knowing you makes the difference. tm 4-nov-2015 – pdmp fall issue forum business transition...

Knowing you makes the difference. TM

4-Nov-2015 – PDMP Fall Issue Forum

Business Transition

Michael Hosterman – Ag Business Consultant


“Estate Planning”

People use the word “estate planning” interchangeably with “succession planning” and “transition planning”; however, these are not all the same.

Estate planning is the orderly transfer of assets after you die.


“Tran·si·tion – noun – Passing or changing from one place, state, or condition to another.”

• We use intentionally to indicate a complete & successful change (not just a distribution of assets)

• It’s about preserving legacy & a way of living

“Suc·ces·sion – noun – The act or process of succeeding to the rights of duties of another.”

• We use the word to identify & develop potential successors to key positions

• It’s about successfully developing & transitioning leadership


Elements Of Farm Business Transfer

SeniorGeneration

NextGeneration

Transfer of only two of three elements leads to many farm transition problems

Transfer Ownership

Transfer Management

Divide Income


Objectives

• Senior generation advice• Business characteristics for successful

transitions• Next generation advice


Senior generation advice


Sad History of Farm Succession…

• ~10% of family farms pass to 3rd generation

• Why? 3 Key Factors (per Farm Journal):– Inadequate planning– Insufficient capitalization (too much debt)– Failure to prepare the next generation

• We would add a 4th factor– Poor Communication


Get Your Financial House in Order

• Income supporting at least 2 families– Even if one is retiring

• Balance sheet strength– Net worth of 65% or greater

• Generating profits– Return on assets of 8% or more– Paying taxes regularly

• Business growing• Attractive to the next generation


Build Respectful Adult Relationship

• Limit traditional child/parent roles to personal matters

• Demonstrate respect for next generation’s potential– Critical to show respect in order to earn it– Commitment they are making is significant, risky, and

voluntary• Welcome new energy, ideas, and change


Get Them Ready…• Don’t prepare the path for the child, prepare the

child for the path• Have them work somewhere else to start their

career• Education requirement – college or technical?• Set expectations for ongoing learning or

continuing education• Have them prepare a business plan• Have them run a popcorn stand within your

operation


Don’t Wait Too Long• Fathers’ focus:

40’s = grow the business50’s = emphasize family & business

philosophies60+ = hold onto control

• Sons’ focus:Under 27 = break free27 to 33 = look to fathers as role models33+ = seek recognition and independence


Business Characteristics for Successful Transitions


How many of you make decisions like this?


“In preparing for battle I have always found that plans are useless, but planning is indispensable.”- Dwight D. Eisenhower


Keys to success

Plan Implement

EvaluateAdjust

Writ

ten

plan

s ha

ve

grea

ter c

hanc

e of

bein

g su

cces

sful

!

Process is

ongoing &

not once and

done!


Consequences of Not Planning:• Family conflict• Taxes• Divided business assets• Power struggles among successors• A business unfit to survive and compete


Business Lifecycle

Not good!


Business Transition Lifecycle

Next GenSuccess

Senior GenStartup

Knowledge/Asset

Transfer


Show Interest in Financial Management of the Business

• Office work ≠ nap time!• Understand financial statements• Prepare Budgets• Include everyone in financial

management meetings• Transition success if greatly

improved if all are involved


Planning for Management Transition

• Clarify roles & responsibilities for everyone• Set goals and expectations for performance• Measure production and financial results • Communicate frequently about results,

preferably in management team meeting• Plan for the orderly transfer of responsibilities

over time


Communicate Openly

• Become an outstanding listener– Stop talking, hear, & think about what is said– Ask questions to gain further understanding

• Get it on the table – Be open– Tell them your goals and ask what they want

• Learn to talk about difficult topics– Usually your fear is worse than the reality– Assumptions are deadly, don’t keep them around


Practice Leadership

• Leaders set and achieve worthwhile goals– Know your personal goals and work toward them– Help others to achieve their goals (Owners,

employees)• Commit to the farm’s mission and goals• Build respectful, working relationships with non-

family employees and outside advisors• Leadership requires practice, start now and build

up to bigger challenges


Build Profitable Business

• Pay reasonable wages• Build a reasonable recapitalization plan• Develop a growth strategy• Have regular business meetings• Encourage leadership from others• Use sound tax planning (not tax avoidance)


Next generation advice


Build Respectful Adult Relationship

• Limit your traditional child/parent roles to personal matters

• Demonstrate respect for senior generation’s achievements– Critical to show respect in order to earn it– Farm business they have built reflects huge

investments of time, effort and money

• Establish your independence– How independent are you if mom still washes your

cloth


Seek & Demonstrate Responsibility• Responsible: “answerable or accountable, as for

something within one's power, control, or management”

• One of the primary attributes the senior generation is looking for…

• Be willing to assume responsibility for important business functions

• Responsible people: set goals, perform tasks consistently, measure results and take the glory or the heat for their actions


Show Initiative• Initiative: “readiness and ability in initiating action;

enterprise”

• Senior generation often welcomes energy and ideas from younger partners

• Don’t wait for instructions on routine tasks, take charge and get the job done

• Seek new opportunities, technology, ideas– Consider how they apply at your farm– Do a partial budget (What it costs, How much it

makes or saves us)


Show Your Desire to Learn

• Don’t:– Be embarrassed about a lack of knowledge, learning

is the cure– Don’t pretend that you know when you don’t, this is a

serious barrier to learning that adds up over time

• Take advantage of learning opportunities• Leverage the knowledge of advisors for your

business


Demonstrate Personal Financial Discipline

• Spend less money than you earn• Eliminate credit card debts• Establish a personal or household budget and stick

with it• Save money for emergencies and for opportunities• Know your credit score• This will affect your future borrowing ability


WRAP UP


A Thorough Transition Plan• Family discussions to reach shared goals• Business structures that you can understand and manage

(partnerships, LLC’s, FLP’s, etc.)• A business plan and financial projections for the next generation• Post-farming plans to fund the senior generation’s needs• Estate plans that are equitable for all heirs• Leadership and management development plans• Risk management plans such as elder care and key person

insurance• Buy-sell agreements and funding sources

A good plan requires significant discussion, analysis, expertise and time. The investment is considerable, but far less than the

cost of poor planning!

• Demand a plan that is understandable, not simple• Pick a team leader

It Takes a Team…

Farm Family

Financial Planner Accountant Attorney Lender Consultant


Michael Hosterman, Ag Business ConsultantAgChoice Farm Credit109 Farm Credit DriveChambersburg, PA 17202

Office: 717-263-3315Mobile: 717-215-3179Email: [email protected]

mailto:[email protected]

knowing you makes the difference. tm 4-nov-2015 – pdmp fall issue forum business transition...

Documents

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transition succession

succession planning

transition aspassing

tm5senior generation

word estate planning

tm2 transition noun

effective transition