The 4 D’s of Transition Planning

 

 

Do you ever notice you are likely to buy into an idea when you understand why it’s important?   Understanding the “why” helps connect the dots of reason to action. It’s funny how as children we often asked the all-too-familiar question, “Why should I do that?” Once we grasp the reasons why an issue or task is important, we are more likely to buy into the idea spurring us into action.   Like a race horse running a track, weaving between the opponents in its path, the objectives are clear. Reaching the finish line means winning the race.  The objective isn’t necessarily to finish in first place.  The objective is to finish strong, believing that the task at hand is worth our time, effort, and in some cases, money.

 

Taking the first step to work through your transition plan is the beginning of your race to finish strong.   Your first step may be to understand the four factors that justify “Why should I do that?”

 

 

1. DESIRE

 

Desire is definitely at the heart of the issue. The reason most people choose their profession is because they have a deeply-rooted passion (desire) for the career they elected to pursue.  Plumbers become plumbers; doctors become doctors; and farmers become farmers because they have chosen to do what gives them the greatest pleasure and satisfaction.

 

Confucius said, “Choose a job you love and you will never have to work a day in your life.”  You have the ability to plant the seeds of desire, those things you love most about your profession, in your successor. You are proud of being a business owner.  You built an enterprise with hard work and endured difficult circumstances as well as triumphs.  Your responsibility is to pass along your wisdom, skills, and passion to the next generation of entrepreneurs following in your footsteps.       

 

 

2. DIRECTION

 

Having a direction for your family business provides clarity.   You must discern whether you take a “business first” or “family first” approach.  Does the interest of the business come before the interest of the family? In the development of your succession plan, discussions are important.  Important decisions must also center on timelines.  When do the responsibilities begin to transition in the various areas? You are not required to hand over the leadership role immediately because you may want to remain quite active in the business. However, at some point, you may only want the role of a mentor. When the direction is clear about roles and responsibilities, everyone involved is onboard.  

 

3. DRIVE

 

Changes shouldn’t deter your motivation. You are driven to help your successor transition into the management and leadership role of the business. “Teaching the ropes” to your successor as well as learning the latest innovative ideas from them keeps you active.   Your influence in the business will continue to exist even as your role gradually changes. Your drive, even as a mentor, continues to thrive and survive through the successes of your established business.  

 

4. DREAM

 

A transition plan allows the dream of your family business to continue beyond your reign.  Pride in the accomplishments you achieved will shift to the pride you have in your successor.  You distributed your knowledge, expertise, and wisdom as well as your assets. Letting go of the responsibilities of running your business allows you the freedom to pursue other dreams you may have put on hold.

 

                                                                            

You can probably think of other factors for action that may not be as positive as the ones listed above. If you don’t have a transition plan, you may have disharmony in your family rather than harmony.  Everything you diligently build up in your business could disintegrate before your eyes.  Rather than build trust, family members will distrust each other for unknown reasons.  You want to disarm any suspicions about your intentions for the family business before disagreements arises. The difference-maker will be when you are determined, disciplined, and decisive in your intentions to move forward with your transition plan.  Now is the time to begin your race so you can finish strong.       

If You Don’t Have a Succession Plan, You’re Not Alone

 

 

In the latest survey conducted by Canadian Federation of Independent Business, 51.1% of 8,303 respondents said they didn’t have a business succession plan to sell, transfer, or wind down their current business in the future.  That number is too high.  One may venture to compare this to dying without a will. How will anyone know your intentions for your business if you don’t have a formal written plan?

If we were having a conversation across your kitchen table or office desk, I would ask what’s stopping you. Most likely, I would share this survey so you would know you weren’t alone.  Although the majority of business owners opt to do nothing, procrastination is not the best solution.   

A handful of the surveyed questions released in May, 2011, are listed below for you to answer. See how close your responses resemble those of the 8,303 respondents.

Results:  Business Succession Planning

Do you have a business succession plan to sell, transfer, or wind down your current business in the future?  (Select one answer only)

9.4	Yes, a formal written plan
39.6	Yes, an informal plan (i.e. unwritten)
51.1	No (Skip to Question 12)

 

Approximately when do you plan to exit (sell, transfer, wind-down) your business? (Select one answer only)

9.8	Within 12 months
37.7	In the next 1 to 5 years
28.8	In the next 6 to 10 years
17.3	More than 10 years from now
6.5	Don’t know

 

Why do you not have a business succession plan for your current business (Select as many as apply)

52.4	Too early to plan for transition/succession
28.5	No time to deal with the issue
15.7	It is too complex
20.6	Can’t find adequate advice/tools to start
12.6	Don’t want to think about leaving
4.8	Conflict with family members/employees
11.5	Other (Please specify)

 

Please indicate your age category (Select one answer only)

1.4	Under 30
31.2	30 to 49
53.6	50 to 64
13.4	65 and over
.4	Decline to state

 

FEELING STUCK? THERE’S NO NEED

 

 

If you feel like you’re stuck and can’t move forward with your transition plan, consider this step-by-step strategy.

(1) Identify the reasons why it’s important for you to develop a formal written plan.  Once you understand its importance, you will devote the time and energy to work on your business succession plan until its completion.

(2) Identify the reasons holding you back.  List every obstacle that hinders your progress.  Your obstacles might resemble the ones listed by respondents when they were asked why they didn’t have a business succession plan.

(3) Then, write three possible action steps to conquer and overcome each obstacle.  

If you have a tendency to say, “I would but…” consider converting every "BUT" scenario into these three words:

          Believe in your ability to tackle this task because it’s too important to ignore.

          Understand you control the outcome of the succession plan, not anyone else. 

          Trust your family and advisors to help you with the challenging task.

 

I don’t know about you but I found the survey results alarming. I want to challenge you to defy the odds, accomplish what most would deem impossible.  Start today with an action strategy to work on your succession plan. Then the next time someone asks you, “Do you have a business succession plan to sell, transfer, or wind down your current business,” your response will be “Yes.”

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.              

A Different Look on Life

We often become obsessed with owning the perfect vehicle, wearing the trendiest brand of clothing, and vacationing at exotic destinations.  For people who have encountered a disaster in their lives, their focus and attitude change. Suddenly, all this “stuff” doesn’t matter.  Their perspective shifts to more concrete things in life: their happiness, health, and family – to name a few treasures.     

Richard Smelski, a farmer in the Shakespeare, Ontario area with over 35 years of agribusiness experience provided permission to reprint his article which appeared in Better Pork’s February edition.  Hakuna matata:  A good philosophy for life is an interesting read that provides a different look on life.

 



Enjoy the moment, for few can appreciate the beauties.



Hakuna matata:  a good philosophy for life

By Richard Smelski

As farmers and pork producers, we face a number of challenges and stressors.  But, we also have a number of blessings and opportunities.  Enjoy the moment.

Hakuna matata ("Hakuna matata" is a Swahili phrase, roughly translated "don't worry, be happy") was made famous through the animated movie The Lion King.  What do you believe - that happiness comes from within you or is it imposed upon you?  Is happiness an inward or exterior response?

“Bill” is a pork producer, friend, and mentor of mine. In my usual pursuit of the definition of success, I asked him, “How can you always be so composed, relaxed and deliberate in everything you do?”

Very quickly he replied, “Twenty years ago I was in a car accident. I was broadsided – I was in the driver’s seat - five ribs broken, bleeding spleen and I couldn’t breathe. I knew I was going to die and for those few moments, I sat there thinking, ‘If only I can live, I would always enjoy what I am doing.’ And then I took a breath.”

Bill manages a very successful farrow-to-finish operation, 1,100 acres cash crop operation, and he volunteers a lot. He’s very successful, very generous and - most of all - fun to be with. He has no desire to be the biggest, the best or the wealthiest, although I think he ranks among the top in each category. He enjoys life and the pork business gives him the opportunity to do so.

Bill now enjoys a balance in his life - how many can say the same? Does it take a disaster to realize the true blessings in life?

The pig industry, similar to many industries, is rapidly adapting to respond to concerns of advocacy groups, labour challenges, price fluctuations, regulation overloads, family challenges, and health concerns – to name a few influences.

Because these crises become standard in our business, does not mean that they need to be a standard for our attitude. Remember the dictionary definition of stress: force applied that strains or deforms the initial shape. If you cannot accept the new shape and enjoy it, the stress can break you.

It’s your choice to enjoy the stress and smile or not. Enjoyment leads to success, not the reverse.

Die Broke by Stephen Pollan, a great book that changed my life, proposes we should forget the idea of spending our entire lives saving and investing with the idea of idyllic retirement on a beach somewhere. His key principles are: quit today, pay cash, don’t retire and die broke. “The last cheque you write should be to the undertaker -- and it should bounce,” says Pollan.

Spend your money while you’re alive. The practice of accumulating a pile of money to pass on to your children is built on the mistaken notion that money has value in and of itself. The reality is that money is a tool; it is a means to an end. Spend your money while you can appreciate it. Plus, giving a pile of money to your kids can ruin them. Money or assets might be left to children or grandchildren at key points of need so the giver as well as receiver can both enjoy the gift.

Enjoy the moment, for few can appreciate the beauties that farmers take for granted. Nature surrounds us and we only need to look around to appreciate it.

You work in one of the most notable and worthy businesses – producing food. Pork producers are blessed with the opportunity to work in a transparent industry where farmers share their production techniques, innovations, health protocols, and labour- saving ideas readily. We take our blessings for granted.

If you couldn’t breathe, would you wish for anything different than what you are doing right now? Hakuna matata.

Line of Credit – The Upside and Downside

 

Have you ever tried something only to discover later that it wasn’t suitable for you? Imagine a relaxing game of golf, a sweater fashioned in trendy colours, or mouthwatering, savory lobster. You may not feel the same about certain activities or things as your friend.   There is truth in Paul Alessi’s words. “There are two sides to every story.”

Depending on the story, situation, or product, you are likely to lean heavily one way or the other. You either like it or you don’t.  You prefer the upside and don’t see any downside. If you are optimistic, you see only the bright side and avoid the dark side.   

Such is the case with the various loan products on the market.  Loans have two stories, advantages and disadvantages. Different loan products are created specifically for different needs.  The features and benefits of a Line of Credit (otherwise known as a revolving loan) are designed to accommodate unique circumstances.  

 

THE UPSIDE

A “Line of Credit” is different from your traditional loan in such a way that you can access “borrowed cash” at any time for any purpose.  Like a credit card, a specific limit is assigned with a Line of Credit, allowing you to draw down to the limit.

These loan products are becoming incredibly popular. Having a Line of Credit is convenient for you and your loan officer.  Instead of running to the bank every time you need a loan, you make an application only once for a Line of Credit.

One major benefit is the interest is calculated daily only on the outstanding balance. You are only charged interest on the amount of money used. If you dip into your Line of Credit two days prior to payday, then interest is charged only for those days. Generally, the interest rate with a Line of Credit is lower than any credit card, saving you money on interest charges.   

Another benefit most people appreciate is that, unlike a credit card, you are not required to make specific payments monthly.  The monthly interest charges are billed against your available balance. However, the expectation is that deposits are made regularly to ensure the account revolves and is used appropriately.   

This pool of readily available cash can be accessed for any purpose at any time. When emergencies occur, you may suddenly find yourself in a pinch. It’s an acceptable practice to use someone else’s cash to pull you through a rough spot.  The question to ask yourself is whether you can become too dependent on a Line of Credit.  Even with a lower interest rate, the interest costs on a Line of Credit add up to a significant amount over an extended period of time. You may discover you are regularly touching the bottom on your limit.



Bank Statement - Line of Credit

 

THE DOWNSIDE

Lines of Credit can certainly be a security blanket when your emergency savings are inadequate to cover your present situation.  

The upside obviously spoke about convenience. We live in a world where “instant results” have become an expectation. Having access to credit for expenses or purchases is a privilege.  We shouldn’t take advantage of credit for every desire because one day we may find ourselves in financial trouble when we have overextended the boundaries.  The blog, Choosing Your Debt Wisely, proves how debt can quickly become out of control.      

As previously mentioned, one attraction of a Line of Credit (LOC) is the interest rate. Compared to a credit card or payday loan, the Line of Credit interest rate is lower than these two.  Take another step and secure your Line of Credit with property. The interest rate is reduced further simply because your promise to pay back the money is pledged by an asset, something you own.  The security can either be your home, vehicle, or investments.  You declare, “I solemnly swear to pay back every penny, and if I don’t, you may take my house, car, boat, and my children.” (I’m kidding about the children.)  Don’t overlook the risk you are taking when you pledge security.

The downside to becoming too dependent on Lines of Credit is that we never see the light, the bright side of being debt free forever.  Lines of Credit are loans.  Borrowed money eventually has to be paid back. As long as we are working and have the means to pay back borrowed money, everything rolls along until the income stops.  Job layoffs, sudden illnesses, and disabilities can interrupt a steady income. The inability to pay back the Line of Credit can suddenly mean financial devastation. 

Be wary of the convenience and low interest rate that a Line of Credit claims to offer.  It’s true that interest is calculated daily only on the amount you use; however, the financial damage occurs when you compromise security for convenience.  This loan product disguises borrowing money for purchases with a convincing argument that a Line of Credit saves you money.   Home equity loans allow the equity in your home to be used for other purposes: debt consolidation, home renovations, investment opportunities, and vehicle purchases.   The intent with this type of loan product is to simplify your life by combining your income and debt under one roof (one account).  You may be convinced the true intent is to lower your borrowing costs.  That’s a good point but you must know and trust yourself. Although this loan product and strategy may work for someone, it’s not necessarily the right product for everyone. Your responsibility is to fully understand the product and match the right one to your needs.

 

THE BRIGHT SIDE

Remember we know our spending habits.  Sometimes, we have a tendency to believe that if we have money available on our Line of Credit, we have cash but these are two different animals. Credit is not cash.

When I had a Line of Credit attached to my chequing account, I constantly did the math.  I calculated how much I could spend before I hit the limit.  That kind of wrong thinking left me frustrated. I finally recognized the craziness in my logic.  If my account was into my $1,000 Line of Credit by $956.55, I believed I had $43.45 in my account.  Seriously? I was in debt $956.55.  Nothing could change the math. For me, the worst part was seeing a negative balance all the time.  I always felt broke.   Then, I opted to replace my Line of Credit with a revolving loan product separate from my chequing account.  I preferred regular payments which ensured my loan would be eventually paid.  The best part was seeing the positive balance in my chequing account, even if it was only $1.

If you are disciplined, then you have no worries.  If you’re not disciplined and are madly in love with the Line of Credit product, I often recommended attaching the credit limit to a separate account, apart from your active chequing account.  Then you can apply consistent payments to the outstanding loan balance with the intention of eventually paying off the debt.

The secret is in knowing whether you can trust yourself with the freedom to have an endless amount of credit (not cash).  Your responsibility is to learn and understand the different loan products. With the right advice, you can match the right one to your needs.  Managing your debt responsibly is one sure way to live a worry-free lifestyle.