Ownership and control

Back in 2015 I wrote a paper entitled “Four Pillars of Family Succession”. The four pillars are:

• Build a strong business first
• Communication
• Fair comes before equal
• Ownership and control

In previous issues of Country-Wide I have discussed the first three of the four pillars. In this article I will discuss the fourth.

So you have undergone a process of discussing succession with the family, everyone has agreed to what is fair, and the business is financially sound enough to allow the plan to be put in place. 

Cool. But you are not out of the woods yet. There is one more hurdle or constraint to overcome, and one, I think, a lot of families do not pay enough attention to, and it is often the cause of failure and bitter resentment. That is control. 

Passing over ownership, or at least a share of ownership is often not that difficult. Lawyers and accountants can sort all of that out for you. There can be trusts and companies and shareholders’ agreements all cleverly drafted by the best minds in the business. But passing over control is a different story altogether. It is not necessarily a legal process but more a state of mind. 

If there is a clean break between Mum and Dad and the successor, there is normally no issue. But if there is shared control, ie, partnership, things can go awry very quickly, and often through no real fault of anyone.

Think about it for a bit, and to avoid being sexist I will refer to “owner” and “successor”. 

The successor comes home to the farm and doesn’t know a lot. They draw on the knowledge and experience of the owner. 

They learn quickly much to the delight of the owner, who is brimming with pride. They also get their knowledge from other sources and develop ideas and styles of their own. They grow in confidence and soon want to know “the final plan”. 

They are bought into partnership with shared ownership and control. If there is a 25-year age gap for example, when the owner is 55 years old, the successor is 30, already a very capable farmer and possibly already has their own successor on the ground. 

Meanwhile, the owner, who has had full control for the last 30 years, either isn’t ready to or maybe just doesn’t know how to share control. Not because they don’t trust the successor, but just because they are not used to doing it. Sadly, the older we get, the less adaptable and more stubborn we can become.

Meanwhile, the successor becomes increasingly frustrated. While the owner is becoming less adaptable, the successor grows more and more impatient with age. With their own successor already starting to show signs of interest, and with the owner still firmly in control, the successor starts to feel like Prince Charles. 

When a power struggle develops

There will most probably be huge respect for each other and they will normally enjoy each other’s company. Because after all, the apple does not fall far from the tree. But they start to butt heads.

Unfortunately, a power struggle can develop, and depending on who you listen to, the owner is a stubborn old bastard and the successor a spoilt, selfish prat. More often than not, neither is true. 

In reality, the successor will be very grateful for the opportunity they have been given and the owner will be grateful someone from the family wants to pick up the baton. It is just that no thought was given to the passing of control and how that will need to change over time. Where it is done well it can be a roaring success. The owner a proud mentor with a gentle nudging hand and the successor a respectful and grateful recipient.

In any succession plan, there are significant constraints, but they can be overcome, or at worst if they can’t, at least front up to them. Those that build a strong business will have more options than those who don’t. Work out what fair is through talking, listening and understanding. When you have achieved all of that there needs to be a transition of not only ownership but also of control.

Admittedly it can be challenging. So before you enter into a partnership with a family member, understand the dangers of control or lack of. Regardless of whether you are an owner or a successor, do some honest self-analysis. 

How am I going to cope if I don’t have full control? At the outset, that will be fine, but what about in five years. It will not resolve itself. So have full and frank discussions at the start and constantly review the situation. If it is becoming an issue, it needs to be addressed before the “horse of reason has bolted”. The last thing you want is a family rift. The solution probably lies within.

Control is an important issue to address and so is ownership. As I said above, transfer of some or all ownership is going to be important and needs to be part of a well communicated plan. Your lawyer and accountant will guide you through the actual process. At some point, passing of ownership will need to occur. It doesn’t necessarily have to happen immediately, but it does need to happen. If transfer of ownership is to be delayed, the reasons for doing so and plan to allow it to happen eventually needs to be fully understood by all family members.

Failure for a lack of clarity

I have seen succession plans fail due to a fight for control and I have also seen them fail for a lack of clarity around ownership transfer. 

I have seen instances where the owners have basically retired and have left all management and governance decisions to the successor. The successor essentially has full control and may well be improving the farm’s productive capacity and therefore capital value. 

The successor is left wondering, “who am I doing this for?” I’m improving the farm and it is becoming more valuable and therefore through my own efforts it is going to cost me more to buy out my siblings. 

The successor sees they are doing a great job and have full control, but they are lacking financial security and that is as frustrating and worrying as having little or no control. Therefore, it is important to get both right

Over the last few articles I have pointed out the pitfalls and there are a few. I have been involved with families where succession becomes just too challenging. Partly because attention to succession came too late. It may have been the business never got to be strong enough, or there was a lack of communication and if there was a plan it wasn’t fair. However, if you can get it right the financial, physical and emotional rewards are huge. 

I recently arrived at a client’s place and there were three generations of red bands at the front door. The generations aged from mid 70s down to about a 10 year old.  I remember thinking that’s pretty cool. 

The outcome everyone wants is for continued family ownership, financial security for everyone, the generations getting on, siblings enjoying each other and first cousins being mates. None of that will happen by accident. If you can get it right, the satisfaction can be immense.

• Peter Flannery is a Southland and Otago-based agribusiness consultant, specialising in business planning, financial management and family succession.