3 Pillars of Succession Planning

-

DID YOU KNOW? Only about 30% of family-owned businesses survive into the second generation. 12% are still viable into the third generation and about 3% operate into the fourth generation or beyond, according to the Family Business Institute.

Three primary transitions comprise a succession plan. These are:

Do you have these pillars in place to successfully transition your business to the next generation? We’ve consulted experts from across the seed industry on how they’ve transitioned the business to the next generation, looking at management, ownership and finance.

Many companies plan for ownership and management but neglect to allocate the proper resources and time for a financial succession plan, says Wayne Gale, president of the fifth-generation family-owned Stokes Seed, which has roots dating back to 1881. Gale says the company has been in his family for three generations and he’s either witnessed or been a part of three very different approaches to succession planning.

Gale’s grandfather (W.H. Gale) worked for Francis Stokes who decided to shut down U.S. operations because the company was losing money during the Great Depression, but Gale says his grandfather took over operations and continued the business with his son (John) by his side.

“I joined the company in 1983 after working as a data processing consultant,” Gale says. “My grandfather had a Grade 8 education and my father had a Grade 12 education. They learned through the company and were extremely knowledgeable when it came to products, the environment and agronomic practices.

“I brought the business knowledge. My father and I each brought very different skill sets to the business and we complemented each other well.”

—Wayne Gale

Gale shares when W.H. passed the business to John, very little support was provided. Transitioning the ownership was very basic and a maybe even a bit divisive, Gale explains. There was very little management transition and the financial aspect of planning was non-existent.

“As my father put together his succession plan, he was very supportive and took a much more sophisticated approach,” Gale says, adding that they had detailed plans for each of the three key components.

Now as Gale looks to the next generation, he says a different approach is required, as he does not have a family-heir interested in management. Gale who has essentially grown up in the business says as an owner, this can be very scary and even intimidating to think about. He knows if Stokes Seed is to continue its legacy, he must plan for a seamless exchange even if it’s not within the family.

“I’m looking at a family-ownership structure, rather than a family-management structure,” he shares.

Gale admits he’s become somewhat of an expert in the area and once a year for the past 13 has taught succession planning to business students at Brock University in Ontario, Canada.

“Passing on your seed business is more than just the transfer of assets,” he says. “It requires thought, frank discussion and goals.”

Barb Dartt, a senior consultant at the Family Business Consultant Group, agrees.

“The complexity of succession planning makes it hard to know where to start … that’s one of the biggest hurdles,” she says. “Also, ‘success’ is different for every family and every business.

“For many, the ultimate goal is to preserve or grow family relationships. And that means that sometimes success means not every family member working in or owning the business.”

She explains that there’s inherently a great deal of risk with any business and when you add family into that mix, the risks are even greater. At the same time, with proper planning, governance and communication, it can also be very rewarding and beneficial for the greater good of the business.

Through the planning process, management has the opportunity to:

  • Motivate employees by creating growth opportunities.
  • Identify skill gaps and talent development needs.
  • Adapt the organization to demographic and talent changes.
  • Transition highly specialized skills into key roles.
  • Preserve institutional knowledge.

Before you can dig in, you’ve got to have a vision. What are your goals for the company? For you personally and professionally? For your team? Once you have a vision in mind, you can go about putting together a succession plan that best meets the vision.

Dartt says business owners need to be clear in what they are trying to accomplish. Since family businesses put family relationships at risk, those doing this planning need to discuss and understand, collectively the answer to this question: “How does working in or owning this business together make our family better?”

We sat down with leaders across the seed industry who are either in the middle of transition or have completed one. These include representatives from the Wyffels, Beck, Latham and Curtis families, in addition to Gale.

Here we are going to focus on the three pillars of management, ownership and finance to explore what each piece entails and possible strategies.

PILLAR 1: Management

When you’re planning for a transition, you need to have confidence in the next generation’s ability. Do they have the skills, talent, strengths and vision? It’s exciting to think about the next generation, the future and the opportunities. Many times, successors grow into their new role.

That has been the case for both Scott Beck and John Wyffels.

Beck returned to the family business after graduation from Purdue University and was named vice president of Beck’s Hybrids in 1990 and then president in 2015.

“We’ve had an evolution of leadership, rather than a revolution,” says Beck, who’s gradually taken on more and more responsibility while acknowledging that the skills, talents and style he brings to the table differs from that of his dad, Sonny Beck who serves as CEO for the business.

Wyffels came back to the family enterprise after working more than 10 years in the financial business. He entered as vice president of finance in 2013, and in 2017, he was named president.

“For me this whole process and topic is really a journey,” Wyffels says. “There’s not an endpoint or destination where you stop and say ‘we are here’ or ‘this is the end.’”

Organizations face constant pressure to build a strong, effective and sustainable leadership pipeline. In a global survey of 2,300 human resource directors, nearly 40% of participants indicated that they do not have a formal succession plan for their CEO.

So what do you do when you don’t have the internal talent needed for a management transition?

Dartt says one strategy she sees being used more and more is that of a bridge CEO. This occurs when senior leadership is ready to step away, but the next generation isn’t quite ready to take the reins. Businesses hire a non-family CEO until the next generation within a family is ready to take over.

“This can be very stabilizing for a business,” she says, adding that it also allows for mentorship of the next generation from someone who is not family.

This doesn’t have to mean a complete exodus from the business. Dartt says, if the governance structure allows, senior leadership can remain active on the board or serve more in a consulting role.

“Just because you have a change in leadership doesn’t mean you have to move away from family ownership,” Dartt says, “but you’ve got to have the right governance.”

Succession planning at the management level instills confidence across the organization that selection of future leaders is strategic, comprehensive and fair. First you need to look at whom. For small- and medium-sized businesses and family-owned businesses, the answer might be apparent. However, companies with a large team will have more people to train up and evaluate. Nonetheless, you need to identify a potential leader or depending on structure, leaders.

Once you know who, it’s important to evaluate and determine the types of training and development opportunities needed to help prepare them for success. Do they need financial training? Do they need soft (people) skills? Do they need to improve in the area of public speaking and their ability to present and articulate different concepts?

Once you’ve identified the areas of improvement and skills needed for an individual, then your team can put together a training program to meet those goals. After you have a training program, it’s just practice and implementing the program.

Brothers Bob and Bill Wyffels (second generation) knew there would be an added level of complexity with a third generation stepping into leadership roles. More than 10 years ago, they had the foresight to create a model business, which they call W3G (Wyffels 3rd Generation). It was a real business that allowed cousins John who was 25 at the time and Jacob who was 16 at the time to make decisions together. They had to learn to communicate with each other and get a sense of the other’s style, strengths and weaknesses, and they got to learn from the other.

“At some point, you’ve just got to start [handing over the reins],” says Bob, who served as vice president of production until February of 2019. Now his son Jacob has stepped into that role. “We wanted the next generation to start filling these positions while Bill and I are alive, while we can offer guidance and help.”

Scott Beck can appreciate that. Sometimes, there’s an unwillingness to let leadership move in and take on responsibility, he says, adding that sometimes that transition is abrupt or unexpected.

Beck went back to school and earned a combined master’s of agricultural economics from Purdue University and a master’s of business administration from Indiana University’s Kelley School of Business.

“It was needed,” Beck shares. “When my dad turned 50, we had about 15 to 20 full-time employees. When I turned 50, we had about 500.”

Training can be extra degrees or it can be in the form of workshops or it can be personal development with a coach.

A few of the courses specific to the seed industry include the University of California, Davis, Seed Business 101 workshop, Iowa State University’s Seed Technology and Business master’s course and the ASTA Management Academy offered by Purdue University.

Depending on how far out you’re working, it’s beneficial to evaluate the plan every six months to a year to check on progress and see if any additional measurements or training is needed. If you can, it’s beneficial to run a few stress tests. This will allow you to further identify any areas where work might be needed, as well as boost confidence for both generations.

According to the seedsmen we spoke with, here are six tips to successfully train up the next generation.

  1. Align succession planning with business goals and values.
  2. Establish a culture of transparency.
  3. Take a comprehensive view of internal talent.
  4. Focus on targeted development.
  5. Establish leadership accountability for the talent pipeline.
  6. Create a mentoring framework.

Building a scalable and dependable leadership pipeline is difficult, but organizations that invest in succession planning are primed for competitive advantage and will be more prepared for turbulence in a rapidly changing economy/industry.

Sometimes management is family, and family is ownership, but sometimes it’s not. Sometimes, family owns the business but is not active in management. Regardless, finding the right person or group to transfer business ownership to is an important aspect of succession planning. And what might be just as critical is that they share in your vision and the company’s mission.

PILLAR 2: Ownership

The transfer of ownership might happen at the same time as the transfer of management, or it might occur at a predefined time. Other times, it’s at the death of the current owners.

For the next generation, being able to finance or being able to write a business plan to finance the purchase is equally important as having the skills necessary to lead the business forward.

Dartt, whose work is 60% to 80% in agriculture, says that if every generation has to buy the business back, it can really slow growth. With the right structure and governance, a company can remain in the family and maintain its growth trajectory through various transitions.

For independent companies, there are five common ways to transfer ownership: co-owner, heir, key employee, outside party and company.

Keep in mind there is no one way to structure a business. Each business is unique, and each family has different dynamics at play.

The first is selling your share of the business to a co-owner, if you have structured the business in such a way. Many partnerships draft a mutual agreement that, in the event of one owner’s untimely death or disability, the remaining owner(s) will agree to purchase their business interest from their next of kin. This type of agreement can help ease the burden of an unexpected transition, for business and family members alike. A spouse might be interested in keeping their shares, but might not have the time, investment or experience to help it grow. A buy-sell agreement ensures they’re given fair compensation and allows the remaining co-owners to maintain control of the business.

That’s the case with both Latham Hi-Tech Seeds and Curtis & Curtis, Inc.

Brothers Blake and Tye Curtis have operated a seed company that specializes in native grass and plant production in Clovis, N.M., since 1956. The business was started by their parents J.V. Rip and Thelma Curtis in 1956. The way the operating agreement is written, each brother owns 50 percent of the business. If something happens to one brother, or one wants out, the other agrees to purchase the other half.

Blake and Tye are in the early stages of a new ownership plan to ensure the business is around long after they’re gone.

More recently (2009), John, Shannon and Chris Latham came together to form Latham Hi-Tech Seeds, and they serve as co-owners. John and Shannon are a husband-and-wife duo, and Chris is John’s brother.

In this trifecta, Shannon brings marketing experience to the table with her background at an ad agency, Chris brings business experience with his background as a chief financial officer for a local business, and John brings sales expertise through the work in the seed business.

“The most important thing for me is to have fellow owners that I can trust,” says John.

Another popular option for business owners who have children or family members working in the business is to pass it on to an heir. If you have just one family member who works alongside you, deciding who is an easy decision. However, it can be quite complicated when you have multiple children and nieces or nephews and more than one is interested in taking over the business. In this case, you’ll need to provide clear instructions on who will take over what and how other heirs will be compensated.

With three kids and 13 grandkids, Sonny Beck had his work cut out for him in structuring an ownership plan; however, only one son was actively involved in the management of the core business. Beck’s philosophy is simple: the basic function of ownership is to finance the company.

“Our rule is that you have to be working for the company to retain stock ownership,” he says, adding that any family member is welcome to work in the business.

But Sonny has two rules: first, you must have two meaningful jobs before you can work for the business; second, before you can be hired, you must have a passion for the job.

Now that doesn’t mean that Scott’s two siblings and the grandkids don’t see value from the family business. They do, and they also get to help direct funds for good causes through other entities and a foundation set up by Beck’s father and mother.

However, not every business owner has an interested heir or co-owner. If no heir is interested and you don’t have a co-owner, you might consider selling it to a key employee. For the best transition possible, you’ll want to choose an employee who is experienced, business-savvy and respected by your staff. Just like selling to a co-owner, a key employee succession plan requires a buy-sell agreement. Your employee will agree to purchase your business at a predetermined retirement date, or in the event of death, disability or other circumstance that renders you unable to manage the business.

Michigan’s John Diehl who founded D.F. Seeds in 1992 went this route a few years ago. In 2015, he transitioned ownership and management of the business to Christine Varner, who at the time was the company’s operations executive. Varner had been with the company only five years, but she brought more than 25 years of agribusiness experience to the table. She was and is the right person for the job, Diehl shares.

This change, Varner and Diehl agree, positions the company for a healthy, long-term future. Diehl is still active in the company, serving as its research director.

When there’s not an obvious successor, owners might want to look outside. Is there another entrepreneur, or even a competitor, that would purchase your business? If this is the direction you see, it’s important to prepare your business for sale as far in advance as possible. This means having an A-team on board, formalizing all operating procedures, getting your finances in check, and making the business as stable and turnkey as possible. Remember, you want to be attractive to outside buyers. Make it an impossible opportunity for them to pass up.

This looks to be the route for Tracy Tally of Justin Seed Co. in Justin, Texas. He and his wife Julie have three daughters ranging from high school to recent college graduate, and they have no interest in taking over the business. Tally is the sole owner and is looking at options for the future of the business.

The last option discussed here is selling shares back to the company — this happens when a business has multiple owners. Companies that structure this way typically have an entity purchase plan or a stock redemption plan in place where the business purchases life insurance on each of the co-owners. When one owner dies, the business uses the life insurance proceeds to purchase the business interest from the deceased owner’s estate; therefore, giving each surviving owner a larger share of the business.

We’ve not come across a company structured this way, but if you are or know a company that is, please send a note to jdeering@issuesink.com.

Once you know who will manage and who will own, and it might even be the same person or group, the financial aspect of succession planning becomes easier, but the ownership piece has to be in play for the best possible financial outcome. Owners will need to secure the transfer of ownership, generally a combination of powers of attorney, a will and trust provisions. As part of this process, you’ll need to assess the value of the land, buildings and other assets.

As a company grows and becomes more sophisticated, Dartt says one tradeoff is that it usually needs to be accompanied by more formal governance.

According to the authors of “Family Business Governance,” strong governance can create an environment of smooth decision-making, cohesiveness, effective conflict resolution and a directive that moves the business forward.

Governance might include creating structures such as a board of directors, family councils, committees and foundations.

PILLAR 3: Finance

Your team of advisers can help figure out the pros and cons of different arrangements and help with the tax implications, Gale says. Many business owners don’t have sufficient cash on hand to pay the sum of federal estate taxes. Here, life insurance policies and the structuring of a trust(s) and different business entities can help create the needed liquidity.

Beck shares Dartt’s thoughts on each generation having to buy back the business. He says with the death tax, formally known as the federal estate tax, many family-owned businesses simply can’t afford to be transitioned every 20 or 30 years.

According to Ross Nager, a certified professional accountant and contributor to the Family Business Advisor, the federal estate tax is levied on the estate of a deceased person before any of the property is transferred to the heirs. On the other hand, most states assess an inheritance tax, which is technically a tax on the individuals who receive property from an estate. The estate pays both federal and state taxes. Both of those taxes are based on the values of the assets owned at death, less liabilities and further reduced by an array of deductions and exemptions.

If you’re transferring property within the family, many usually do so below market prices. If you don’t plan for the transfer of assets, state law might dictate how the business and its associated assets are distributed in the absence of a succession plan.

As the Curtis brothers work through the transition of management and ownership to the next generation, one of the things they’ve realized is that they can’t liquidate their assets in a C-corp, so they have had to transition the business to an S-corp.

“As part of that change in the structure of the business, our assets are essentially frozen for five years,” Curtis shares. “And what we are seeing is that our guys are needing to own different assets to have something to borrow against.”

Curtis says he’s really pleased with the work of the next generation of owners and the progress being made and fortitude being displayed.

“It takes time,” Curtis says. “You’ve got to have a flexible timeline to be able to work through the necessary steps to get the structure that best suits your business.”

One of the biggest reasons why people fail in successions is incompatible estate planning.

“It can undermine even the best of intentions,” Gale says.

Beck and Gale agree this is where you need help to get the best possible scenario.

“My dad always said, ‘learn from the mistakes of others because you’re not going to live long enough to make them all yourself,’’ Beck says. “Talk to someone who has done it. Be open to sharing information and ideas. Get an advisor and read a book on the subject.”

This is not a process that you want to tackle alone. Assemble the best team possible. You’re going to need people you trust and respect to help get you through the process. If it’s a family business, consider bringing in a third-party facilitator to ensure meetings run smoothly, cover all necessary points and that everyone get to voice their concerns.

Experienced bankers or wealth managers can help facilitate parts of the discussion. You’ll also need to consult with legal, tax and financial advisors about succession plans. Once a plan is determined, the rest is straight forward. Follow it and evaluate periodically for a successful transition.

If independent business is to be a thriving sector of the seed industry, we must properly plan for the next generation.

Podcast

Don’t Get Caught on the Wrong Side of EU Privacy Requirements

Jodi Daniels is Founder and CEO of Red Clover Advisors, a privacy consultancy, helping companies create privacy programs, build customer trust and...

Calendar

Do NOT follow this link or you will be banned from the site!