According to Bryce Gibbs, principal advisor at K Coe Isom, a business advisory company, 70% of U.S. agricultural property will change hands over the next 20 years. Most of the transitions will take place through gifts, trusts or wills. Most family operations do not have a next generation who is skilled in or willing to continue to business.
“This is something we see every single day with clients and family,” Gibbs said. “Nobody wants to take over or they have not been properly trained to carry on the existing skills necessary to make that transition.”
Three key components
“We all need a plan, and a plan requires three important components,” Gibbs said. He described the components as:
- Ensure your financial house is in order. “That means having a good understanding of your financial positions — what your costs are, where your revenues come from, so you understand that business.”
- Identify and secure capital and leadership roles. “Identify any secured capital through banking relationships, interests’ program, anything that will help secure that transition.”
- Have a plan for execution. “You have to make a plan to actually execute that plan. You have to have a commitment to execution.”
Gibbs recited family business statistics that were based on a 2008 University of North Carolina study.. According to the study, family-owned businesses represent more than 90% of all business enterprises in the United States. In those businesses, approximately 30% survive into the second generation, 12% survive into the third and 3% survive into the fourth. Since 30% of businesses survive into the second generation, the remaining percentage — 70% — fail. Of that group, 60% fail because of communication and trust issues, and 25% fail due the lack of preparation of the next generation. Of the senior generation, 80% would like the business to stay in the family, but 25% of those people have no complete estate planning, and 25% of that same group lack confidence in the next generation.
Transition planning vs estate planning
Gibbs was very adamant about the fact that transition planning is not estate planning. Instead, it is the “human side” of transferring a business. Meaning, the development of management and leadership skills, carrying out the knowledge provided by the business founders and helping family throughout the process. Estate planning, however, is the paperwork and financial part of the estate planning, which are designed to mitigate the estate tax and prepare for wealth and asset management.
Steps to transition planning
Transiting planning requires a lot of talking, said Gibbs, who broke those steps down into four parts:
- Communicating with stakeholders — not just future owners but consumers, suppliers and banking relationships
- Developing a business succession plan
- Developing a plan for your estate/gifts
- Deploying your plans
Gibbs advised owners to be honest and transparent throughout the planning process. He said the exiting partners should even discuss their retirement plans, along with their needs and aspirations of the next generation. One of the most difficult but “crucial” parts, Gibbs said, is repairing relationships between estranged family members, which may at times requirement outside help. Setting agreements for non-business children is also equally important.
According to Gibbs, a lot of young people grow frustrated at the lack of business planning. This time frame, according to consultant William Bridges, who coined the Bridges Transition Model, is the “neutral zone.”
“The neutral zone is the pain of not knowing,” Gibbs recited. “It’s a place of high anxiety and stress because you don’t know what the plan is or what the future holds.”
Family versus business
Gibbs said while there is a blurred line between family and business practices, differences remain. When companies are family-focused, their approach is more emotional, inward looking, and kinship-based with generational authority and transferable values. A business-focused organization, however, approaches things in a rational and outlooking way, is more merit based with positional authority and transferable profits.
If you’re going to be a business family, Gibbs said it’s important to have structure in place, like operating agreements, structured meetings, professionalism and a core mission.
Being a successful family business
Talk often and openly, be able to distinguish family from business culture, see and treat people as investments. Gibbs also said estate plans should be reviewed every three to five years.
Transitioning out of the family
“There are a couple different options that can take place when a family business transitions out of the family,” Gibbs said.
The options Gibbs referred to are selling or merging with a third party, selling to a related party or selling to employees, offering an employee stock ownership plan (ESOP), transitioning to a passive investor or selling business assets.
The main idea
Out of everything listed above, Gibbs concluded with these important takeaways:
- Communication is critical
- It’s never too early to begin talking about transitioning and company desires
- Develop a plan and hold yourself accountable to those actions
- Consult with your accountant banker and business advisor to analyze further selling options