Key Items for Your Business Succession Plan

More from Neil Harl’s book Farm Estate & Business planning.  Here are some key items that should be addressed in your business succession plan:

• DEVELOP A STRONG COMMUNICATION SYSTEM.  Minor problems can become major headaches because of poor communication.
• BUILDING A MANAGEMENT TEAM.  Focus on developing management skills of team members and giving them an opportunity to develop a broad understanding of the business, including financial, marketing, legal and personnel matters.
• THE "POWER" ISSUE. Examine where decision-making power will be held and put in place provisions to assure an acceptable balance of power.  Work to create an environment where the merit of an idea is valued over where it comes from.
• ASSURE FAIR COMPENSATION. Under-compensation of potential successors with the intent of "someday making it right” is a recipe for distrust and loss of loyalty.
• ANTICIPATE DISRUPTIONS. Consider the possible disruptions and response strategies. Death, Divorce, and Disability are the three “Ds” of disruption.  Buy-sell agreements and proper insurance can help greatly.  Make sure there is a plan for a “smooth” transition.
• VALUE OF OWNERSHIP INTERESTS. Generally, there is no ready source of information on what an operation is worth.  One of the best approaches is to periodically re-negotiate a fixed price with a back-up appraisal method if an agreement is not reached.
• PHASED RETIREMENT. While it is never easy, timelines should be established and incentives put in place to encourage the older generation to move toward retirement.  This can also be helped by establishing a retirement plan to help fund the retirement.  Relying solely on the sale of the business as the “retirement plan” can make transition more difficult.
• PROTECT MINORITY OWNERS.  If there will be minority owners or passive owners, those interests should be protected from abuse at the hands of the majority.  This protection should include an exit strategy.  I generally discourage passive owners in the farm or ranch business.  These individuals rarely see the value that comes from re-investing in the business and rightfully expect to see a return on their ownership interest.  This can lead to dissension and litigation.

Again, it is not just the ultimate plan that matters, but also the journey in getting there.  The process itself will strengthen your business and make it more valuable.  This along with the systemization of the business will allow it to become something that has value above and beyond its component parts and truly worth passing on.