FACING REALITY CAN PREVENT A NIGHTMARE SCENARIO
Neglect succession planning for your family farm, and you could leave your loved ones with a financial and emotional disaster. Carry it out properly, and you’ll earn their lasting love, respect and gratitude.
Unfortunately, when considering the future, many family business leaders refuse to think “When I die”, preferring instead “If I die.” Because of this denial, they never get around to planning what will actually happen when they do die, even though such plans could avoid or alleviate financial and emotional pain.
The two most predictable consequences of the failure to focus on long- range succession planning are the faltering of a business left without a leader and lasting bitterness amongst family members resulting from fights over control. But there are other effects, as well. A business may become crippled by the need to use limited working capital to pay taxes. Yet these can easily be avoided or reduced with the help of a lawyer, a tax adviser and basic estate planning techniques, provided this happens beforehand.
Another result of a failure to plan for death is the increased possibility of a battle among the children (or between the children and the surviving parent) for control of the business. If a fight of this nature breaks out, hostility can increase to the extent that compromise becomes almost impossible and the matter can land up in court and involve huge legal fees. The result of no one having figured out how to share the goose that lays the golden eggs is that no one can see an alternative to killing the goose.
While the business owner is alive, the situation is rarely so serious that it cannot be improved upon. Yet far too often, the owner remains paralysed because each course of action throws up problems and challenges. But as difficult and risky as moving forward may seem, doing nothing carries a far greater possibility of danger. When a family agribusiness lacks a succession plan, or when it has a plan that is unworkable, the result may be one or more of the following scenarios:
• The dictatorial successor
Here, the successor will try to mimic the iron will of the dynamic former leader. Unfortunately, this management style works for very few people, and a successor who behaves in this way will probably find that his or her siblings resent, or refuse to tolerate, such behaviour.
• Rival successors
In an effort to encourage all of their children, some family agribusiness owners lead each child to think that he or she will one day be the boss. But then, uncomfortable about nominating one over the others, they never actually appoint anyone! This inevitably leaves multiple heirs vying for the role. It is difficult to imagine a happy outcome in such cases.
• The powerless successor
When a child who is capable of running the business doesn’t inherit control of the trust of his or her siblings, the predictable outcome is failure. A leader needs this power to carry out his or her vision.
• Siblings who cannot collaborate
In this case, lack of trust will ultimately inhibit the business’s success.
• Heirs who don’t understand the business
Many children of dynamic family business owners grow up thinking that making money is easy. The parents always seemed positive and optimistic, and failed to educate the children about the risks and insecurities involved in running a successful business. Not knowing how to evaluate risk and do business properly can lead to ill-advised decisions.
Moreover, survivors who don’t understand the factors that led to the company’s success can fall prey to non-family employees (the ones who are actually running the company) or prospective purchasers who will readily take advantage of the survivors’ naivety and lack of insight. These parties’ agenda will be to buy the business at a handsome discount, and their leverage will be considerable.
HOW TO AVERT DISASTER
The steps that can be taken to avoid tragedy depends upon the people involved and their emotional resources, emotional intelligence, communication skills and ability to find and work with talented advisers. No one formula or plan will work for all businesses, but all successful plans have a couple of things in common.
WISE ESTATE PLANNING
All too often, lawyers, accountants and other estate planners are asked to devise a plan that focuses only on tax savings, without regard to whether the plan leaves the business in an unmanageable posture. No matter how much is saved in taxes, a business will not succeed if control is left to a surviving spouse who cannot run it and is concerned only with how much cash he or she needs to extract to cover personal expenses.
Wise estate planning takes into account not only tax savings, but also the critical need to create a structure that enables the business to prosper, even if it means paying more taxes. In the general scheme of things, taxes are a good investment if they increase the possibility that the business will continue to be successful.
ENGAGEMENT OF THE FAMILY
No one person can solve the problem; the entire family must be involved. Family members must discuss and understand each other’s goals, fears, strengths and weaknesses before a dispute or crisis develops.
The goals of wise estate planning and family engagement cannot be achieved through wishful thinking. Steps must be taken toward these goals, either with or without the help of the family business owner who is in denial about the problems that would be caused by death.
Certainly, the involvement of the strong leader is helpful, but there are measures that can be implemented without the patriarch or matriarch’s participation:
Convene meetings (with or without the business leader);
Create a plan for building trust among siblings and their surviving parent;
Invest in leadership assessment and training;
Devise a succession plan for the family business.
Ultimately, if successful, this should result in the family being able to agree on governance structures that will help the business and the family to succeed. For the business, this often involves defining the power of the leader and giving the other owners veto powers over major decisions.
Effective governance for the family often starts with convening family meetings and forming a family council to separate family matters from business and ownership concerns.
Sometimes, promises must be made regarding eventual financial rewards for the owners who are not actively engaged in the business. These promises can take the form of an exit strategy (being eventually bought out) or regular distributions of income. It is common for the person responsible for running the business to have serious doubts about such financial commitments. But the fact remains that unless inactive stakeholders believe that the business benefits them in some financial form, they will be dissatisfied, and this dissatisfaction can eventually cause serious problems.
The commitment to providing financial benefits to inactive stakeholders (just like the prospect of imminent disaster) will focus the mind of the leader. There is no magic bullet, no perfect plan and no guarantee for the future. The only guarantee is that if no one does anything, the possibility of a business failure is increased. Where benign neglect does solve a problem, it is usually by coincidence and blind luck, not by design. In general, ignoring a problem is a plan for failure.
Published in Farmer's Weekly 8 July 2022
Family Legacies www.family-legacies.com is a multidisciplinary family business consulting company. Our consultants are leaders in their respective fields including; Family Business Consulting, Strategic Planning, Financial Planning, Wealth & Risk Management, Corporate Finance, Business Transitions & Exit Planning - Buy, Improve, Grow & Sell Businesses, Commercial & Family Law, Executive Coaching, Leadership Development & Facilitation, providing our clients with a professional and integrated multi-disciplinary service.