members are likely to jump to conclusions, do things their own way without any consultation, and make rash decisions.  In the end, the family business will suffer as a result. Closing the communication gap will create family harmony rather than conflict.   Developing a Code of Conduct and a standardized operating procedure for addressing conflict will help in building family unity. 

5.    Focus on the end result.

“Begin with the end in mind,” advises Stephen Covey, in his book, The 7 Habits of Highly Effective People.  Ignoring transition planning is like carrying the weight of the world on your shoulders. On the other hand, when you begin the process, you will feel a sense of renewed energy as you take charge.  When you schedule regular business meetings or appointments with your advisors, you will achieve small victories on your journey. These baby steps eventually see you to the end.  Since this journey may take between three to ten years, any progress towards the ultimate goal is better than no progress.  When you persevere through your challenges and use your time wisely, you will arrive safely at your destination with a transition plan in place.  

I said it before in a previous blog, Don’t Wait, Just Start, and I will say it again, “You have to ‘Eat That Frog’.” The items on your to-do list need to be identified.  Transition planning is something you can’t put on a list but the incremental tasks can be broken down into a list. The longer you procrastinate the more overwhelmed you will be with the entire process. Start small but start nonetheless.  You will be glad you did.              

Looking at a Dairy Producer’s World From Their Perspective

Kernaleguen Dairy Barn

 

There is a saying, “You can’t really understand another person’s experience until you’ve walked a mile in their shoes.” I would like to add that if you can’t walk in their shoes having them tell you is the next best thing.  As part of the AG Advisors Forum in Melfort, Saskatchewan last week, attendees had the privilege of touring the Kernaleguen Dairy Barn and later in the afternoon listening to Brenda Kernaleguen enlighten her audience about the expectations they have from their advisors. Brenda graciously granted permission to have her presentation shared on this blog website.  Her presentation was insightful, sincere, and honest. Above all, her presentation is worth sharing with advisors who deal with the clients in their respective farming communities.  Listen in; I am sure you will agree.

 

 

Good afternoon everyone,

 

My son Paul and I were just discussing the fact that despite our farm’s upgraded technology, we are still having a major battle with mastitis in our main herd. Our somatic cell count is verging on violation, so it is imperative that we isolate the source of the problem, looking at inflation cleanliness, the number of collect cows and their periods of absence, recipe formulas that may contribute to possible acidosis (resulting in inverted protein/butterfat ratios) and the moisture content of the various silages, checking whether any components such as DDGs, Jumpstart, or Energizer have been incorrectly calculated or missed altogether in the ration.

 

Now, who can tell me what I just said?

 

The first important point to keep in mind when you are dealing with farmers is that farming is no longer the fall-back position of kids or adults who are lacking either the energy, desire, or intellect to pursue post-secondary education or a career in a more challenging field. Farming has, in fact, become a science demanding a high degree of continuing education and effort in order to be successful. As experts in our field, we have a language that accompanies our work, just as you do in your field. In order for farmers and accountants or bankers to communicate, therefore, we must be respectful of one another’s expertise while trying to find a common language through which to communicate with one another. You explain things to us in layman’s language and we will try to do the same. Please do not try to wow us with fancy terms and statistics and we promise to refrain from identifying you with either parts of our cow’s anatomy or the substance that is regularly expelled from that anatomy.

 

Rule #1, then, is “No bullshit from either side!”

 

A second helpful exercise for anyone dealing with a farming operation is to try and gather as much information about the individual members of the business/family as possible.

 

Who has what education?

Who does the work?

 

What work is being done?

Who is a visionary? Who is not?

Who is technologically savvy? Who is not?

How is debt perceived by each of the individuals?

What regard is given by each person to family dynamics such as safety, vacations, recreational activities, homes and yards.

 

Believe me when I say that multimillion dollar family farming operations can dissolve over such seemingly trivial things as dog food, TV antennas, grass mowing, or egg money – to name but a few.

 

You see, as much as one person (or perhaps several family members) might like to castrate Uncle Bob and send cousin Sally to Hinterland, family business operations do not lend themselves to such easy solutions. An astute accountant or banker would hopefully be able to delineate the generational differences in regard to technology, encouraging the older generation to recognize the efficiency and statistical value of computerized data, while keeping a check on the younger generation’s casual lack of regard for debt and its consequences. As my son so often points out, “If your farm is not moving forward, it is already dying.” So try to respect Grandpa’s legacy of hard work, without ignoring the present generation’s desire to improve and expand. Always be aware of personalities who simply want to posture for attention’s sake, or because they have finally found an arena over which to exert control. One stubborn family personality can often stall a farm to death, so it would be very helpful if you, as the “professionals,” could outline in specific terms what the ramifications of killing a family business will look like, and how it will affect the person in question. Few people survive a sinking ship, and if they do, they have irreparable damage to deal with in the end.

 

Point #2 then, is “Find out who you are dealing with, and deal with them!”

 

A third and extremely helpful tactic in dealing with family farm businesses is to come to the negotiating table with as much help as you have time and brains to uncover. There is money out there. There are possible profit-producing programs available. Are the hard-working family employees aware of these possibilities – not always, and I would venture to guess, not even often. They don’t have time to read all the brochures; they are simply too busy. You will win for yourselves undying loyalty and support from farm members whose business difficulties can be resolved by your knowledge of a possible solution.

 

For instance, a farm’s crippling water bills (as is the case for many dairies) might be eliminated, or at least diminished, with a reasonable bank loan and a matching government grant through the Growing Forward program that would enable the possible drilling of a well, or the laying of a pipeline to a more economically sustainable water source. Or, you might reduce the personal tax of a farming family member just by suggesting he or she keeps a log for trips made in the family vehicle for farm business. A percentage of those trips can be deducted.

 

Perhaps you could make a point of outlining the advantages of incorporation versus operating in a partnership. Twenty years ago, my husband and I went looking for a different tax arrangement for our farm, when we had too few kids to bring in any child allowance money, and not enough depreciation to offset our tax bill. We paid $28,000 that year to the government – the salary of a hired hand my husband pointed out – but it simply went into the hands of the government of the day, never to be seen again! Incorporation soon followed.

 

And speaking of incorporation – try to inform families just what can and cannot be legitimately claimed as corporate expenses. List them, even. Knowing takes the guesswork out of doing the books, and puts all families involved on the same page.

 

If succession planning is your forte, then be as creative as is humanly possible. Insurance payouts for the non-farming sons and/or daughters is not always the most reasonable or affordable solution -- although it might be, if RRSPs can be used to fund the insurance payments. Exploring the assigning of differing types of shares might be an option; assigning off-farm assets such as real estate or other valuables may also offer interesting options. Whatever you do, please try to refrain from the familiar mantra of days gone by, “Let’s make our decisions with just the siblings and no spouses.” Hello! Each family member willingly chose that spouse and like it or not, they have to sleep in the bed they made. Those spouses often made major sacrifices to become a part of that particular family business operation and for that reason alone, they deserve a voice at the table. Will it be complicated? Yes. Will it be messy? Probably. But the mess and the complications are going to happen anyway, and it will simply destroy families behind closed doors, if those members are not allowed at the table. Your best chance at a solution is to have every member present – bring a sword and a shield if necessary.

 

After this lengthy explanation, then, point #3 echoes the trusty Boy Scouts – “Come prepared.”

Lastly, let me read you my Christmas letter from 2015.

 

 

T'was 5 days before Christmas
And all through the barn,
Disaster was lurking
Starting with a 4 AM alarm.

The robot was calling,
Air pressure was low;
Out into the winter
Trudged sleepy-eyed Joe.

A crack in the compressor
No glue could set right, 
So off headed Brenda --
in to the dark night.

A part was secured 
From the Dairyland store, 
Only to discover that
Of disasters - there were more!

The scale on the mixer
Simply gave up the ghost - 
All our measured out rations
Would be nothing but "toast."

And just when we thought
It couldn't possibly get worse, 
The milk started heating --
Would Joe break down and curse?

No, such is our life 
On a robotic dairy;
We win some, we lose some,
Some days are plain "hairy."

But thankful we are 
For the work and the wonder
Of caring for cows
And putting right what's asunder.

Work is our play;
It keeps us at home - 
But when happiness abounds
Who needs to roam?

Wishing you and yours a Dairy Christmas and a Happy Moo Year!

 

 

The response to my Christmas letter was varied. Some friends thought I’d made up the circumstances just to generate a seasonal laugh. Others hoped that next year would be better. When I explained that all of these events had indeed happened in just one day, five days before Christmas, and I had not fabricated a single detail, every friend registered a note of alarm.

 

The truth of farming is that it never ends. You take the farm’s problems with you to bed at night and they are still there in the morning, no matter how strong the breakfast coffee. Vacations are few and far between, if they happen at all! Meals and, in fact, most events that other families would call “ordinary” are often unpredictable and inopportune, as is the weather and the mates your children choose to marry!  I have a set of tea cozies, (those fabric tents you pull over a teapot to keep it toasty) that I regularly tug over dishes of hot food to keep our meal warm while we tend to a robot that’s stopped, or a calf that’s fallen in the gutter, or a bovine birth that’s rapidly going wrong. Supper is still edible at 11:30 pm - not an unusual occurrence on our farm!  

 

I remember barely sliding into church one Sunday when the power had flashed off at 5:30 am and had stayed off for two hours. We were still milking in the parlour at the time (this was prior to our robot installation) and a fellow teacher friend had commented on how he’d missed his hot coffee that morning.

“Hey, how’s does a power outage affect you guys?” he queried.

“Well,” I explained, “when the power stops, all 24 milking claws drop to the cement and we have to race up and down the parlour to pull them out from under the cows before they get stepped or crapped on. The head-gates holding the animals in their milking positions lock in place and all the fans go off, as well as the lights. So now we have to contend with 24 hot, increasingly agitated cows mooing in the dark, along with the rest of the sweaty herd confined in the holding area behind them. We do have a generator to run the parlour, but it means driving a tractor to the replacement power source, hooking up the PTO, and restarting all of the equipment from the compressor to the bulk tank to the parlour itself.”

With a rather stunned expression on his face, my colleague managed to stammer, “I will never look at a power outage in the same way again.” And he wandered away.

 

My fourth and last point is this, “Yes, “shit happens,” most often and most profoundly on a farm.

 

Please be empathetic. Whether it means rescheduling a meeting, driving to the farm rather than meeting in your office or skyping a clan gathered around the supper table at nine pm, a farming family will certainly appreciate your understanding support.

 

Thank you for the opportunity to speak to you this afternoon. I hope I have enlightened you somewhat in the fine art of dealing with farming families as businesses. Remember these 4 points:

 

1.     Speak to be understood – no bullshit from either side.

2.     Find out who you are dealing with – and deal with them.

3.     Come prepared. Even better, come with creative and problem-solving suggestions.

4.     Expect the unexpected at the most inopportune times and be as helpful as you can.

 

Other than that, as a dairy farmer, I implore you to vote “no” to the TPP if you have the chance, eat as much cheese as your bowels will allow you, drink milk and smile at dairy people every chance you get. They may only be half awake but they’ll appreciate the warmth of your attention! Thank you.

 

 

Top Six Reasons Business Owners Should Meet With A Financial Planner

 

 

“I take you … to have and to hold, from this day forward, for better, for worse, for richer, for poorer, in sickness and in health, until death do us part.”

This marriage vow can be easily confused with the verbal commitment many entrepreneurs make to their business.  I know how important your business is to you. After all, I am married to a farmer.  Whether you are looking to become engaged to a new business or are exiting a present business relationship, you face a huge undertaking.  When I heard Alison Anderson share her story about her newly-formed business, I was intrigued by her intuitive need to help others buy or sell theirs. I can confidently say that if you know someone who is looking to do either, buy or sell, you will want to point them to SuccessionMatching, a “dating service” which matches buyers and sellers.  Alison has graciously allowed her story to be reprinted at my blog website.

~ ~ ~

 

Six years ago I had a client at Community Futures who was looking for a way to sell his plumbing business without disrupting it in the process.  He knew it was going to be difficult to find a buyer while maintaining the strong working relationships he had with his suppliers, staff and customers. It occurred to me then that this was a problem many business owners were going to face in the near future. Eventually, it is a problem every business owner will face.

I decided then to take an economic development approach to succession planning and built www.SuccessionMatching.com to address this problem. We are an online platform that allows business owners to actively search for buyers while maintaining control over privacy. We also connect site members with economic development officers who can provide resources and advice on where to start their transition plans.

There are three types of succession plans: family transition, employee share ownership programs and third party sales. Over the past five years, I have facilitated many succession plans, gone on speaking tours, and worked directly with clients within all three types of succession plans. From these experiences I have documented trends and pain-points familiar to thousands of business owners who are going through the succession planning process. SuccessionMatching and Community Futures Saskatchewan have partnered to put together a free step by step road map for business and farm transitions:

http://cfguide.successionmatching.com/

It is important to involve the right professionals throughout the succession planning process to help ensure the transition goes smoothly and maximize retirement funds from the sale. One of the key advisors that all business and farm owners need to meet with is their Financial Planner.

Here are six top reasons business owners should meet with a Financial Planner before selling their business:

 

1. Evaluation of their current financial situation.

 

2. Identification of retirement goals, places you want to travel and how much to put away (if any) for inheritances.

 

3. Calculating how much you will need in retirement.

 

4. Mapping out retirement goals. You have worked hard to build up your business, now is the time to do what you have always wanted to do.

 

5. Understanding your cash flow and expenses during retirement years.

 

6. Designing an investment strategy around your changing needs and bringing in necessary experts to accomplish these milestones.

 

 

Alison Anderson

CEO, SuccessionMatching

~ ~ ~

 

Alison gladly welcomes feedback on her six points why business owners should talk to a financial planner before they look for a buyer. 

 

 

 

 

 

Do You Know Your “True” Cost of Farm Living?



Like any business, running a farm operation requires a viable cash stream. Along with funding day-to-day expenses and debt payments, farm operations have to be prepared for unexpected emergencies:  a tractor breaks down; a farm well collapses; and the roof on the cattle shelter leaks. Goals, dreams and aspirations are also a big part of the overall farm plan. Dreams of owning a different combine, purchasing additional farm land, or opting to fertilize hay land all require cash flow.  Among the money requirements is also the need to support the family’s lifestyle. 

The article, Can the Farm Afford your Cost of Living, published in AgriSuccess, posed an important question. Unless you keep actual records, determining the answer can be difficult. Whether you are the parents headed towards retirement and have children who will take over the farm operation or whether you are the child (children) taking over the family farm, knowing your lifestyle expenses is important. Elaine Froese, a Farm Family Business Coach, strongly encourages family discussions to be part of the transition process. Elaine's numerous articles appear regularly in the monthly Grainews publications. This one in particular, How Much Does Your Lifestyle Cost, may peak your interest.

Whether a financial plan is prepared for a young couple who are working to support their farming operation or for a couple who is choosing to transfer or sell the farm, the premise is to determine which way the money is flowing (in or out of the farm operation).  There are several questions requiring answers.  Who is supporting whom? If money is being injected into the farm operation, how long will this continue until the farm can financially stand on its own? If the reverse is occurring with funds being withdrawn, what level of lifestyle can your farm support?  

Knowing your lifestyle needs today and your expectation of a lifestyle in the future can only be determined by tracking personal expenses.  Quite often I have seen bank transactions, both personal and business, processed through one account for sole proprietors. Since you are the sole proprietor of your operation, there may not appear to be any need to keep the transactions separate.  However, the strategy is to separate farm transactions from personal ones and manage the farm operation as a business.  Whether you pay a salary to your personal account or lend money to your farm operation from off-farm income, the benefit is tallying the cash flow. Separation provides clarity.  Even though receipts are recorded for farm income and expenditures into accounting ledgers, a quick glance at the farm bank statement instantly provides the current financial status. 

Seeing is understanding.  Having the two separate accounts, farm and personal, isn’t intended to complicate your life. Rather, the purpose is to account for your lifestyle needs.  Quantifying the money required for sustaining your farm business or lifestyle will be revealed in the financial statements.  Even if you borrow money from one account to fund the other, you will have a better understanding of the funding needs of both your business and personal lifestyle if separate accounts are kept. The process may place both your business and family on a controlled budget. The advantage of doing so is that personal goals may be more easily funded.

One personal goal is to save for retirement. In order to know how much to save, you need to know how much you spend.  Your retirement fund might evolve from the equity in farmland.  The sale proceeds or rental income generated from the farm land may be one source of retirement income along with non-farm investments.  A financial plan will solve the mystery of the unknown retirement income.  Because the questions appear endless, the Saskatchewan Ministry of Agriculture created this excellent workbook, Succession Planning-Estate Planning Checklist for Farm Families to walk you through the process. The appendix section provides specifics worksheets: Collecting the Data; What Are Your Income Needs; and What Can the Farm Afford to Pay You. 

Farming provides a rewarding career opportunity and a unique way of life for many families.  However, this way of life can sometimes present stresses from many avenues. The confusion and uncertainty can dissipate with advanced planning and advice from qualified professionals.