Succession Assets vs Management
Succession. When the word succession is used in agriculture circles most think of who gets what and when. Typically when any industry group hosts a panel on succession, they include a lawyer, an accountant, a young and old rancher; all talking about passing down the assets. When you run an agriculture business, succession is much more than the passing of the asset. The stickier part of succession is management succession. Who controls what? How are business decisions made? How do we help the outgoing generation step aside with confidence? How does the incoming generation develop the competence to step up? At the Ranching for Profit School, we discuss management succession. We teach how to build effectiveness areas and the importance of designing positions based on these effectiveness areas. This process forms the basis for management succession.
Succession planning must start with a clear understanding of the desired outcomes. Too often those who own the asset make decisions about asset succession that undermine management succession. These decisions are often made with good intentions. We want to treat our offspring fairly and we want to avoid paying unnecessary estate taxes. Unfortunately, these good intentions often make it difficult for those operating the business to have the autonomy needed to be successful.
For example, if ownership wants to keep the property as an intact operating unit, and allow those operating the business the freedom to determine enterprise mix and other key business decisions then the asset succession plan should support these desired outcomes. We often hear some form of “I want my kids to all be ranching together on this place when I’m gone.” This is a fairy tale that sounds nice but is about as likely to come true as Snow White. It works on rare occasions, but often the result is divided up ownership with units too small to support a family and worse yet, siblings that no longer speak to each other.
When current ownership makes the plan with clear intentions, that plan should be communicated to all interested parties. Unspoken expectations and surprises following the blessed event also tears families apart. If you are the current owner, you need to clearly communicate the plan. If you are an expectant heir, you can ask with love for clarity. “Mom and Dad. My family and I love being here on the ranch with you. But if we spend the next 10-20 years here, I will not be very marketable to go do something else at that point in my life. I’ve brought my spouse back here with me and we are growing a young family around this ranch. I need to know your plan for what you’re going to do with this now so I can make these important decisions with full knowledge of the plan.”
We at RMC hosted our first in-house succession planning intensive this past September, Ranching for Generations. It was amazing! Dave Pratt took the lead on developing the course and taught the inaugural one. Participants left with a clear goal for their succession plan, had an opportunity to evaluate alternative strategies, developed a timeline for succession and then created an action plan for the next few months based on that timeline. We are excited to announce that we will be offering the Ranching For Generations Succession Intensive as an annual course, with Dave as the instructor. This is only open to alumni businesses of Ranching for Profit. The business must have sent at least one person through the school to be eligible to attend, but not all persons attending the succession intensive must be RFP alumni. Click here for details on the upcoming succession intensive.
December 08, 2021 at 5:47 am, Dan Brockman said:
The problem with ranch management succession is that many ranchers don’t have a clear understanding of their managerial position. They go through their day to day activities like a leaf floating on a rushing stream, going from one catastrophe to another- the yearlings are out so the fence needs fixing, the hay is rained on and needs to be raked, the heifers are calving so everything else takes a back seat. If you don’t take control of the flow, the stream will take you wherever it wants; often not where you want to go.
As long as ranchers look at themselves as cheap labor, that’s about all they are. If you’re doing the job of cheap labor, who’s doing the job of management?
December 08, 2021 at 6:02 am, Rafa Flores said:
Dallas, This is an incredible topic. Incredibly difficult. I attended Stan’s school in 1990. Even then, the greatest drive for attendance was because family ranches had lost all hope, and the owners said… let’s give this a try. In my observation from all the classes that I attended and helped with, the greatest obstacle for all was this exact situation… Succession. I am glad that you and Dave have taken this on. It is definitely a needed part of any business plan… Even if your kids are in diapers or you don’t have kids at all. Succession/retirement need to be planned ahead of time. Not only does this make economic sense, but also ecologic sense. Why ecologic? Because without a clear plan, retirement looks like cannibalizing the edges of your ranch and the break up of the ranch means ranching disappears as smaller and smaller land holdings are not large enough to sustain themselves, or become housing developments (Lasater Ranch, Colorado the most recent example of a housing development).
Great topic. Great challenge. I’m glad y’all are taking this BULL by the horns.
December 08, 2021 at 9:34 am, Monte+lerwick said:
Thx Dallas – it feels like this is an issue you are very strong on – at least it’s the thing you’ve helped our operation on the most. The only thing I would add is that if management succession is a continuous thing, the asset succession will be a much smaller issue. That’s the beauty of a separate operating company, it opens the door to continuous management ownership transition to the new generation with low risk to the older generation. It can transition management at a quicker rate, and it can evolve to fit the management style of the people who are in it at the time. During our transition, in order to allow fair risk/reward and a “management proof of concept” phase, we had two operational companies working side by side. They had different owners and different but complimentary functions. When we worked in Dad’s business we did it Dads way. When we worked in my business, we did it my way. Everybody paid fair rent and fair wages and settled up annually. In our case, real management experience was more valuable than a simple business structure.
December 23, 2021 at 7:40 am, Calvin Crandall said:
Dallas and Dave,
We are well on our way to creating a Dynasty Trust for the land assets and need some advise. Do I put the cattle and machinery in the trust and carry on the business as we are presently doing, or create a separate cattle company for ownership of the cattle, machinery and management? Why or why not?
December 23, 2021 at 9:51 am, Dallas Mount said:
Hi Calvin… Maybe Dave will chime in too, but I’ll give you my 2 cents. Dangerous ground giving advice on a blog with 2 sentences of information. I’ll sound like a university professor and say “it depends”. Is the goal to avoid taxes or to provide a successful platform for management? If it is the latter, I’d much prefer keeping the operating company assets out of the trust. If I was the next one to run the place, I want to be able to decide what livestock and what machinery I need to create the business that meets the goals of ownership. If it is all in the trust, I bet that would complicate the situation and limit my abilities to be nimble.