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Succession Planning

Succession planning ensures the transition of a family business. It involves planning for the transfer of labour, management and capital


January 15, 2008
By Alberta Rural Women’s Network

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Succession planning ensures the transition of a family business. It
involves planning for the transfer of labour, management and capital.

Succession planning ensures the transition of a family business. It involves planning for the transfer of labour, management and capital. It’s about creating, maintaining and distributing wealth generated by the farm business and in many cases, choosing and grooming the successor(s).

In a well-managed succession, the values of the family as well as business values are transferred.

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Succession can be executed in many ways. It is important to create a plan that ensures your transition has the highest chance of success. Sometimes succession occurs in the absence of a plan and in a crisis situation such as the death of the founder.

An effective succession plan depends on open communication, goodwill, respect and a desire to maintain strong relationships among the family members. Here are some do’s and don’ts to help start the farm succession thought-process.

Do’s
•     Do think of succession planning as a process rather than an event. It takes time and effort.
•      Do start planning now. The earlier planning begins, the greater the number of options.

•     Do keep the big picture in mind (long-term, strategic direction) along with a positive attitude. These can make all the difference.

•     Do a financial analysis of the past and present farm business along with some financial projections. Look seriously at profitability. If the farm is not making money now, what can be done to make it profitable? Is the farm business viable in the long run? Profitability is the “showstopper” when it comes to developing a succession plan.

•     Do become educated about the subject. Participate in workshops and seminars, read articles, conduct Internet research, complete self-assessment questionnaires related to succession. Become an active participant in the planning process.

•     Do consider using a “family meeting” mechanism to open the lines of communication among family members. An objective, third party facilitator can help ensure that the initial meetings run well and everyone has an opportunity to voice their interests and concerns.

•     Do develop a strategic plan for both the family and for the business at the start of the process. This plan includes a long-term vision of what you want to happen to the business. Write it down and plan toward this vision.

•     Do discuss family and business goals and objectives as part of the strategic planning process.

•     Do communicate with family members about plans, strategies, issues and problems.

•     Do discuss the issue of fair and equitable vs. equal division of the farm early in the process, especially if there are off-farm family members involved.

•     Do prepare a legal will early. A will can provide guidance on how the estate should be settled.

•     Do develop a “successor development plan” for any family member(s) who is (are) planning to take over the business. This is a plan to train and develop the successor(s), so he/she has the appropriate skills and knowledge to successfully run the business.

•     Do continue to generate and discuss various options and be creative. These will need to be narrowed down to just a few ideas.

•     Do assemble a “team” of professional advisors – lawyer, accountant, financial planner, banker – and work with them; communicate and ensure they fully understand what is wanted. Once there are some clear ideas of how the transfer might take place, the team of advisors can assist in looking at the pros and cons of certain ideas. The family members involved will decide upon the best plan and strategies for their situation. The advisors can then help document and fine-tune this plan.

•     Do consider the advice and ideas of different advisors as the plan develops. Each advisor will have a slightly different perspective to consider. Remember, this is the family’s plan, not the advisors. Family members have to buy-into the plan for it to be successful.

•     Do consider the tax implications, but don’t emphasize them as the most important thing. For example, “We don’t want to pay any taxes.” Instead, the goal should be to determine and select the best process to transfer a profitable and viable farm business while considering the tax consequences and preserving as much family capital as possible. Sometimes paying a little tax now is better than getting hit with a big tax bill later (if the strategy was to defer taxes).

Don’ts
•     Don’t procrastinate, start talking about succession now.

•     Don’t be afraid to ask questions and listen carefully to the answers – even though you might not like them.

•     Don’t assume you know how others feel about the process or what they want to achieve from the succession plan. Listen carefully and ask questions if you don’t understand.

•     Don’t be afraid to share responsibilities. Both generations will need to work together to ensure the transfer of labour, management and assets. As mentioned above, a “successor development plan” (a plan to ensure the next generation has the skills, abilities and knowledge to successfully operate the business) can help.

•     Don’t define one’s life as the business. There is more to life than work; family, friends, leisure enjoyment, sports, hobbies, etc.

•     Don’t put all your eggs into one basket. Plan ahead, think early about retirement, save and invest off-farm, so that you will have some options in the future.

•     Don’t rely on just one professional advisor. While each individual is important to the process, one person cannot possibly provide all of the answers to everything involved in a farm succession plan.  
From: The Alberta Rural Women’s Network