Farm Transition Plans

An interview with John Black, Farm Credit Business Consultant

Transition planning is an important topic for farmers because a family business can have an emotional impact on the family structure. It’s hard to separate business and family in any type of family business. Essentially, the farm is the family’s way of life. As a consultant, I meet with families, look at the numbers and the situation in a non-emotional manner.

What do you find are stumbling blocks for families developing a farm transition plan?

1. Financial position. Whether it’s a feasibility study or a succession plan or a transition plan, the plans all revolve around finances. The businesses’ financial position will largely determine the transition plan. There are three ways to transition assets: selling, gifting, and inheriting. Usually, it takes a combination of the three. If a business has debt, how does that impact the ability to transfer? Can the business generate the cash flow to afford a buyout and still provide for all the members? Good financial records will help determine the needs and position.

2. Communication or lack thereof. Sometimes, it’s easier for families to not talk about a transition. As you know, farmers are farmers because they like working with animals, or they like working on a tractor, but they may not like working with people. Communication often is a stumbling block.

3. Ability to negotiate between partners. Many times, in a family business, you cannot look solely at your own interests. Successful transitions include negotiation between partners.

For most transitions, there’s a senior generation and a junior generation. Do you typically hear first from the senior generation or junior generation, and why do you think that is?

It depends on the situation. I’ve worked with a balance of junior and senior generations who drive the transition plan. For families that communicate well, I hear from the senior generation first. Usually, they’re ready to start transferring assets.

Farm transfer includes three items: transfer of management, transfer of ownership, and the division of income. Typically, all three items don’t happen at the same time. Within these elements, you might see the transfer of ownership starting with cows, machinery, or animals and machinery. Near the end of the process, families will transfer the real estate.

In progressive families with open communication, they’ve initiated transfer management and they’re ready to move onto the next step. I’ll hear from the senior generation first in that case. Conversely, with families that struggle with communication, the farm transition process hasn’t started. I’ll hear from the junior generation in those cases. When I refer to the junior generation, it might be people in their forties or even fifties without a transition plan. Now the junior generation is the one that is contacting me because they want to get mom and dad moving. It really depends on the situation in terms of who I hear from first.

What is the one piece of advice farm families should remember while embarking on a family farm transition?

The big thing is to start early. A successful plan doesn’t happen overnight. It takes careful thought and consideration that evolves over time. Involve everyone within the business. Plan annual family meetings, discuss financial performance, and involve the younger generation early in finances. I encourage everyone to work with a team of consultants, with a consultant, or with a team of advisors to help them through the process. Set your SMART goals and complete a written plan. Finally, take that plan and review, review, review. Review not only to make sure that you’re on track with your goals, but also to make adjustments with your plan. The plan isn’t rigid. Life changes; your plan will too.