When it comes to family-owned and -operated businesses, partners often avoid the difficult conversations about separation, often to the detriment of the business’s health and long-term viability. Two recent sessions during the virtual Pennsylvania Dairy Summit this month tackled the often-tricky topics of business divorce and managing family dynamics through governance.
Mike Peachey, with Acuity Advisors and CPAs LLP, and Mike Hosterman, with AgChoice Farm Credit, spoke about how farm businesses fare better if key documents are put into place for partner buyouts and sellouts long before invested partners exit, either because of marital divorce, death or disability.
Peachey and Hosterman characterized a separation, regardless of the cause, as a business “divorce” that should be viewed as such legally. They advocated for advanced planning to protect the operation for the remaining partners and future generations as well as to spare family members heartache and strained relationships.
Peachey said the dissolution of a partnership is not always a bad thing, however.
“It can actually lead to a much better quality of life for the partners if they’re looking to exit and end their business agreement,” he said.
In some cases, the remaining partner has a clearer vision and mission because of a singular purpose.
“At the end of the day, it comes down to what is the level of trust that you have with each other and what is the quality of communication. … A strong foundation helps carry the day towards a quality business relationship,” Peachey said.
He continued, “Respect for one another’s gifts and talents as a business partner, and feeling that each person brings their best every day and that we’re better together … that leads to the financial piece being easier to deal with in business agreements.”
Hosterman said, “This can be tough because (while) we may be brothers or sisters, we don’t always communicate in the same way. You need to have trust in each other.”
Embrace the Business of Operating
Hosterman said that working with a third-party advisor to keep personal and business decisions separate is the best strategy to aid partners now and into the future.
Peachey said that in the same way that counselors or clergy are often engaged in conversation before a marriage, the same should be done in business partnerships.
“There’s a lot of quality to that because it can ground them in reality,” he said. “… What are the expectations … and assign value to what each partner brings.”
Governance documents are important, but Hosterman highlighted the importance of knowing job descriptions and performance expectations, how each person will be held accountable, and how decisions will be made. Regardless of the business type (partnership, LLC or corporation), Hosterman said that a buy-sell agreement must be part of those foundational documents.
“It doesn’t make losing a partner easier, but at least it offers a fallback position that we know what we’ve agreed to,” said Hosterman.
All documents, including the operating agreement, corporate bylaws and buy-sell agreement, should be revisited every few years, according to both experts.
Hosterman strongly advocated for hiring a professional to write and update the foundational documents, saying that spending money on positive and well-informed advice is priceless for a business.
Peachey echoed those sentiments and encouraged owners to conduct an outside analysis of the value of the business every year, since it fluctuates. This can help to determine partner buyouts and any penalties or discounts.
“If there is a gap in value, the exiting partner may have an idea of what the value should be and the remaining partner has a different idea and they end up having an expectation gap,” he said. “… That can lead to disappointment … disillusionment and then a pretty significant conflict.”
Legacy Family Business Hones in on Governance
In another session, Phil Clemens, the recently retired president and CEO of a legacy family business, Clemens Family Corporation, spoke about his experience with family governance and managing family dynamics while serving at the helm of a business that has 775 living family members, 371 family members as owners and 28 family members as employees of the business. The Clemens family business has been passed down through seven generations.
“We have one individual from the second generation still living; our oldest shareholder is over 100 and our youngest is less than 1.”
According to Clemens, governance helps professionalize farm businesses and ensures fairness and accountability.
The publicly traded Clemens Food Group includes the well-known Hatfield pork brand, Country View Family Farms, and PV Transport for livestock and refrigerated trucks, as well as Clemens Development Group’s many property entities.
Clemens’ sales exceed $1.5 billion and the operation owns 3,000 acres of land, has facilities with over 3.75 million square feet, processes 5.5 million hogs each year, and owns over 1.75 million square feet of managed real estate.
Today, Clemens processes 80% of Pennsylvania-raised hogs and currently has 110,000 sows and 278 family farms in their hog production portfolio.
Clemens said that the COVID-19 pandemic led to the worst week in the company’s history. Disruptions in distribution channels led to the possibility of meat going to waste sitting in production facilities, so the company was forced to give away much of their available products at the time.
Clemens illustrated a wealth of knowledge about leading a national corporation within the context of large-scale family governance. Clemens emphasized a trust circle that in their case includes a Family Council, as well as a board of directors, Clemens Family Ownership Board, and the management team, all of which have their own governance, missions and values.
“Governance includes legal documents, but more importantly, it’s how things are done. It’s important for all sized-businesses. Family business is really hard work … and family businesses are complex. You have family members and ownership within the business, even if you’re a single-family operation. When it doesn’t work, and it fails, things get ugly and finger pointing happens,” he said.
Clemens emphasized the importance of family harmony and a family mission statement as key goals, especially as prices and markets fluctuate, and income ebbs and flows. In their family, key values are service, integrity — which includes embracing the legacy of the family’s history and subsequent challenges — and generosity, he said, “always striving for unity across the entire family.”
He said that being part of a family business or legacy business does not entitle you to a job or future ownership; that is determined solely by qualifications.
Clemens says that as family businesses progress to a second or third generation, these topics become especially critical. Clemens noted that statistically, only 33% of businesses progress from the first generation to the second generation, 12% continue from the second generation to the third generation, and less than 4% go into the fourth generation.
“We have not always done things correctly. In fact, it took us nearly 100 years in business before we actually got it down to where we wanted it to go,” he said.
Within the Clemens Family Corporation, the entity of the Clemens Family Ownership Board handles all shareholder issues including exits and entrances into the business. It also recommends candidates for the board and sets owner expectations to ensure sustainability of the business.
The vision includes three values: legacy, participation and sustainability. Sustainability (cash within the business) includes first and foremost the needs of the business, then needs of the shareholders combined, and finally, the needs of individual shareholders. This hierarchy differs from the value systems at many other large corporations, according to Clemens.
Owners’ expectations, which are written, include financial (such as return on net assets, cash flow, net income before tax), shareholder satisfaction (growing the value of the business by investing in the right things), risk (percentage of borrowed capital) and stewardship (cash or food contributions, environmental concerns and employee turnover).
The CFOB writes down how shareholders can enter and exit the business, including what to do when shareholders behave badly, whether they be family members or not, as well as buying and selling stock. Owners governance also includes helping individual shareholders with assistance and advice with estate planning, wills, and the like.
Clemens says that it is vital to be intentional about business and family roles: such as when owners are wearing the boss hat versus the family hat.
“When you’re in a family discussion, the boss hat is not applicable, the ownership hat is not applicable. … So, if you’re my child and coming in asking me a business question, that’s not a ‘Hey, Dad’ question.”
He continues, “Can the boss ever fire their child? No. But they can fire an employee who’s not doing their job.”
Clemens suggested that on the farm and in business, when questions about the business arise, employees at all levels should be addressed by their first name, not family title, so everyone is clear that when a business decision is being made, it’s the boss making the call, not Dad or Grandpa.
Succession Planning is Key
According to Clemens, Peachey and Hosterman, succession planning is paramount to the long-term success of a business. When looking for a CEO of a business, Clemens says, “They should have a strong financial background, unquestionable ethics and integrity. They can embrace our vision, values and culture, with no conflicts of interest with our business … because we are trying to build trust each and every day.”
He continued, “What I don’t like to see is ownership tied to working in the business, because if they don’t perform well as an employee and they are fired, they end up losing their job and ownership at the same point in time, and a situation becomes ugly.”