Broker Check

Make Your Farm Great Again – Keep the Kids in the Business

February 15, 2017

With the election of Donald Trump as U.S. President there has been a lot of talk about his family and their role in the family business. For many farm business owners this is common. Is it always good for the business?

We have seen a lot of the Trump family in recent months. The new President has said he will turn over all his businesses to his adult children. Is your operation ready for a similar change of leadership? Would it be a good idea?
Experts see both advantages and challenges when a business is passed from one generation to the next.

Advantages of Family Succession

1. Loyalty. When you consider stepping down from your business, or lay the groundwork for after your death, being confident you can trust your successor makes a real difference. When the successor is a family member, and when that person has history with your operation and a financial stake in the long-term success of that business, you have better odds of success.
2. Willingness to speak truth to power. Parent-child relationships generally get tested as the child comes of age, and if the relationship survives the rebellious phase there can be a value to having family members involved in the business. Your operation benefits when your successor is not afraid to suggest new ideas or question your judgment. This dynamic tension creates real opportunity for improvement. Many times it's easier to hear these new ideas from family rather than an outsider.
3. Continuity. A successful business transition might take 10 years or more to complete. If you hire a non-family member with plans for them to take over the operation in the future, they can get anxious to take the reins before you are ready to let go. Sometimes, the would-be successor jumps ship if he believes the transfer of power isn’t taking place quickly enough. It can be hard to see a valued team member who you thought would be the key to your transition out of the business leave before you get a chance to step aside. But often a family member who is positioned as successor is more willing to show the necessary patience.

Drawbacks of Family Succession

1. Sense of entitlement. Just ask yourself who is going to be hungrier, more willing to go the extra mile to move the business to the next level – an outside employee working to earn promotion up the ladder, or someone who feels entitled by birth to step into the parent’s shoes?
2. Promotion beyond abilities. Top talent is hard to find. Business acumen is not necessarily hereditary, and drive certainly is not. Picking a successor just because they are next in the family line might mean ignoring an unrelated person who is better qualified for the job. Worse, it could mean handing that job to someone who is nowhere near capable of handling it.
3. Jealousy. Nothing can ruin holiday dinners better than a family member being passed over in favor of someone whose most prominent achievement was their birth order or being born the "correct" sex.

Preparing the Next Generation to Succeed

For many farm families, the farm business has always been a family business. In my mother's family, the home place was bought in 1881 and is now operated by the fourth generation. For many operations this tradition has worked well. But, it seems production margins are always shrinking and for many farm businesses, it's not easy to remain successful.
When you look outside of agriculture, successful multi-generational businesses are pretty rare. A Harvard Business Review study found that just 10 percent of family-owned businesses remain active and still family-owned by the third generation. Some of this may be that the kids can't cut it, but often the original business just couldn't keep up with the times. Regardless, it's clear that passing a family business to the next generation is NOT automatic. Here are some ideas to help you help the next generation:
1. Require competitive qualifications. Imagine that you where hiring someone to join your operation. What education would you expect? Would you like to see an advanced degree? Would you want them to have any special certifications or licenses? Apply the same standard to any family member you consider as part of your business transition.
2. Encourage outside experience. Even when the plan is to bring your sons and daughters into the family business, it might be a good idea for them to prove themselves elsewhere first. It gives them a chance to prove to themselves that they can succeed on their own. And, when they do join the family business, they bring outside perspective and experience that could help your operation reach the next level.
3. Give clearly-defined responsibilities. Creating a nebulous role for a daughter simply to get her involved in the company is not a very constructive plan. Like anyone else, she should have clearly-defined responsibilities and evaluation metrics. This not only will require that she prove her ability, but it will also give her a chance to build credibility. It's better for everybody to see her as a valued contributor to the operation and not just the boss's daughter. This is especially true if your operation includes non-family employees.
4. Involve trusted non-family advisors in these decisions. It is very helpful to have good professionals around you who can help evaluate a family member’s abilities from a more objective perspective. Not only will this help you get a more honest assessment of your son’s abilities and work ethic, but it could also start to build a supportive team of key advisors who have bought into junior’s rise to the top.
For most farm families, it's always the hope that the kids take over the operation when you are gone. But, today it's more important than ever to look at this succession as a business transition. You can help your farm business -- and your family -- by making sure that the successor you choose is the well prepare and is the best person available for the job and not just somebody who has the right last name.
Are you thinking about how to bring the kids into the operation? Contact my office at rdunn@dunncreekadvisors.com to talk about ways to make it work better for everybody. I am committed to helping farm businesses successfully transition to the next generation. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.