Succession planning - Start now

Keywords: succession planning, progression planning, human resource management, business decisions, farming families 

Take Home Messages 

• Succession planning must be seen as an ongoing process of high-quality human resource management
• Rewards and responsibilities must be clear for every person in the business
• Contribution of capital must be rewarded in a clear and transparent way
• By rewarding for labour, capital and risk, people can be involved in the business in a range of ways. This leads to a flexible and fair approach to succession
• This approach applies equally to consulting businesses as it does to farming businesses.

Introduction

Since I began consulting in 1989, I have been involved in assisting farming families with succession in a range of ways. In the early 2000s, together with my business partners we began planning an approach to succession at RMCG. In 2008 my wife and I sold our equity in RMCG, a few months later I realised if I applied the same principles to succession for farming families, I could help them develop a sound, logical, framework. This paper describes how we managed succession at RMCG and how this applies to family farms. 

Succession at RMCG

RMCG has been operating since 1989. Rob Rendell and I were the original owners. We employed an office manager. After about four years, we employed other people part-time, then full-time, then sold 50% of the business to 2 of the employees. Since then new partners have bought into the business and three partners have sold their share. I believe we have successfully enabled people to join the business and leave the business with minimal disruption and a fair deal for everyone along the way. Currently three ex partners work in the business as employees. 

The three basic principles we applied are:

• everyone in the business knows their role and responsibility clearly and is rewarded accordingly
• the capital contributed or used by the business (in the case of RMCG the buildings) are rented from the owners of the capital
• the profit is distributed after everyone is rewarded and the capital is rented based on this share of ownership of the business.

How this works: 

1. Clear roles and responsibilities and rewards – all employees are paid a salary based on 50% of budgeted fees plus a share of 10% of the profit. Every employee has an employment agreement and there are clear and transparent processes and expectations of both employees and employers. 
2. Renting of capital – the buildings we use are owned by a range of people. The building in Bendigo is owned by a mixture of partners and employees in a property trust. This building is rented by RMCG from the property trust. The other buildings are owned by people I have never met but we have clear rental agreements. 
3. After payment of salaries to all staff and partners and reward for management, the profit is split based on the share of ownership. 

There is nothing new, clever or revolutionary about these three principles. 

Succession on farms

These principles can be applied to a family farming business. 

1 – Roles and responsibilities

Everyone in the business must understand their roles and responsibilities and be rewarded appropriately. Therefore, whether it's a casual contractor, a family member working when they are home from school, one of the business owners or a family member "doing the books", they must have a clear definition of the roles and responsibilities and be rewarded appropriately. This is essential. 

Some farmers believe this is difficult for a variety of reasons. For example "we can't afford to pay the boy" or “their role is too hard to define". I maintain it is too important to ignore and it is the start of the rot. 

The most important activity in human resource management is the "staff review".

At RMCG, we must conduct staff reviews three times per year. It's part of our quality systems. I was surprised recently when presenting to a group of young people in horticulture, out of 25 people none of them had been involved in a staff review in the past 12 months. The staff review is an opportunity to discuss the person's aspirations, performance, rewards and training. The staff review is an important part of succession planning because it regularly provides an opportunity to discuss openly and honestly the person’s roles, responsibilities and aspirations. These conversations form the basis of the discussions about becoming an owner in the business. 

Good human resource management is also essential to ensure everyone in the business is safe, satisfied and is likely to believe they have a future in the business.

The following diagram shows the levels of roles and responsibilities at RMCG. Everyone understands these roles and everyone can be involved in discussing moving up or down through this diagram.

The award for farm hands has eight levels. It describes roles and responsibilities for people just entering the business through to manager level.  This provides a useful guide to discussing roles and responsibilities.

2 – Renting capital

The major capital employed in a farming business is the land. I argue strongly that the owners of the land must apply a rent to that land and that rent is paid. (If it is not paid it is still important to do the calculation). The amount of rent may be negotiable, however it is important to recognise that owning capital has an opportunity cost. This ensures that when the ownership of capital is uneven, the owners of the capital are rewarded appropriately. This also allows family members or non-family members to purchase land and rent it to the farming business.

3 – Distribution of profit

The value of the operating entity in many farming business, particularly grain business, is the value of the stock and plant. The operating entity takes the risk and the return on business capital should reflect the risk the business is taking. I have analysed a number of successful farming businesses over 10 to 20 years and although these are very good businesses they average between 15 and 25% return on business capital. This is after all wages, payment to owners and rent on land is paid. This is an attractive investment, however it is risky. 

By adopting the principles outlined above as we did at RMCG, someone coming into a farming business can see a pathway and a mechanism to enter the business, increase their responsibilities and rewards, and then invest in the business in a way which is rewarding.  Before coming into the business, people will know and understand that they will always be rewarded appropriately, have an opportunity to purchase land, and may have an opportunity to purchase into the operating entity depending on their performance. This I believe is highly motivating, transparent and fair. 

The most common objection or question which is asked after I explain these principles is – "we can't afford it" or “how can we afford it".

My response is – "if you can't afford it, can you afford succession planning?"

By definition, if a business can't afford to reward people appropriately, pay an opportunity cost on capital, and reward risk appropriately, then can it afford to be in business? 

For any business to succeed it must have high quality human resource management processes and it must be profitable. The human resource management processes can be fixed, if the business doesn't have a strong track record of profitability what options are there? 

• The first option is to sell the business.
• The second option is to discount the rent on land. This can be fairly applied if the owners of the land believe their capital gain makes up for the rent they are losing.
• The third option is to not reward people properly. Unfortunately, this seems to be a popular option. My experience is that this leads to disharmony, breakdown of relationships, misunderstandings - and then people sell the business.

Contact details

Nigel McGuckian,

RMCG,

BOX 2410, Mail Centre Bendigo

nigelm@rmcg.com.au

0418510644