by Sally Colby
Dr. Alex White, Department of Dairy Science at Virginia Tech, has tip for ruining a family dinner: start bringing up topics that many families avoid, and ask questions like “Hey Mom and Dad – what am I getting from your will?” or “When are you going to retire so I can take over?” or “We should invest in new equipment.”
White said while these sensitive topics aren’t suitable for the dinner table, the questions are valid and should be asked. The main goals of the older generation are different from those of the younger family members and include retirement, less risk and maintaining the status quo. “If we want to expand, it probably means more borrowed money and more risk, and now we have a goal conflict between the younger and older generations,” said White. “Try to look at it through the others’ eyes.”
Unfortunately, only 30% of family businesses make it to the next generation. “About 12% make it to the fourth generation,” said White, “and that’s a very low percentage. The main reason is because we don’t talk about it or plan. We think ‘We’re families – we don’t have to do this stuff.’” White said major killers of family business include the thinking “We’ve always done it this way” or “We’ve never done it this way” or “We’ve done okay so far, we’ve done well for ourselves – no need to change.”
One problem White sees with farm families is that they tend to put things off and avoid important discussions. “You know you need to do this, but see the tractor is leaking oil or a cow is out of a field, so what do you do?” he said. “You put the transition planning off – you’ve made the conscious decision that that tractor or cow is more important than the family. We need to sit down and have these talks. They’re not always fun but once you start, it gets a lot easier.”
A good spot to begin the transition planning process is including it in the farm’s business meetings. “The main reason you need to have regular business meetings is to keep everybody on the same page, to come up with a plan and see what needs to be done this week, this month, this year; here’s where we’re going in the future,” said White. “It gets everyone rowing in the same direction.”
Every business meeting should have written minutes. “If you aren’t having regular business meetings and don’t have minutes and are sued, people can say you aren’t operating in a business-like manner and you lose all liability protection,” said White. “One meeting a year is okay, four is much better – but keep minutes.” The tendency for families is to think “because we’re family, we’re great at communicating.” “No, we aren’t,” said White. “Families stink at communication.”
In too many cases, families don’t think about transition planning until someone in the community dies. “Whether it’s in your family or not, people don’t want their family to go through it,” said White. “They think they need to make plans to minimize the impact on the family. But it doesn’t work too well – the tractor is leaking and that’s more important.”
A family business transition involves moving the ownership of the assets and management responsibilities to the next generation – defining who’s making decisions, who has the responsibility to do this. White said what’s hardest on the senior generation is giving up ownership because they’ve spent years building the business and have pride in it. “How many times have you heard ‘Yeah, I’m going to bring junior into the business and let her make the decisions,’ but who ends up making the final decisions?” he said. “Mom, Dad or whoever the older generation is won’t give up that responsibility. The younger generation is not much more than hired labor. We need to mentor them, bring them in and make things happen.”
White described two ways to transfer assets from one party to the next: with a warm hand or cold hand. “The warm hand says ‘Let’s do it while you’re alive,’” he said. “The cold hand says ‘We’ll do it after you’re dead.’ Do it while you’re alive – you’ll have more say and more options about what’s going on.”
There’s a difference between ownership and management, and it’s important everyone involved in the transfer understands the definitions and how they apply to the business. For example, people can be equal owners but not have the same management authority. “We can separate ownership and management,” said White, adding that the designations should be written in the bylaws of the organization. “It’s a common sticking point. Owners don’t have to be involved in management, and often shouldn’t be involved. But it should be formally written.”
The main factor that poisons the transition process is procrastination. “We’re so busy day to day and forget to do it,” said White. “You ignore it and think ‘We’re family and everyone knows what we want to happen.’ Or there’s silence – ‘We can’t talk to Mom and Dad.’”
White suggested outlining goals as part of the early planning process. “If you don’t talk about your goals, your six- or seven-year transition plan is going to be horrible,” he said. “Write down your goals, figure out what’s important to you personally and business-wise. You also need to talk with everyone else because you’re going to have goal conflicts.” White added that discussions about estate taxes, income taxes and liability are comparatively easy, but if families don’t establish goals, those aspects won’t matter.
While the transition process seems overwhelming, there are only a few main options. “We can keep the farm in the family and continue to own it whether we operate it or not,” said White. “We can keep the family on that farm. We can keep the family in farming – sell the property and move to a property with better markets and better access to supplies. Or we can keep the family from farming by not planning.”
Transition planning takes time, forward planning, communication and, ideally, a team of professionals. “It isn’t something we can do overnight,” said White. “It’s a process we need to work on. We have to be more open-minded and talk as a family. It’s a constantly changing world out there, and you always need to make some changes.”
Part 2 will include considerations for the transfer process.