Small businesses (including farms and agribusinesses) are recognized as the backbone of our economy. Frequently, but not always, small businesses are family owned. If unrelated people start or own a small business together, they also frequently become close friends.
As a result, transitioning ownership or control of a small business, particularly to or among people who previously worked for each other, is not simple because people’s personalities are not simple.
Successful business succession planning requires a few key components, all but one of which are intangible. First, there must be sincerity and conscious intention by both the “senior” owners who are transitioning out and the “junior” owners who are transitioning in. Simply put, the desire for succession must be mutual.
Second, there must be desire for a “win-win” outcome. If the senior owners do not feel that they can get more intrinsic value (satisfaction/happiness) and/or extrinsic value (money) from the succession than they would get from an outright sale of the business to an unrelated third party, succession planning will not be successful. Similarly, junior owners must feel that the purchase of this business will benefit them more than if they start or purchase a different business.
Third, the senior owners must force themselves to be unusually open. Early on, junior owners must acquire at least recognition of the scope and depth of the business’s assets, liabilities, cash flow and trade secrets to know that succession will be a win for the junior owners.
Finally, the succession plan needs to be at least somewhat formally organized, most obviously to protect both the senior owners and the junior owners from changes in circumstances, such as unexpected deaths. That formal transition plan should be very flexible, despite its formality. A well-written succession plan will do just that.
The existence of and commitment to a formal transition plan also deepens and broadens the senior owners’ and junior owners’ commitment to the transition.
A formal transition plan should also help to overcome personal disputes and personality clashes because the formality naturally decreases and eliminates uncertainty. As George Washington once famously said, “The best way to keep the peace is to prepare for war.” In this context, the best way to avoid misunderstandings and hard feelings later is to clarify expectations now.
Among business owners, farmers are particularly stubborn in not formalizing succession plans. The usual excuse I hear is a version of the following, “If yields are down and commodity prices continue to decrease in the coming years, there may not even be a farm to transition to my kids/junior owners in five years.” I often reply with, “Yes, but if you do have a farm in five years, would you prefer to see it in the hands of certain people?”
The development of the succession plan itself is frequently led by an attorney with experience in that area of the law and should also help to deepen the intangible components of succession planning: sincerity of purpose, win-win mentality, and openness.
Lee R. Schroeder is an Ohio licensed attorney with Schroeder, Blankemeyer and Schroeder LLP in Ottawa. He limits his practice to business, real estate,estate planning and agriculture issues in northwest Ohio. He can be reached at email@example.com or at 419-523-5658. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.