Farm Succession – What really is involved in Passing on the Farm?
Farm succession can be defined as the “passing of ownership and management from one generation to the next.” In the past this process may have been called, "passing on the farm, or dad is finally letting go or the son is taking over."
Family members can, and do, react in a variety of different ways when they hear the words “farm succession.” For some, particularly the younger generation (successor generation), there is excitement and anticipation. When it comes to parents, you never can predict how they will respond. Mother may be dreaming about travelling and spending more time with friends, family and grandchildren; father on the other hand may be dreading slowing down.
Farming is no longer a lifestyle that automatically provides a good living. Farming today is big business, it requires the ability to make difficult decisions, the ability to change and adapt, and the ability to develop and maintain a mental toughness for dealing with the day-to-day stresses.
To generate one income from farming often requires an investment of $1-$3 million and in some sectors even more. To have over $10 million invested in a farm business is no longer exceptional.
Over the past 11 years, I have had the opportunity to work as a communication coach with families going through the succession process. Some families do it very successfully – it is virtually a seamless transition from generation to generation. Other families struggle to make the transition works. Why the difference? One word – Communication! In families where communication takes place naturally, or is formalized through meetings, the succession process has a much greater chance to take place in a seamless manner. When communication among family members is a struggle, and there is no formalized meeting structure, succession can become a dragged out process. In this environment when decisions do get made, they are often made out of frustration and not well thought out. Good decision making requires excellent communication.
How do you start the process of Farm Succession? It can be helpful to distill the succession process into three very basic, but pointed questions:
1. Can the farm financially support the retirement of mother and father and the added income needs of the successor generation?
2. Does the successor generation have a big enough dream/passion to pull them out of bed each working day for the next 15-25 years?
3. Can a deal be put together that will allow mother and father to sleep peacefully each and every night for the rest of their lives?
As mentioned, these questions are basic and pointed, but they must be answered for a successful succession to take place.
To answer the first question, please seek out the advice of your accountant. The numbers must work before you even start thinking about succession.
The answer to the second question is more difficult to quantify. The following are some best practice suggestions for the successor generation:
1. Pursue a post-secondary education at the diploma or degree level. A degree in business or at least significant business courses will serve you well. Take up employment away from the farm for a minimum of three years. Live away from mother and father. If you want to come home on weekends and holidays to help out, great.
2. Consider working for more than one employer during this period.
3. Start talking about your interest in coming home to farm while still holding down your job away from the farm. Dream about how you would like to run the farm. Draw up businesses plans – yes more than one plan is good. Do budgets. This can be a time to do a lot of “fantasy farming” without fear of making mistakes. But please do not be tempted to short-circuit this experience away from the farm and come home early.
What is next? Trusted advisors are essential. Your accountant is going to be the cornerstone to the success of your succession process. Having faith in your accountant is essential because you need them to provide tax advice, create shareholder agreements, critique budgets, give advice on life insurance needs, provide direction to your lawyer, and answer the many questions you will have. They are the heart and soul of the process. You will also need the involvement of your lawyer, insurance agent and your lender(s). I have also seen situations where other trusted farm advisors, such as veterinarians, have been asked for advice. Also, do not discount the value of talking with other farmers.
My first experience with farm succession was as a successor – my brother and I took over a 60-cow dairy farm from our father in 1975. We expanded to 125 cows over the next 15 years. That is when I had my second experience with succession - I transitioned out of the partnership. My brother and I still operate a seed business together that has been part of the family since 1975.
I am frequently asked, “Do we need a communication coach/facilitator?” Even though farming is big business, when it comes to making decisions, particularly around the topic of succession, EMOTIONS frequently trump logic. For example, mother may have a different opinion on how the non-farming children should be treated regarding inheritances than what father does. A non-farming child may feel that the parents are favoring their sibling who is going to stay on the farm. A daughter-in-law may feel that her husband is more dedicated and a harder worker than his younger brother. In another situation a daughter-in-law may feel that her contribution on the farm is not being valued by her in-laws. If there are situations like this that you are facing, engaging a skilled coach/facilitator maybe an excellent decision. Everyone needs to be listened to. More importantly, they must feel they have been listened to. Getting everyone’s thoughts and feelings out in the open at the beginning of the process before sitting around the board room table in the accountant’s office can eliminate a lot of frustration and surprises. There is often a perception that if there is conflict before succession has taken place that succession will solve the problem. Wrong! Conflict is going to happen. It is how families deal with the conflict that is critical. Acknowledging that conflict is part of business and creating strategy to deal with it should be part of the succession process as well.
The final question: Can a deal be put together that will allow mother and father to sleep peacefully each and every night? The succession process can take two to five years to put in place. One of the reasons is that mother and father frequently need this time period to feel comfortable that the successor generation has the ability, the required skill sets, the passion and commitment to carry the business forward. They want to see results. The security of mother and father’s golden years are dependent upon a thriving business.
It may seem a bit radical to conclude an article on farm succession with this thought, “in certain incidences selling the farm might be the best decision for everyone”.
If mother and father agree that they will be able to sleep peacefully each and every night after this deal gets finalized, you are well on your way to having a successful transition of your farm business.
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