Management, Ownership, and Control – What Are You Transferring?
In planning for the transfer of your farm, ranch, or other family business, many people believe that on some date (usually in the future) you will transfer the business, one hundred percent, all at once. But that is almost always a mistake. In reality, you are transferring three distinct roles to the next generation: management, ownership, and control. While they can be transferred as one item, the most successful transition strategies will break the transition into these three distinct parts and transfer them in that order.
Management
The transfer of management is the transfer of what you do on a day-to-day basis. It the daily decisions that need to be made in the operation of the business. Early in the transition process, a key exercise is to prepare an organizational chart for the business that can be referred to frequently and updated as necessary. To create an organizational chart, map out all of the key functions in the operation. The organizational chart should look something like a pyramid. It is helpful to start at the base of the pyramid and put in place all of the different blocks. Then move up from there into sub-management and management levels until you reach the top block, the owners. You can subdivide your organizational chart functionally, such as production manager, marketing manager, and financial manager. Or you can divide it based on the product, such as dairy manager and crop manager.
Each block should have a person that is identified as having responsibility for that area of the operation. Looking down will tell that person who she is responsible for and looking up will tell that person who she is responsible to. In smaller operations, one person may fill many positions in the organization, but it is important to remember that no position should be filled by more than one person. While you may fill most of the roles presently, by the end of the process, they should all be transferred to the incoming owners. This should start to happen before any ownership is transferred. Once you feel the person has what it takes to succeed, the transition of ownership can begin.
Ownership
The transfer of ownership is a legal process that moves actual title to the business from the current owners to the incoming owners. This is usually staged over a period of years. There are tax and control issues related to ownership transfers and therefore it should be handled strategically. Moving too quickly or without the proper documentation could result in a premature loss of control over the entity and potentially leave you in a vulnerable position. The transfer of ownership should only start once you are comfortable that the transfer of management responsibilities is going well and it appears the incoming owners are likely to succeed. It should also be done in a manner that allows you to claw ownership back if circumstances change.
Control
Control is that last thing that should be ceded. This is when you are ready to transfer final decision-making authority to the incoming owners. It should only be transferred once you are certain the plan is working properly and there will not be a need to reverse course. Properly prepared ownership agreements can allow you to keep control even when you have less than a majority interest in the company.
Transition can be scary. But if you break it into its distinct parts and only make transfers at the appropriate time, it is a lot less daunting. Additionally, your odds of success are much greater. Which is what everyone is hoping for.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.