Any ranch looking to survive beyond the current generation could use a chairman of the board.
When folks think of leaving their ranch to the next generation, they often think exclusively about transferring hard assets and wealth, while incurring the least amount of tax liability possible.
Yet, succession planning — transferring the management of the ranch as well as the vision, goals and values that define the management — has as much to do with potential ranch sustainability as the hard assets says R.L. “Dick” Wittman of Culdesac, ID.
“Two-thirds of family-owned agricultural businesses never make it past the second generation. Is that destiny or a choice?” wonders Wittman, himself the manager of a multi-generational cattle, farming and timber family partnership.
You can start down your own list of neighbors and friends whose ranch legacy was waylaid by everything from rotten luck to estate and succession planning they never found the time to formulate effectively.
Luck is untenable, so you're left with the other two.
Though less fun and often complex, Wittman points out transferring wealth — estate planning — is straightforward enough with plenty of tools such as trusts, easements and life insurance. He does recommend involving the experts once your homework is done.
“Don't self-medicate when it comes to estate and transition planning,” Wittman says. “Do the job of gathering the necessary information first so that advisors can devise a solution for you that meets your goals.” In addition to the family operation, Wittman also provides consulting services to a variety of agricultural operations, including help in succession planning and transferring management.
That leaves you with succession planning, a big chunk of which is figuring out who will replace the current ranch manager, who is capable of doing so, and who truly wants the job. None of that may be as easy as appearances suggest, especially when the current generation intends the next generation to assume ownership and management.
“Sixty percent of failed management transitions are due to unresolved family conflicts and communication issues; 25% are due to poorly prepared successors,” says Danny Klinefelter, a Texas A&M University Extension agricultural economist specializing in agricultural finance and management development. He, too, is involved in his family's multi-generational cattle and farming operation. He's citing a statistic from Mark Voeller, a clinical psychologist and specialist in succession planning for family businesses.
The first barrier — unresolved conflict — is plain enough. Just think of that grasping hussy, Aunt Agnes, whom Uncle Fred never should have married when on the rebound. Or, remember cousin Edgar, who never was any help and now believes its his birthright to return home after failing in his big-city ventures. Or…
Poorly prepared successors may be harder to grasp. You've spent every day since the kids were born showing them the ropes and teaching them everything you know and then sent them off for a college education to boot. Surely it's not possible they're unprepared to take the reins.
Assumptions are rife in family businesses when it comes to transferring management across generations, says Klinefelter. For instance, some simply assume the intended successor wants the job, is capable of being the manager and is willing to accept the salary and benefits the business can afford to pay.
With these and other assumptions in mind, Klinefelter recommends the current manager (CEO) and eventual successor answer a series of questions independently, and then discuss them (see “Questions To Ask,” below). Besides helping to determine whether the intended successor is the correct fit, it allows the current and future CEO to determine what training opportunities could benefit the new CEO and the business the most. Klinefelter says this process is one of the hallmarks demonstrated by family businesses that successfully transfer management between generations (see “Reasons for successful transition,” page 58).
Ease into retirement
Even if capable and willing successors are ready to take the reins, transition can also be doomed if the current CEO is unwilling to step aside and allow the new CEO to begin managing.
That's one reason Wittman believes family agricultural businesses could benefit by adopting a more corporate-like governance structure. Specifically, he recommends family businesses consider making the retiring CEO the new chairman of the board. In simple terms, the new CEO manages the operation, while the chairman focuses on strategic planning for the business and serves as an invaluable source of expertise and a sounding board for the new CEO.
That allows the business to preserve the intellectual asset of the retiring CEO, clearly delineates who does what and provides a bridge of continuity through the transition. It also offers the chairman a challenging new position prior to full retirement.
The Wittman family business has endured seven major transitions in the past 28 years — people entering and exiting the business, creating new needs along the way. One reason they've been able to sustain the business through such dynamic change is they embrace transition planning as a continuous process rather than a one-time destination.
In family businesses intended to be carried on by the next generation, Wittman explains, “Transition planning starts when your kids reach the age of reason and it never stops.”
Reasons for successful transition
- Assessment of the needs of the business, not just for now, but for the future.
- Objective analysis of the strengths and weaknesses of the current CEO.
- Objective analysis of the strengths and weaknesses of the successor.
- Open, honest and mature communication.
- Creation of a management development plan that addresses experience, responsibility and training, along with honest, objective evaluation and feedback.
- Planned experience, exposure and networking opportunities for the successor, not just outside of the business, but outside of the industry.
- Development of a common vision for the business.
- Ongoing delegation of responsibility and authority to the successor, with a specific timeline.
- Involvement of the successor in the development of the business plan and strategic decision making process.
- Implementation of a plan for what the current CEO is going to do next.
— Danny Klinefelter,
Texas A&M University
Questions To Ask
Questions a successor should answer first
- What's important to me; what's acceptable and unacceptable?
- What does the business look like to me in the future?
- What do I want from it?
- What do I hope will happen?
- What am I afraid might happen?
- What do I want the business to accomplish?
- What do I want to achieve personally?
- What sacrifices am I willing to make?
- How will I measure the performance and progress of the business and for myself?
- What is my plan or approach for accomplishing the goals I've set out?
- How do I propose to implement these strategies?
— Danny Klinefelter,
Texas A&M University
For estate-planning information, see the spring 2007 BEEF Cow-Calf issue at: http://beefmagazine.com/issue_20070215/.
Another planning resource
The information presented in this article is the tip of the planning iceberg. Dick Wittman and Danny Klinefelter were among the speakers at the recent King Ranch Institute for Ranch Management Symposium dealing with management and wealth transfer planning for ranches. You can find more information at http://krirm.edu.