Recently, a producer asked me about management practices for business transition.  However, instead of the best practices, he wanted to know what to avoid. He asked, “In all your travels and teaching, what are some of the worst management practices you observed in business transition management?” Well, in no particular order, below are some mistakes you should beware of.   

First, some individuals think that an estate plan is a transition plan. While dividing assets at death is a necessary, critical element, a transition plan is a long-term, planned progression, often with multiple turns. A plan of transition focuses on management change and evolving the business generationally. In fact, a true transition plan is never done because the details, methods and even goals may change depending on economics, trends and dynamics among the families and partners.

Next, do not mistake a verbal agreement for a written one! The other day, a producer found that the second mortgage on his farm was worthless because the agreement was not in writing. Worsening the situation, a pending divorce situation forced a short sale of the farm in a down market. Due to the suppressed sale price, proceeds failed to cover his second mortgage. Clearly, this was not an ideal situation. In summary, a transition plan needs to be in writing as well as documented.

A transition plan maps out the inclusion of the next generation, but that is usually the easy part. The other element to include is the exit plan of the current generation from the business. Think through, on paper, scenarios where parties or partners have difficulties in working together or cannot work together at all. Granted, exit plans can be emotional as well as difficult. However, if delayed, an exit can become an experience much like a root canal for all involved!

Lastly, another worst management practice is retaining an unproductive employee through the transition, whether a family member or not. If an employee lacks the necessary skill set or productivity level, profitability will suffer. High commodity prices can disguise many of these types of issues; however, tough economic times will only further exacerbate the problem.

The past commodity super cycle was like a magnet attracting young people to agriculture. However, in some cases, the business was not large enough economically to accommodate new members, particularly with retracted commodity prices. These situations created economic shortfalls and tough discussions about who stays and exits the farm business. This can certainly affect any business transition.

While this is not a comprehensive list, hopefully these examples of avoidable missteps will provoke further thought. As the year progresses, we will continue to explore more business management practices, both good and bad. Business transition management is not easy, but leaving it unaddressed could be the worst management practice!