Annie’s Project – Education for Farm Women Annie’s Project – Education for Farm Women a 501(c)(3) organization.

Succession Planning Part Four Developing the Action Plan

Key Succession Planning Tasks Planning for the gradual shift in management from one generation to the next Shifting ownership of the assets involved from generation to generation Anticipating events that could disrupt management and ownership succession In recent years, an increasing number but still relatively small proportion of farm and ranch businesses have been pursing an objective of continuation of the farm or ranch beyond the lifespan of the founders. A succession plan provides helpful guidance as individuals move into and out of the farm or ranch business with their own life cycles. The critical issues in succession planning are: (Move to slide and introduce issues) There are seven major elements of a succession plan: (next slide)

Building a Management Team Design a team approach Develop new management skills Cross train Seek a functioning and effective system of routine communications Implement non-threatening evaluation processes 1. Stressing the idea of a team approach to making decisions rather than deferring to the senior individuals. 2. Focusing on developing management skills in younger members of the farm and ranch business. 3. This allows younger members to gain experience throughout the firm. 4. Develop and implement a functional method to communicate. 5. Evaluating the contributions of each team member so each understands their strengths and weaknesses.

Developing the Next Generation of Managers “The final test of greatness in a CEO is how well he chooses a successor and whether he can step aside and let the successor run the company.” Peter Drucker “The final test of greatness in a CEO is how well he chooses a successor and whether he can step aside and let the successor run the company.”

Turning Over Control Start early to learn each potential successor’s capacity. Successor may be in-law, grandchild, or neighbor. Ask yourself, “can I live with their decision?” Give control over different sectors of the business so the next generation can master each one independently. Rome was not built in a day – your successor’s transition into control should be gradual (but not so gradual that they lose interest). Each person has different gifts/talents and can be valuable to the business if skills are matched with jobs. You might have to face the reality that one of your sons or daughters does not have the capacity or desire to take over the family business. Do not delegate more than you can live with.

Addressing Power Issues Who controls decision making? Decision making control should be secondary to the quality of the decisions. Decision making under alternative scenarios The issue is who controls the decision making process. From a fundamental planning perspective, ideally, create an environment in which the decision making power is secondary to the quality of the decision. Organizational structure sometimes dictates the decision making structure. The corporation presents the most rigid structure. The succession plan should contain an audit procedure that focuses on the quality of the decisions. (evaluation and review of decisions made) Example: In 1968, a farmer died unexpectedly at age 48 leaving a spouse (who received 48 percent of the stock in the family farm corporation) and four sons (each of whom inherited 12 percent of the stock). The sons have generally voted as a block since that time to pursue an aggressive expansion strategy with no dividends declared. The mother is extremely unhappy that her stock, now worth more than $1 million, has produced no income in nearly 30 years. She is confident that her late husband never once thought about who would have the whip hand of control.

Assuring Fair Compensation Address compensation for labor, management and capital contributions Especially younger generation members with little or no decision-making power The hazards of delaying compensation adjustments, which is fairly common in family operations, are well known. It is important to compensate each individual fairly each year. If cash compensation would strain the cash flow from the business, part of the compensation could be paid in increased equity in the business.

Valuing Ownership Interest Ownership interest on a fair and equitable basis Review process for establishing ownership interest Especially for those unable to force dissolution and liquidation of the business, periodic valuation of ownership interests on a fair and equitable basis is a key part of protecting owners, particularly minority owners.

Protecting Minority Owners Minority owners should be protected from the harshness of majority rule In addition to providing for a fair and equitable valuation of ownership interests, minority owners can be protected from the harshness of majority rule in other ways: Carefully drafted provisions for triggering first option and buy-sell agreements can be used to create a market for stock or other ownership interests. These arrangements can provide for funding through life insurance, sinking funds, or installment arrangements. The traditional decision-making rules can be modified in various ways to provide greater protection for the minority owners by providing for: 1. a greater than majority vote for decision making; 2. a below-majority vote (in some states); 3. key issues (such as an assured employment for a specified number of years or a designated minimum salary) to be pre-decided in a shareholders’ agreement, voting trust or pooling agreement; 4. cumulative voting; 5. pre-emptive rights.

Encouraging Phased Retirement Encourage older individuals to retire Level of compensation Access to retirement benefits Reduced-responsibility positions on the management team The final element of a succession plan focuses on encouraging older individuals to retire and may include several components— • An appropriate level of compensation should be assured during the retirement years. • Access to retirement benefits should be assured and compensation arrangements should be compatible with receiving social security benefits, particularly for those under age 70. • Reduced-responsibility positions on the management team should be established for those approaching the retirement years. Encouraging Phased Retirement

Anticipating Disruptions The 6 D’s review Death, Disability, Disaster, Divorce, Disagreement, Disengagement Legal risk and other liabilities Related to “power issues” but much broader in the range of concerns. Plans should have provisions to deal with the disruptions that could derail the gradual shift of ownership and control to the next generation. Review the 5 D’s (I would make it 6 D’s with the 6th D being “disengagement” to cover retirement and someone just deciding to leave the business.) Legal risk are best handled through a through review of possible incidents (especially livestock operations having a permitting process such as EPA, Department of Natural Resources) These types of developments are difficult to plan for, but failure to plan can produce undesired consequences.

Remember to Communicate Satisfying succession plans depend heavily on the personal chemistry of the individuals involved. The underlying success of any business agreement depends on healthy family relationships. More two-generation family business arrangements fail because of poor family relations than any other reason. In the final analysis, a successful plan of succession in the farm or ranch business depends heavily on the personal chemistry of the individuals involved. However, a carefully considered and thought-out succession plan can be helpful in shaping expectations and in providing a framework for implementing the steps needed for an efficient and tranquil transition. “The underlying success of a business agreement depends on healthy family relationships. Probably more two-generation family business arrangements fail because of poor family relations than any other reason.”

Barriers Discussion What are some of the barriers you have discovered in reaching a decision to transition the farm or ranch business or pass a set of assets to the next generation? A free class discussion of barriers they perceive to writing and implementing a transition plan. With each barrier discussed, relate back to one of the six (6) tools that can be used to overcome the barrier. During the class, instructors should keep a record of the discussions on each of the tools and build a list of potential barriers to discuss at this point. Instructors should also develop a list of the “ah-ha” moments in each section which can be referred to during this discussion.

Transition Plan Road Map Accomplishment Beginning Establishment Commitment Testing End Transfer Stages Transfer Process Child Parent Divide Income Transfer Management Transfer Ownership The stages and process for successful transition plans. Over the course of the next 5 meetings we will introduce you to the steps involved in developing a farm and ranch transition plan and give you the tools necessary to fit the pieces into a successful transition of the farm or ranch business. There are four distinct stages of a successful transition plan from the patriarch’s point of view …….. Testing the validity, based on the goals and strengths and weaknesses of the organization. Commitment to the plan by all parties involved Establishing and developing the succeeding generations management. Withdrawal of the preceding generation from day to day involvement and oversight of the farm or ranch business. In addition to the four steps of implementing the transition plan, three things need to occur along the way. Income - Dividing the income of the current management and the succeeding Management - Transferring the day to day and long term management responsibilities Ownership - Transferring the ownership of the farm or ranch business assets from one generation to the next.

Your Action Plan Family Meeting Date: _________ Goal Setting Date: _________ SWOT Analysis Date: _________ Advisory Team Date: _________ Decision point Date: _________ Are you going to transfer a farm business, Or are you going to distribute assets? Transition Plan Date: _________ Encourage each participant to establish a date for either starting or completing each task leading to a decision of whether they will develop a transition plan or pass farm or ranch assets to the next generation. Select and implement an advisory team to help evaluate the transition plan for the business. Possible advisors include, attorney, CPA, banker, Financial Planner. Each participant family will need to make a decision to either develop a transition plan or estate plan. Discuss where the class is in relation to developing the knowledge and skills to develop and implement a transition plan. If the decision is to develop a transition plan, when do they anticipate they will have the plan started, developed and implemented.

Annie’s Project – Education for Farm Women Annie’s Project – Education for Farm Women a 501(c)(3) organization.