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Farm management: Business-first families or family-first businesses?

Lynn Jaynes Published on 28 January 2015

Have you ever heard any of these thoughts expressed, or maybe they crossed your own mind?

  • “If Dad would just give up some power ….”
  • “If Mom would just say what’s on her mind ….”
  • “If the kids just had a work ethic ….”
  • “If he hadn’t married her, we’d be fine.”

Jolene Brown, professional speaker, author and family business consultant, advises, “We have to start with what’s real – not what’s fair or what should have been in the will, not with what would have been right.

We have to start with what is real.” In other words, the “if onlys” aren’t going to help move a family business forward. What moves a family business toward healthy business succession is beginning with hard realities.

Business first or family first?

business or family

One of the first realities to face for the owners is to decide if they want to operate as a family-first business or a business-first family. Brown says, “A family-first business bases decisions on habits, traditions, assumptions, wishes and hope.

Sometimes they tolerate behaviors (anger, laziness, arrogance) from family members no other business would allow, and they even reward those behaviors with a paycheck.”

As cold as business-first may sound, it does not demean the family, nor does it say the business is more important than the family. In fact, Brown says, it elevates the family by saying, in essence, “We honor the family so much, we’d better get the business right; if not, at the end of the day we may have neither family nor business.”

Brown emphasizes acceptance in a family is unconditional. If you’re a parent, you get to love them, lead them, help them grow, then let them go. Acceptance in a business, however, is conditional; it is not a birthright.

Leadership in family businesses

Another paradigm shift to a business-first family is making sure there is a clear and well-trained leader. Brown asks, “Who makes sure the vision and common goals are defined? Who explains the job descriptions, hires, coaches, promotes, fires? Who is the people person with the education, experience, character and personality others will want to follow? Also, leaders in transitioning businesses understand the number one job of leadership is to replace themselves.”

Brown says, “In a legacy business, the minute you say, ‘I want this business to continue,’ you are no longer independent but interdependent. Then watch to see how power is exercised.

If you choose to maintain sole control of management, leadership and ownership, be a sole proprietor, not a corporation, partnership or an LLC. Let others know you are the puppeteer and they are the puppets. Then pay them well, for that’s how you will get loyalty.”

If, however, you want the business to continue, then you become interdependent, and leadership skills will be key. Leaders communicate the farm’s vision – the harvesting schedule, the calving vision – and let everyone know what the job description is.

A leader must train, mentor, coach and have the necessary competencies, experience and education to lead a growing team. Leadership is a people skill; a leader decides “what” before “who.”

Advisory team

Creating a successful business alone is unrealistic in today’s environment. Brown says you need an accountant, attorney, personal financial planner and a family business consultant – and these may not be the family friends you’ve used for years. Seek those who specialize, work well together and who will hold the family accountable while also celebrating your successes.

While moderating a panel of key advisers, Brown asked “What do farmers do that drive you crazy?” Accountants said farmers do not want to pay any taxes; lawyers said farmers want them to tell them how to divide the estate so the kids won’t be mad; financial planners said farmers want to know exactly what day they will die so they have enough money to live until then; family business consultants say farmers want to focus on production, not people, forgetting it’s the people that do the production. The reality of these mindsets often keeps wise decisions from being made.

Compensation

Brown says money matters. Employee compensation has to be evaluated fairly and dispassionately. Employees, whether family members or not, must be evaluated on the basis of the value they add to the business and be compensated at fair market value.

If market-value compensation is not paid, then Brown advises rewarding the “sweat equity” each year, not at the time of death. Brown says, “Remember, the kids don’t have to start out where you are today – you didn’t. But neither can they start out where you were when you started out.”

Contract versus conversation

When working in a family business, Brown cautions about three commonly made false assumptions:

  • “If you work hard, someday you’ll own all this.”
  • “Someday I will retire.”
  • “Don’t worry about the siblings; they have other jobs and don’t care about the business.”

These three assumptions cause a lot of trouble among families but can be remedied with contracts and other paperwork – and a conversation is not a contract.

Good businesses have many things in writing, including the all-important management and ownership transfer plan, a conflict-management plan, and a buy-sell agreement. Brown says, “With family, more – not less – needs to be in writing, and remember, wills can be changed on a whim.”

Long-term financial security

In order for the business to continue, each owner must work toward a level of financial independence away from the business. To do this, Brown suggests two considerations:

  • Building assets so that 50 percent of a retiree’s financial needs comes from sources outside of the family business

  • Two-tier compensation

Brown says if an owner doesn’t diversify interests and create other revenue sources, he or she will micromanage the business to death. The senior generation must be financially and emotionally ready to transition control.

A two-tier compensation plan requires two types of payment: one for ownership representing a return on investment; a second for compensation representing salary for working in the business.

Brown also suggests the senior generation owner may need to keep some assets in his or her name that cannot be collateralized by the business. This allows the next generation to take the risks for their decisions without affecting the security of the senior generation.

When times are good

The last three years, according to Brown, have been some of the worst times to bring family members into the grain business, and more recently, into the livestock business. Without perspective, new business members may expect continued high compensation with a lifestyle not supported by the cycles of agriculture.

Celebration

There is nothing better than building a strong family business, one worthy of transitioning to the next generation. As business-first families, Brown says farmers grow in motivation, appreciation and positive results. They have earned reasons to truly appreciate each other and celebrate the journey. Brown says, “They become much more productive and profitable while sleeping a whole lot better at night.”  FG

Based on a presentation given by Jolene Brown at the Mid-America Alfalfa Expo in Norfolk, Nebraska, 2014. For further invormation contact Jolene Brown.

PHOTO
Child at play. Photo courtesy of Ray Merritt.

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