Seven keys to measuring progress in family business transfer
What is it that keeps a family from successfully navigating a generational farm transfer? If the answer were simple, more people would complete a successful transfer.
Part of the struggle that families have is figuring out where to start. The solution is to have a process for measuring progress in the key areas of succession planning while carefully identifying the gaps in perception between family members.
The solution is the “Continuity Quotient.” This process includes seven themes that must be accounted for to allow a family to manage the succession planning process. Here are those seven themes:
• Business and estate planning. There are a few aspects to the business and estate plan that are crucial. Having a contingency plan for management and ownership needs to be a part of any well-thought-out plan. Randy Johnson, an insurance professional who specializes in family-owned businesses, says, “The best plans are developed when professionals such as CPAs, attorneys, insurance professionals and bankers collaborate on behalf of the family.” The ideal plan eliminates surprises for the family while minimizing tax and facilitating an orderly transfer.
• Communication. Communication of intentions and dreams for the senior generation and the next generation is crucial. The ability to work through challenges, while speaking respectfully, is very important. Families that set aside time to “work on” and talk about the business and the goals for their family will increase their likelihood for success.
• Leadership development. Developing the next generation takes both initiative and patience. An “intentional” skill development plan for the next generation will give them confidence and skills and will allow the senior generation to delegate meaningful responsibility when the time is right. Creating expectations and accountability for the development of the next generation will aid them in their growth.
• Trust. There are many types of trust that need to be in place for a generational transfer to be successful. The senior generation must trust the decision-making ability of the next generation in both their personal and business life. They must also trust that they have similar goals for the future of the family business. Equally important is the next generation’s trust level with the senior generation regarding their intentions for the future. If either side doesn’t trust the other, the process of transitioning the business will most likely break down.
• Personal resilience. It may seem strange that personal resilience is one of the measures for business continuity, but it shouldn’t surprise you. Successful business owners know how to learn from their mistakes, embrace change and not give up when things are difficult. In generational transitions, if the next generation doesn’t have a great deal of personal resilience, this will send up a red flag that things might not go according to expectations. It is best to find out early if a person isn’t “wired” to be an owner. This is not an insult to someone who isn’t, it is just an observation that if you aren’t comfortable with struggles or don’t quickly learn from your mistakes, you may not be suited to be a business owner.
• Retirement and investment planning. Most successful owners of family businesses have one common challenge. They are usually asset rich but somewhat cash poor. When considering the prospect of transitioning out of the operation, the business owner’s retirement cash flow sources and needs should be carefully planned for. It should be determined what the desire for cash flow is, and then it needs to be measured against the ability that the business has to create that. It is recommended that families that desire business continuity through the generations should do everything they can to create alternative sources of “retirement” cash flow sources. Judd Norman, president of Lincoln Capital, shares, says, “Business owners need cash flow from investment dollars strategically placed in assets held outside of the business. These investments should then provide the senior generation with additional cash flow created via interest, dividends, returns and market accumulation while allowing the next generation of family managers to reinvest back into the business for continued future growth.” Relying solely on cash flow from the business is a recipe for heartache and frustration.
• Key non-family employees. In family business succession, the key non-family employees are sometimes the most important piece of the puzzle. Taking the opportunity to share the family’s vision and dream for the future with the key employees can instill confidence and loyalty in a group that will ultimately help navigate the most difficult part of the transition. Sometimes communicating with them is enough, but other times financial incentives are used to entice them to help the family make the transition successfully.
Each family has unique issues in its generational transfer, but if you can identify the strengths, weaknesses and gaps in perception with the seven themes of the Continuity Quotient, you will increase the likelihood for success. Getting “intentional” about working through these challenges is the most important step you can take.
Generational transitions are hard work, but if they are done properly, they will not only strengthen the business, but also they will fortify the family relationships every family hopes to preserve and perpetuate. Your family and your business deserve a thoughtful process to continue your legacy of success.
Specht is coordinator of family business programs at the University of Nebraska-Lincoln, in the College of Business and Extension Education. Email firstname.lastname@example.org or call 402-470-7416. His website is www.davespecht.com.
This article published in the September, 2011 edition of NEBRASKA FARMER.
All rights reserved. Copyright Farm Progress Cos. 2011.