Many farm business owners, and owners of any small business, seem to believe that their succession plan will have at least a LITTLE magic in it, based on some misguided myths. Let's have a look.

Here is the straight talk about five examples of "magical thinking" common to the business transition process.

1) There is no retirement fairy

Sometimes it seems that business owners have based their business exit on a belief that when they want out of the business, a fairy will magically appear and present them with a check to buy out the business and fund their retirement. In fact, you will need a plan, worked out over a period of years, to successfully exit your business.

2) There is NOT plenty of time

In business succession planning, time is either your ally or your enemy. You can spend time planning for succession during your active business lifetime, or postpone planning and wait until the more chaotic, uncertain and expensive succession planning occurs post-mortem, when the choice is no longer yours.

Just because you don’t WANT to deal with legacy planning, doesn't mean that you won't get sick or die and force the transition before you are ready. So, start early. Select your successor(s), and work with a financial professional to develop a succession plan before it’s an issue.

3) A Successor may NOT be ready when you are ready

It’s surprising how many business owners come to an advisor wanting a succession plan without a successor clearly identified.

Preparing the success means more than simply identifying the person. It also means an apprenticeship to provide time to learn all the operational tasks required in the business. And, it may require still more from both the successor and the business owner.

Growth is the lifeblood of any business. A successful succession plan builds into the apprenticeship not only the mastery of business tasks but, equally as important, the building of the business. Testing the successor on management and growth are equally important when you identify a successor.

The business owner may also have handpicked a successor that has very different ideas as to how the business should eventually be run. Now the owner has to listen to new ideas about a successful business he or she has built. It’s not easy. That’s why an advisor should stress a long apprenticeship as part of the succession plan.

4) Equal is NOT the same as ‘fair’

It isn’t at all unusual for a business owner to say to an advisor that he intends to divide a business equally between all eventual heirs.

In a family where one of the three heirs is engaged in the business and is the likely successor and two of the heirs are not actively involved, an even split might not be appropriate.

But if the senior generation transfers a larger share of ownership to the primary successor, the siblings may not think that’s fair.

Knowing that someone is going to be disappointed makes it hard for everybody. But, if the senior generation is clear on their goals, that's a great first step.

If we are clear on the goals and priorities, it might not eliminate the discomfort for some heirs but provides a framework for dialog.

5) Giving up ownership does NOT have to mean losing control and income

Too many business owners see a succession plan as “all or nothing”—that changing ownership necessarily means giving up control and reducing income.  However, it’s entirely possible to create a succession plan that transfers business ownership to an eventual successor without losing control or income.

The sooner the senior generation starts transferring ownership to a successor, the likelier it is for a succession plan to be a success, both emotionally and financially.

The senior generation should work with an estate tax expert to evaluate the risk of estate tax issues if NO planning is done, then look at the potential long-term tax advantages of passing on a portion of ownership in the early stages of a long apprenticeship.

By using the current federal gift and estate tax exclusions and exemptions to transfer ownership in the business to successors over a long period of time, the senior generation can maintain control and preserve the income of the business. The plan may also reduce the total tax burden that is required. Good planning is good business!

If this blog has got you thinking about your own situation, get in touch with my office ([email protected]).

The opinions of the author are not necessarily those of Farm Futures or Penton Agriculture.