Succession Expectations or Agreements?

Transitions are hard enough. A lot of folks make them tougher by making assumptions and building expectations. We can remove unnecessary drama and angst by turning our expectations into agreements.

An expectation is something that either you or I have. An agreement is something you and I share. In the short run, expectations are convenient. We don’t have to clarify or verbalize our thinking and we don’t have to discuss or negotiate anything with anyone. But in the long run, our expectations are costly. They often lead to disappointment, fractured relationships and life-long resentment. 

Assumptions and expectations aren’t enough. We need agreements. The more important the issue, the more important it is to form agreements. Succession is one of those important areas where agreements are essential. There are at least three areas in succession where I think agreements are critical:

1.Roles in the Business

Unless your ranch is just a jobs program for otherwise unemployable family members, there should be at least some minimum standard for employment. A family employment policy is important whether you are going through a generational transition or not. But it is particularly important in succession planning to know who will be stepping into new roles, and why. The key question is “Under what circumstances does the business employ family members?”  

Reaching agreement is a two-way street. The generation who will be transitioning out should explain their intention and their thinking behind it. Their children should express their level of interest in working in and management of the business. There’s no point to putting your son or daughter in a management role if they don’t want to be there. Whatever the arrangement, it’s important to replace expectations with agreements and document those agreements.

2. Who Gets What 

Whether spoken or implied, the promise that “someday this will all be yours” doesn’t mean much. Who will inherit what needs to be spelled out in writing. Transferring assets upon someone’s death is emotional enough without adding unnecessary surprises.

Parents don’t owe their children an inheritance. I remember my mother explaining that my sister and I must not count on an inheritance. When we were young, she made it clear that whatever she made or saved would be for her long-term care. When my mother died, she did have a modest estate that she left to us. Because neither my sister nor I had an expectation of inheritance, it was easier to focus on my mother’s true legacy and not worry about who got what.

3.The Value of Sweat

One of the biggest assumptions the inheriting generation makes is how their sweat will be compensated. Too many businesses rely on “sweat equity.” The person doing the sweating usually has an inflated notion of what their sweat is worth.  Meanwhile, off-farm, non-sweaters are quick to exaggerate the value of perks that go with working on the ranch (free housing, utilities, vehicle, insurance, etc.). 

If you want to avoid hard feelings when it comes time to settle the estate, you’d better document the value of your sweat while you are still sweating. It’d probably be a good idea to stop calling it sweat equity and call it what it really is, “deferred wages.”

Kathy and I are working through the process of transitioning ownership and management of RMC to a new generation. As of 10/1/2019 Dallas Mount will own and run RMC. As you might imagine, as we prepare to step away and Dallas prepares to step up, there are strong emotions varying between excitement to terror, for all of us.  One thing that has kept the process smooth and effective for all of us is our transparency. Whether financial, functional or emotional, we haven’t assumed anything. We’ve shared what we are thinking and feeling. We have not relied on expectations. We have forged agreements.