Planning a successful transition from a family operation to an agricultural business
By Kylene Scott
For one Montana ranch it came as quite a shock when the ranch founder and patriarch suddenly stepped down from the helm, leaving four siblings to deal with the aftermath. Even though there had been “phenomenal” estate planning and 48 percent of the ranch had already been transferred, the remaining 52 percent was the four siblings’ inheritance and the future of the ranch was in limbo.
Estate planning is one thing, but succession planning is a whole different story, Rick LaPlante, a former director and general manager of the Microsoft Visual Studio Team System, said at the recent Colorado Cattlemen’s Association and Colorado Livestock Association convention in Breckenridge, Colo.
LaPlante has been working with the S Ranch in Montana since 2008. Started in 1948, the ranch has grown to be one of the biggest cattle ranches in the area, and world-renowned for its American Quarter Horses. However, when the ranch patriarch stepped down suddenly in 2007, it left four siblings the task of continuing the family operation.
Oftentimes, ranch owners don’t have a clear idea of how they want the ranch to continue. LaPlante said for the family business to continue, don’t go hire some lawyers and accountants to do just estate planning. That is only half of the process.
“Succession planning is very different, as it is who is going to run this business,” he said.
Important questions must first be asked. How is generation one going to have money? Who is going to manage and lead it? How do I pass on the relationships?
“Ranching is about relationships I have found. It’s about the guy that’s buying your calves, selling you the feed, trucking your stuff, right?” LaPlante said. “And you as that generation one, you built these relationships. The more successful you are, it’s probably because the more successful the relationships you have. How do you pass that on? How do you pass on those relationships to this business succession?”
And then that person who does take over—and culture says it’s usually the first-born son—is responsible for driving value to their siblings and everybody else. That in itself often creates problems within the family.
“Just remember you can be really good at estate planning, and have done nothing for your business to succeed when you step out of it,” LaPlante said. “They’re very, very different things. Succession planning is about transferring decision-making. It can’t be as it was, and we’re going to see the costs of doing it day one.”
Success for the planning depends on three attributes of the people involved. First, the willingness to work, second discipline and focus, and finally third is the willingness to try new things. Historically speaking, this is not the way ranches, dairies or agricultural operations have been run, LaPlante said, and eventually those who are farming or ranching will have to go through the “getting out of the business” process.
“If you have a business, when you’re ready to not have a business—whenever that is—if you pass away or decide that life is too short or whatever it is, you will have to go through this,” LaPlante said. “Done well, you can do a lot of great things. You can preserve, but not just preserve, but actually create new wealth, and that’s the most important.”
It is also not a short process, and for the ranch LaPlante worked with it came over a 5-year period, starting in 2008.
“This doesn’t happen overnight,” LaPlante said. “It’s very, very important to start 10 or 15 years before you want to give it to them.”
But for the four siblings of the S Ranch, the process wasn’t started early. For the first time in 30 years, they had the opportunity to lead the ranch and make decisions. But there was one problem, LaPlante said; they didn’t know why they were doing this or what their outcomes would be.
“It was literally one day they were in charge, all four of them together. They didn’t have a choice,” LaPlante said. “(Marci Scott) said they were digging themselves out, and it required learning what they didn’t know in a hurry, because the business wasn’t going to stop.”
LaPlant advised them to appoint a CEO and a board of directors. They also gathered an advisory board to help them with issues that came up. He said the siblings were worried about losing control and not being able to make decisions, but eventually they saw the light and realized as part of a board of directors they had plenty of power.
The Scott family had to learn four things during their transition:
Learn what they want the business to be.
Deeply understand the financial situation.
Learn what it takes to lead.
Recognize the paradigms that are holding them back.
“We have to be willing to look at this as a business and be able to step back,” LaPlante said. “So, most important question, if you remember nothing, remember this. You just have to ask what do we want this business to do for us and our families.”
LaPlante said the siblings needed to remember that they are shareholders. As shareholders the business needed to make a profit as well as preserve a legacy.
“Sometimes people say this is really about a legacy, and sometimes you should be really intentional about that,” LaPlante said. “If this is about preserving a legacy, then you might make really bad business decisions.”
Ultimately, Jim Bode Scott (the youngest son) was named the CEO of the S Ranch, and began leading the ranch successfully. The ranch had a mission statement, and LaPlante said theirs is one of the best ones he has encountered. It has driven nearly every decision the family has made. The statement reads: “To optimize the value of assets and make money while helping the partners achieve personal and financial goals.”
“This did not say preserve S Ranch as one of the largest ranches in Montana. It did not say preserve Dad’s legacy,” LaPlante said. “How are we going to do that mission statement? We will be successful—we will have succeeded in our journey, which means you know you’ll never get there. But we will succeed in our major enterprises.”
To continue the ranch’s success, they had to realize they were in several businesses, not just ranching, and that they are diversified, thriving and profitable.
“So we will look at every single business and figure out if its diversified, thriving and profitable, and if it isn’t we’ll make decisions based on that,” LaPlante said.
The Scott family made an empowering statement that struck a chord with LaPlante.
“The blessings from the business are distributed to individual owners, to the partners providing need for the good living and allowing each to follow their heart’s desire, and have individual flexibility to manage their personal estates,” he said. “One, we’re not going to do to our children—you know, like dad sort of did to us. And they’re thankful.”
The ranch ended up making quarterly dividends to the shareholders because they made a point to be intentional.
“We’re going to start out by saying this is the dollar figure that needs to be distributed every quarter. Now sometimes you can make it and sometimes you can’t. Right, but you’re going to make all decisions based on that goal,” LaPlante said. “They can’t just keep burying the cash in the business so they don’t have to pay taxes. The beauty of paying taxes is you made money.”
Through all the work and transitioning of the family business into an agricultural business, the S Ranch learned several things.
“The Scotts will tell you the most important thing that came from this—this business was about twice the size it was 5 years ago,” LaPlante said. “The value of this business is almost doubled. Almost doubled because of intentional focus.”
The horse business was downsized and moved from Texas back to Montana. The farming was almost completely cut and the ground was replanted into grass to pasture because it wasn’t profitable to have 20,000-plus acres of dryland farming in addition to the cattle herd.
“There were so many intentional decisions, and all the while dividends were being paid to the shareholders because the shareholders are compensated like shareholders,” LaPlante said. “This is probably a very important point. How do shareholders make money? By the value of the assets increasing or by dividends.”
LaPlant reiterated that shareholders are to be compensated like shareholders. Pay it as a dividend because dividends are taxed lower and if it is paid as a salary, the government will get their share.
“So there’s just thoughtful ways of doing these things. Shareholders compensated like shareholders,” LaPlante said. “The family is more close today, besides the fact that the ranch is twice as big the family is more close today, which is more important to them than anything else.”
Kylene Scott can be reached by phone at 620-227-1804 or by email at email@example.com.