Building your family farm and its future
I don’t know the reason, but we have gotten several requests for mentoring help from farmers and farm families that want help with succession planning. After my initial conversations with them, I find out that there are many reasons behind these requests. And rest assured that this topic has many twists and turns that make this a multi-facetted task and each situation is unique. Therefore, I will do a few columns on this very complex topic.
SCORE has partnered with Mass Mutual to develop some great resources for this topic and makes them available on its website. I will share some of that content in this an the subsequent columns on the topic.
PLANNING YOUR FUTURE:
You’ve worked hard building your family farm. And now, you’ve decided it’s time to move on. As a farmer, you know how important it is to be prepared for any contingency. And you should approach your business exit with as much planning and preparation as you run your farm.
First question—what are your goals? Do you want to keep the farm in the family? If so, know the odds are not in your favor. Statistics show it’s rare for a family business—any type of business—to make it through the third generation and almost unheard of to make it to the fourth.
But the good news is that you can save the family farm with proper succession planning.
THE IMPORTANCE OF GOAL SETTING
Setting goals is not a solo performance. All family members should be involved in the process and establish goals for both the future of the farm and for themselves. Ultimately, those goals must be compatible—and prioritized.
3 Keys to Setting Goals
- ACCESS: What do you want for the farm business? For your family? How do you envision your retirement?
- PRIORITIZE: What’s most important to you? Keeping family harmony? Ensuring business success? Living out your retirement dreams?
- DEFINE: Your goals should be clear, documented, well-defined, and realistic. You need to establish a timetable as part of the goal-setting process.
WHAT IS SUCCESSION PLANNING?
Don’t over complicate this. Succession planning is simply the process of writing a plan for when a business owner decides or is forced to step down from leading their business due to a voluntary or involuntary departure.
What are some key elements of a good succession plan? Here is a basic list:
A succession plan addresses:
- YOUR GOALS: What do you want to get out of the business when you retire?
- YOUR SUCCESSOR(S): Who will be taking over?
- OWNERSHIP: Will there be multiple owners? If so, be specific about ownership percentages and responsibilities.
- MANAGEMENT: Are non-family members involved in the farm’s operation? How will you keep them in place through (and possibly beyond) the transition?
- TRANSFER: When will the transition take place? How will it be implemented?
- FINANCES: Where is the money to buy you out coming from? What will the tax impact be? How will that affect your personal estate plan?
Common Issues Facing You and the New Owners:
- For the new owners:
- Is the older generation willing to let go?
- Do they have equity to bring to the farm business?
- Do their projections show they can make their payments and make a living?
- Is there off-farm income to support the family?
- For you:
- Does the successor have the necessary management ability?
- Can they comfortably retire—emotionally and financially?
- Will there be issues between family members?
- Can the farm support multiple families?
Reasons for Farm Transition Failure.
As I mentioned, there is a high incidence of failure going forward in the transition process. Consider the most common reasons as reported in the research.
- Not knowing your exit options. Be sure that you have carefully considered what are the financial ramifications of your chosen strategy?
- Insufficient capitalization. Be realistic, can the farm financially support multiple generations?
- Failure to prepare the next generation properly. Ask the tough question. Do they have the skills needed to operate the business? If not, what can be done to help them prepare?
- Inadequate retirement planning. Consider this question. Is there an intention or ability to walk away from the farm?
- Inadequate estate planning. Ultimately, here is the bottom line question. Is the farm prepared to survive the transition?
Intentions are really a matter of trust
Most farmers intend to keep the farm in the family, according to a USDA NASS survey:
- 48% want to keep it in a trust
- 23% want to sell it to a non-relative
- 14% want to sell it to their family
- 14% want to gift it to their family
Keeping the farm in a trust is the number-one intention for farmers. Trusts can help farmers manage and distribute their assets, so you can meet farm transfer goals—both during your life (called “living” trusts) and after death (“testamentary” trusts). Trusts are often incorporated with a will as part of your estate planning strategy
In my next column, I will start with identifying your “exit” options.