It is estimated that less than one-third of family businesses successfully transition to the second generation and nearly 90 percent of family businesses never make it to the third generation.

Dave Specht, a family business consultant and lecturer in family business management at the University of Nebraska – Lincoln, acknowledges that business succession requires thoughtfulness, hard work and diligence. To facilitate that process, he advocates that family business owners focus on three important C’s.

Specht said, “As farmers and ranchers as a group continue to age, the challenge of generational succession planning becomes more important than ever.

The difficulty with knowing where to begin often paralyzes families from doing anything at all.”

Thus, Specht said focusing on the three C’s – communication, contingency planning and cash flow planning – can serve as a starting point to the succession process. He shares this advice:

Communication is key to the ongoing success of a family business and ultimate happiness of the participants, said Specht.

Because of this, he said, “Getting two generations that work together to talk openly about the outlook and desired goals for the long-term future is crucial. It is necessary to encourage and sometimes force family members to begin talking about goals, perceptions and challenges in the business.”

Specht adds, “Too few families create an open, safe forum for communication. Some of the biggest problems family businesses face can be prevented if the tough conversations are managed and confronted. Conflict is OK as long as it is managed.”

He also points out that encouraging family members involved in the operation to talk about opportunities and threats to the business is healthy.

Families who have open dialogue are usually able to navigate the difficult and sometimes stressful process of transitioning a business.

Specht suggests that to get the lines of communication started, it is often helpful to use a trained mediator to run family meetings while the family gets acclimated to the structure, purpose and ground rules of these interactions.

A trained professional can also help manage the conflict that inevitably arises. He adds, “Once your family establishes a healthy pattern for these interactions, the family can choose to manage the role of meeting leader internally.”

The second C is contingency planning. Specht said, “One of the biggest threats to a farm or ranch occurs when a leader dies or suddenly becomes unable to function in their normal role.

It is strongly recommended that a written management contingency plan be in place to set guidelines, provide instructions and to select who should lead if such an event occurs.”

This management contingency planning process should identify a leadership development plan to close the “knowing/doing gap” that exists between the current and future leader.

Secondly, the contingency plan should address how ownership will be transitioned if something happens to one or more of the owners.

An updated buy/sell agreement with a fair valuation methodology is a good start, suggested Specht. An understanding of estate tax implications of such a transfer is also vital.

A third step should be communicating the plan to the necessary parties. “Having the opportunity to explain your intentions and goals for the family and operation is key to helping the people you care about to navigate the transition during an otherwise difficult time,” said Specht.

The last C – cash flow planning – is sometimes the most difficult for farmers and ranchers, acknowledged Specht. Where will the senior generation’s retirement cash flow come from when they decide to exit the day-to-day operation of the farm or ranch?

“Ideally, you should set aside money over the years to have an alternative source of income to cover necessary living expenses during the retirement years” said Specht. He adds, “Relying on the next generation to provide for retirement cash flow from the operation is not only risky, but it also adds tension to family relationships when the operation struggles.”

Specht concludes, “Understanding and managing the three C’s will not only help your operation succeed long-term, but will also insulate your family from unnecessary friction and conflict.” 

David Specht is a coordinator of family business programs for the College of Business and Extension at the University of Nebraska. Contact him at www.davespecht.com

PHOTO: Families that want to keep a ranching operation moving forward into the next generation start with solid communication. Staff Photo

Think a transition plan isn’t important?

Some number crunching illustrates what’s happening when successful estate and transition plans don’t materialize.

Nebraska data show that in 1982 there were 13,436 operators of farms under the age of 35 and 8,777 farm operators over 65 years of age. In 2007, there were 3,353 farm operators under the age of 35 and 13,062 farm operators over 65.

Put another way, in the 25 years between 1982 and 2007, the number of young farmers declined to 25 percent and the number of senior farmers increased to 149 percent.

University of Nebraska agricultural economist Dave Goeller suggested the demographic trend leads to three potential outcomes.

The operator or his heirs will liquidate the operation, or the operator or heirs will rent the land and equipment to the highest bidder, or a successor will be found to continue the existing business.

The choice of bringing in a successor versus the first two options is going to be a major decision of the retiring operator, said Goeller.

He added that the decision about a business successor depends on whether the retiring farmer wants his life’s work to continue – and takes the time to develop a plan for it to continue. If a family member is available and capable, the decision may be easier to make.

But he also emphasizes that a family successor is not required for the operation’s legacy to continue.

If no family heir is interested or available to carry on the operation, Goeller suggests third-party networks, such as Nebraska’s Network for Beginning Farmers or the TIP Net launched by USDA (http://www.fsa.usda.gov/tipnet), programs designed to connect young farmers with retiring farmers in an effort to ensure business succession, rather than business liquidation.

That said, Goeller emphasizes that planning is a necessary element needed to initiate and facilitate this transition.