Only 10 percent of family businesses survive into the third generation, and more than 50 percent fail in the second generation. To improve your odds of successfully continuing the family business, find a trusted business consultant who also understands family dynamics and personal issues among family members.

Bringing the next generation into the family business is not for the weak of heart. This may well be the toughest, least understood—but most rewarding—responsibility in family businesses.

The key, according to Norm Coe, business consultant with First Pioneer Farm Credit, is to get help from a trusted business consultant.

"Families transfer their businesses to their children only once in their lifetimes," says Coe. "So, of course, they need help to move through the process and to sidestep potential pitfalls."

On your own, the process can be overwhelming. Your business is unique because it is shaped by your family dynamics. And combining the emotional dynamics of family relationships with the demands of a business often creates very difficult challenges. Bob Pingrey with two of his sons, Dan, in striped shirt, and Don. Their transition plans are moving along nicely because of excellent communications between generations and their profitable businesses.

Get help from a business consultant

Many business owners think first of the legal, tax and financial aspects of transferring the business. While these issues are important, addressing the family dynamics and personal issues among the family members in the business should come first.

Farm Credit consultants can help. We work with the thorny issues of family businesses every day, and can help you every step of the way, from planning for the gradual transfer of management to promoting good communications in the family.

A four-step action plan

As you consider transferring your business to the next generation, Norm Coe suggests that both generations ask the following questions. The answers can form a solid foundation for your transfer plan:

1. Am I ready?
2. Can I afford it?
3. Does the family communicate effectively?
4. At what speed should we transfer management responsibilities?

Am I ready?

Here are some "readiness" questions for both generations. "No" answers mean you have more to do before you proceed.

For the current owner, ask:

• Am I ready to give up some authority?
• Am I open to letting the next generation test their ideas?
• Can I support their efforts when they make a mistake?
• Will I encourage them to work off the farm for a few years to experience life in other businesses?
• Will I share my expectations with them and listen to their dreams?

For the next generation, the questions are equally significant:

• Do I have the knowledge to be an asset to the business?
• Have I attended college or seminars on business management and people management?
• Am I ready to commit myself to the future of the business?
• Do I have the patience to stand back for a few years to absorb lessons that my parents have to teach?
• Am I ready to learn their philosophies of business management, financial management and people management?

Trial period

Dave Stafford, a business consultant with Farm Credit of Western New York, cautions families to start down this road slowly. He recommends that both generations use a two-to-five-year trial period to determine if their relationship is likely to succeed.

Stafford also recommends delaying the transfer of ownership during this period so that both sides can assess the situation and withdraw, if necessary, before committing to a joint operating agreement.

The future owner should work as an employee in the business during this period to learn its inner workings while earning greater responsibilities. The employee should have a written job description that clearly spells out both generations' expectations and the business transfer plan.

Both generations should sit down to review each other's performance regularly. Talk about the business's weaknesses and what you can do together to improve it. Also discuss how the transfer plan is progressing, and bring up any concerns.

Responsibility, authority and ownership

Once the trial period is over, be ready to pass on more management responsibility, authority and decision making to the next generation. And don't wait too long, because you can create serious conflict among your children.

Norm Coe cautions, "Transfer management responsibility to the next generation before you transfer ownership. Transferring management is a long-term process that involves developing people skills in the next generation. Just because the children have worked in the business for years, doesn't mean they are ready to manage people. They first need to learn how to treat employees, talk to them, direct them and ensure they are happy on the job. Take the time to nurture these skills in the next generation to ensure the long-term success of the business."

Another challenge is learning to pass "authority" along with "responsibility" to the next generation. Sometimes the line between the two gets cloudy. If the next generation must come to you to approve their decisions, then they have responsibility, without the authority. If your daughter manages a crew of employees, for example, then you need to stop listening to the crew's complaints. The next time an employee turns to you, just say, "Talk to my daughter about that problem. She's in charge of those issues now."

Can I afford it?

A decision to transfer the business to the next generation should be based on its profitability. Only if the business is profitable can the parents be in a position to provide an opportunity for the children without risking their financial security in retirement.

Norm Coe says parents should remember that the parents' financial security must come first. Social Security retirement benefits are not enough to fund retirement. Consider how you will fund your retirement before you help your children start in business.

You need four sources to fund your family living expenses in retirement:

1) income from the sale of the business

2) savings and investments

3) income from tax-deferred accounts, such as IRAs and SIMPLE retirement plans

4) Social Security

If you plan to transfer the business to your children, consider what the next generation can afford to pay for it. The amount is typically less than its net worth. So consider if you can afford to sell at a reduced price without compromising your financial security.

Does the family communicate effectively?

Very few family businesses exist without experiencing communication problems at one time or another. Poor communications can cripple a family business from moving forward. So before you think about transferring the business to the next generation, your family needs to be able to communicate on a consistent, peaceful level.

Here are some suggestions for keeping your lines of communication open:

• If an issue is bothering you, don't let it fester. Speak up while it is still clear in everyone's mind. Bringing up sensitive issues is never easy, but ignoring them can lead to disaster.
• Feel free to debate ideas and issues, but remember that blaming the other person never solves a problem.
• Find time to talk about issues away from the business from time to time.
• Stop trying to find the perfect solution that everyone will love. It probably doesn't exist. Just look for one that will work and be acceptable to both generations.
• Never go into business with a family member whom you can't talk with.
• Keep all spouses informed. They need to know how the transfer will affect their futures.

At what speed should we transfer management responsibilities?

As a parent, you tried to raise your children with common sense, warmth, kindness and a little discipline. You gave them a solid work ethic and the desire to be part of the business as adults. You taught them the importance of education, and you recognized their talents and worked with them on their weaknesses.

Now as they are about to enter the business full time, the current owners need to switch hats from parents to mentors. As the business owner, your job is to develop future leaders, and to create win-win situations in your business.

But at what speed should you proceed? Parents: Only you can determine your comfort zone, when it comes to teaching—and turning over—management responsibilities. And kids: You'll have to figure out how much attention you will give to learning these skills.

Dave Stafford offers a few tips to help you teach the management, employee management and financial skills the next generation will need to handle ownership responsibilities — regardless of your pace of change:

• Open up about business problems so they develop realistic expectations.
• Open the books. Discuss your income and expenses. Allow someone in the next generation to pay bills, hand out payroll checks, make deposits and process payroll so they understand day-to-day money matters.
• Look over management reports together and note line items that require close attention, such as whether income and expenses are on target.
• Ask your Farm Credit records expert or loan officer to stop by to work with the next generation on how to interpret financial records, cash-flow planning and business analysis.
• Meet monthly to go over ideas and plans and to discuss what's coming up.

One family's smooth transition
See how one family has prepared for making the transition to the next generation. Click here for the Pingrey's story.

How Farm Credit can help

A Farm Credit consultant can work through each of these four steps and bring an objective viewpoint of your business as well as knowledge of the technical aspects of a business transfer.

Why not talk with someone who knows just about everything there is to know about family business transfers? Call your Farm Credit office or E-mail us and ask how a business consultant can help you plan your business transfer.

• Who needs a consultant?
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