There is an old saying that it is easier to build a business than to transition or exit one.
Often, one of the main reasons is that a person’s identity, along with their “why” or life purpose, is deeply integrated into the trials and tribulations of growing that business. Carrying on the legacy cultivated and nurtured by previous generations adds its own set of challenges. When combined with personal life stories that have shaped both individual and family experiences, this complexity can understandably come to a head during one of life’s most significant events: The transition or succession of a family-run agricultural business.
In this article, we’ll consider 5 approaches that, combined, could help to make the process of developing future leaders and transferring ownership a success.
1. Find a way to jumpstart the conversation
Much like jump-starting a tractor on a cold morning, sometimes all it takes is an outside power source to get things moving.
A technique used in our dairy creamery with multiple owners, as well as when facilitating family business conversations, is what we call the “drop-dead exercise.” Simply put, stakeholders write their names on pieces of paper. A name is then drawn at random, and participants are told plainly that this individual has died. The question becomes: “What do we do now?”. The selected individual may try to speak but is instructed to leave the room. In some cases, the youngest person or the individual most critical to a business’s future is chosen, simulating a life event that fundamentally changes the landscape and culture of the business.
This process typically stimulates immediate discussion, starting with the basics. Where are the critical documents: Wills, mortgages, rental agreements, ownership arrangements for cattle and machinery, bank accounts, and other key records?
2. Build your transition & succession team
Discussion of the individual’s roles and responsibilities within the business, along with potential replacements and business continuity plans, moves to the forefront. The roles of key advisors like the banker, legal team, accountant, and financial coach are critical in laying a foundation for a successful transition.
Throughout the transition journey, it is important to remember that it is a marathon, not a sprint, and the road has plenty of twists and turns. In some cases, the process can require over 100 hours of owners’ and stakeholders’ time across a span of up to two years. Successful plans often require a team approach, including meetings with outside experts and a facilitator or coach. This individual’s skill set should include strong listening and organizational skills, as well as the capacity to develop agendas and document specific outcomes from each meeting so the process does not hit the proverbial “marathon wall.”
As a business owner, family member, or stakeholder, you will be assigned specific tasks in collaboration with professional team members. In recent years, there has been a trend toward retainer-based compensation rather than hourly fees. The transition process is often treated as a project, with periodic payments made as milestones are reached.
3. Develop a family business history
In the initial phase, engagement and buy-in can be increased through developing a family business history. This is where children or grandchildren interview various family members and, more recently, capture those stories through videos, written narratives, or other creative methods. This process opens the door to the past through a series of milestones and stories and often provides a gateway to the future by shaping the vision and core values moving forward.
4. Understand your teams’ communication style
Another tool for overcoming communication roadblocks you may want to consider is investing time and money in a personality profile. Understanding one’s own communication style, as well as those of fellow stakeholders, can be instrumental in sharing perspectives and achieving closure on key issues. Often, the real challenge is not the person themselves, but rather their personality style, and the pressures of the moment can quickly influence these communication dynamics.
5. Clearly understand the business’s financial positioning
A third-party assessment of business assets, along with complete transparency about liabilities and obligations, brings objectivity to the table and is critically important to the overall process, since emotions often come into play. For example, a favourite cow, tractor, or section of land may be relatively minor in value within the broader financial picture, yet it can become a significant roadblock to completing the transition process.
A major mistake often made is relying on tax returns to gauge profitability. Instead, accrual-adjusted financial statements, updated monthly and incorporating inventories, payables, receivables, prepaids, and accrued expenses, give a far more accurate picture of true profitability. In recent years, the role of off-farm revenue, such as employment or other business ventures, has also become an important bridge for cash flow needs.
The “soup-to-nuts” approach of following established steps and processes places the odds in one’s favor, not only for the transfer of assets and equity but also for the successful transition of management to the next generation. While procrastination, a reactive mindset, and a desire for quick answers can lead to business, family, and personal turmoil; family businesses may find that prioritizing institutional memory of the senior generation, combined with the innovative mindset and energy of the next generation, can help them to propel the business forward.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
