5 Things to Consider When Creating Your Farm Succession Plan
Farming isn’t an easy business. There’s so much more to it than most people realize. The same is true of farm succession planning. With huge differences in operation size and circumstance, trying to put any type of cookie-cutter solution in place would be unwise. It is a well-known fact that family business succession planning fails by the third generation. In fact, more than 70 percent of family-owned businesses do not survive the transition from founder to second generation. Succession planning is about figuring out how to pass the baton to the next generation.
"Only 30% of family farms are still operating by the 2nd generation."
What are you doing to set the next generation up for success?
Farm succession planning is an intimidating task. It’s complex and emotional. However, it’s also something that you can do to help set the stage for the future success of your family farm.
Read on for the 5 things to consider when creating your succession plan.
1. Your Retirement
When you pass the farm to the next generation, you’re giving up a source of income. In some cases, you may also choose to hand over the homestead. You’ll need to have a plan to replace those things. Investing in stocks, bonds, and other investment vehicles is one way to create a retirement portfolio.
You may also want to be sure that you have proper coverage for long-term care. If you don’t, you run the risk that nursing homes or other care facilities could end up with key chunks of the agricultural business that you worked hard to build and intended to pass to your heirs.
2. Talking to Your Family
You may want your first born to take on the task of running the farm, but does he or she have the business skills, or even the interest to do it? Perhaps there is another family member more capable, or someone outside the family better suited for the job.
Talk with your planned successor and make sure that they’re on the same page. If they aren’t yet actively involved in the farm’s operations, be sure to check periodically that they’re still interested in taking over at some point in the future. After all, circumstances, and plans, can change.
What if you have more than one potential successor who wants to take an active role in the operation? That can create an even trickier situation. Can they share responsibilities and work together? If not, can you separate the operation in a way that allows them to operate independently and still provide the opportunity for a viable agribusiness?
What about any non-farming heirs? How can you acknowledge them while still ensuring that the business that you’re leaving to your farming heirs still has the resources that it needs to function successfully? Are there non-farming assets like life insurance that you could use for them?
Be prepared for hard feelings. It’s not uncommon for non-farming heirs to feel like they’re being treated unfairly or receiving less. After all, the land, equipment, livestock, and other assets needed for even a small agricultural operation typically have a high cash value, and many business-savvy farmers also try to leave their farming heirs enough cash to help with inheritance taxes. Clear communication is the key to success here.
3. The Management Changeover
No one is born knowing how to run a business. Even those who grow up working in a family business that they love and plan to eventually helm can have dangerous blind spots if they don’t actively train for the position that they will eventually hold.
Once you’ve identified your successor or successors, it’s time to talk with them and begin creating a plan for how management of the business will eventually transition to them.
Decision-making should be collaborative. While there may be limits, always deferring to senior members for all decisions should be avoided.
Developing management skills in the incoming generation should be a priority.
Encourage cross-training to hone skills and gain experience.
Normalize routine communications that keep everyone in the loop.
Schedule regular, non-threatening evaluations to provide team members with useful feedback.
As your successors provide management input and labor while they learn the business, you’ll also need to address the issue of compensation. Cash is only one way to compensate someone for their time and efforts. In this situation, compensation could also come in the form of equity in the business.
4. Getting Outside Help
There are all sorts of rules, regulations and exceptions when it comes to farms and estate planning, so it would be wise to retain the services of a professional to determine the best way to set up your estate. Accountants, lawyers and financial advisors can all help shape what your business succession plan will look like. Working with a team of financial professionals who understand your goals and concerns can help you establish an effective plan.
How do you decide who to work with? Look for a reliable expert with a solid reputation. Choose someone you like and respect that you’re comfortable working with. Be sure that they’re familiar with the challenges of estate and succession planning for agriculture.
5. Life’s Uncertainties
No matter how carefully you plan, you cannot plan for everything. Families grow through marriages and births. Unexpected illnesses and deaths occur. Divorces happen.
Make it a point to review your succession plan periodically. If something that demands action occurs between reviews, make an appointment with the appropriate professional to go in and make the necessary adjustments.
Having a plan that’s up to date protects you, your heirs, and your farm.