Business Succession: Planting the Seeds for an Abundant Future

This article appeared in the spring 2013 issue of Certified Organic and was written by Jay Silverstein, partner at Moss Adams.

Whether retirement is near or far, thinking about who will take the reins and lead your farm into the future isn’t easy, but it’s especially relevant these days. According to the USDA’s National Institute of Food and Agriculture, approximately 70 percent of U.S. farmland will go on the market in the next 20 years as the nation’s farmers age. Without a succession plan, many family-run farms are likely to go out of business, be bought by larger farms, or get turned over to real estate developers or other purchasers for nonagricultural use.

Establishing a Well-Defined Succession Plan

With a solid strategy in place to identify, develop, and groom the next generation of leaders and owners, your farm is more likely to achieve longevity and success. Indeed, those who translate their vision for long-term prosperity into a detailed succession plan can not only resolve uncertainties about the future of the business but also enhance its long-term performance and health.

A plan also helps the farm prepare for other future challenges, such as securing access to capital. Beyond assessing whether a business has a sustainable competitive advantage, dependable cash flow, and solid net worth, lenders often look for a succession plan when determining the amount of credit to extend. A formal plan, accompanied by the development of key successors, will go a long way toward demonstrating long-term financial viability to your bank or other lender.

While succession is a natural stage for most kinds of businesses, it represents unique territory to farmers, for whom the success of your business can be much more closely tied to your personal wealth. Thus, it’s important to begin well in advance of the transition, since many of the important issues may take time to talk through and evaluate, including:

  • Your personal cash flow needs. Do you have assets outside the business to satisfy those needs, or will they depend on the business?
  • Your successors’ ability to operate the business. Have you identified the next generation of management? Are their plans for the farm consistent with your—and the farm’s—cash flow needs?
  • Creating equity between children that work on the farm and those that don’t. In the case of family succession, how is management and ownership being structured between working and nonworking family members? Will there be tension about the cash flow needs of the business and return on ownership?
  • Personal guarantees and credit. If there is to be a family succession, will you remain personally liable for bank debt? If so, for how long? What is the borrowing capacity of the inheriting owners?
  • Tax. Have potential estate taxes been accounted for? If so, how will they be paid?

Where to Begin?

Start with written goals that establish a timeline for your exit, identify your successors’ responsibilities, and determine what credentials they should possess. These goals will ultimately serve as benchmarks you can use to track progress and guide future business decisions.

By definition, succession is about change. It will be important to consider how the business might need to change or grow in the years ahead and what skills and talents its future leaders will need. Planning for succession will provide natural opportunities to make changes that strengthen leadership performance for the long term, ensuring the company has the right people in the right positions at the right time.

Your succession plan should also provide for an orderly exit of owners and leverage exit strategies that enhance the company’s value in the process. You’ll want to carefully evaluate your exit alternatives, which may involve selling all or part of the business to existing management and employees, a financial or strategic buyer, or family members.

Family Matters

Family-owned farms often want a successor from within the family. While some family members may not have an ownership role or even work on the farm, they may still have considerable influence on its future. A family business owner must strive to meet not just the different needs of management and ownership but also those of a third stakeholder: other family members.

A family conversation can be a good first step toward navigating the process of succession planning. Inviting all stakeholders to engage in the conversation together allows everyone to offer his or her input about the plan.

Tailoring the Right Plan

Every company has a different financial scenario, operations, motivations, and leadership team requirements. An advisor can help you develop a customized plan: one that fits your business and helps you build a legacy that’s just as unique. Ask yourself:

  1. Do I have a timeline for exiting my business?
  2. Is there a succession plan for key positions?
  3. Is there a process in place to identify successor candidates?
  4. How will I transition key business and client relationships to successors?
  5. Are bankers aware of my succession plans, and do they approve of the successor candidates?
  6. Do I understand all my choices for exiting the business? If I’m considering selling, do I know whether there are financial or strategic buyers? Should I sell to employees, third parties, my children, or a combination of all three?
  7. How much in net proceeds will I need from the sale of my business or ownership interests to meet my personal financial goals?
  8. What’s the best way to communicate my ownership transition and estate plans to key employees or my children?
  9. Are my business operations structured properly to take advantage of current income and estate tax laws?
  10. If something happens tomorrow, can the company continue without me?

Jay Silverstein has over 21 years of experience serving the food processing and agriculture industries. He specializes in business succession and estate planning. He can be reached at (707) 535-4115 or jay.silverstein@mossadams.com.

 

Tags: