The most current USDA data from 2015 indicates that family farms accounted for 99% of U.S. farms, and 89% of production1. Further, on family farms, the principal operators and their relatives (by blood or marriage) own more than half of the business’ assets. In short, a family owns and operates the farm1. So, it goes without saying, that the majority of agribusinesses have a generational impact on the family since the majority of the family’s assets and wealth are tied to the business. And, agribusinesses can often have impact on the community in which they are located since the business may actually be providing employment stability in more rural areas.
No different than other types of businesses, there eventually comes a time when agribusiness founders and owners are ready to step back and turn over the reins. Yet, with so much dependent on the success of the business, too many agribusiness operations find themselves woefully unprepared for generational succession. And, this leads to a number of business and personal risks for the owners.
Tarnished family name
It’s typical that family-owned agribusiness operations carry the family name, and those that have been in existence for some time also have preserved a legacy that translates to a perception within the industry and the community. Therefore, mismanagement of ownership transition can not only hurt the operation, but can tarnish the family name.
Damaged family relationships
Misinterpretations, inequities, and poor communication can not only fracture family interpersonal relationships, but can also stifle an agribusiness operation, and either set the business back, or keep it from evolving and innovating to thrive.
Diminished family wealth
Unplanned or uncommunicated transitions can quickly erode accumulated family wealth. Whether through paying unnecessary taxes, having to buy-out non-operating shareholders, or having to sell important assets in order to pay an estate tax bill, the cost and consequences of this oversight could prove too much for the business to weather.
Strategic planning for business continuity
Given the family ownership of most agribusinesses, it understandable that agribusiness owners view their tenure with the business as a temporary stewardship, and hope to someday pass the business along to their children and grandchildren to carry on the legacy. Therefore, one of the most important goals of agricultural producers is farm/business continuity in order to ensure this vision is realized.
While there are never any guarantees regarding long term agribusiness success, given the inherent industry variables such as weather, disease, technology, legislation, regulation, international trade, and so on, there are certainly ways to minimize risks tied to business transition in effort to ensure business continuity. Let’s examine the 3 C’s of business continuity as ways to mitigate risk.
1. Cash flow
Cash flow clarity is key. It is crucial that every agribusiness operator has a clear understanding of the business cash flow. And, it’s important to “stress test” the operation to see what types of shocks specific to input costs or prices the operation can withstand. Besides the cash flow of the business, the operation needs to consider the cash flow needs and sources for the retiring generation. If retiring owners don’t have assets accumulated outside of the operation, their retirement would logically be funded through the successful operation of the enterprise.
2. Contingency plans for management and ownership
Every agribusiness operation needs to have a documented, communicated, and frequently re-visited contingency plan for both management and ownership.
- A management contingency plan looks at the people in the operation and strives to identify the duties and decisions made solely by one individual without the involvement of others. When single individuals are making purchasing, marketing, and other decisions on their own, risk is created should this person could become incapacitated, die, or leave the business. So, continuity is jeopardized. Each agribusiness operation should identify these risks and identify and train back-up personnel to minimize the risk.
- An ownership contingency plan establishes clarity specific to how assets flow if any owners pass away or become disabled. This sounds like a simple and logical expectation, but very few operations have a clearly documented and communicated plan in place for how assets pass when owner(s) retire or pass away.
3. Communication
Successful enterprises create structures and expectations for how shareholders and the families that control the operation communicate, and this is where many agribusinesses fall short. It is crucial that a regular pattern for communication be established to keep shareholders informed, provide a venue for questions, and establish an environment of transparency and trust.
Conclusion
Ultimate success in succession planning is accomplished when family relationships are preserved and business continuity is accomplished across generations. This risk assessment planning work is not easy, but it is well worth the effort when the time for transition comes.
- United States Department of Agriculture, Economic Research Service
David Specht is the National Development Manager for Family Dynamics within Wells Fargo Wealth Management with responsibility for creation of training, education, and ongoing culture development of the Family Dynamics offering. Using proprietary and original content, the Family Dynamics team helps families navigate issues at the intersection of personal and leadership development, family culture, and family enterprise.
David joined Wells Fargo in 2016. Prior, David founded Advising Generations, a consulting company to multi-generational family companies. He also served on the faculty of a Big Ten business school where he lectured and developed the curriculum for their Family Business Management program. David is a two-time author and oft-quoted subject matter expert on issues related to family business continuity, leadership and management transitions, and family dynamics during wealth transitions.
David holds a bachelor’s degree in Business Management from Brigham Young University-Idaho and a Master’s Degree in Tax and Financial Planning from San Diego State University.
