Articles

Facing a Difficult Question

Family farmers are at a crossroad in today’s age. Difficulties in input costs, pricing, and a host of issues have added additional pressure to their success. One thing that can alleviate some of the pressures of running a family farm is the planning for how it continues after you’re gone. A thoughtful plan helps ensure that the farm continues to thrive for future generations. Without one in place there’s a risk the business may struggle to carry on beyond the current generation.

Only about 30 percent of all family-owned businesses successfully transition to the second generation, according to PricewaterhouseCoopers.

Pressures on Family Farms

Consolidation has put significant pressure on family operations to match the efficiencies of competitors backed by billions in investor dollars. This has squeezed profit margins for smaller farms:

• Around 70 percent of small farms operate with less than 10 percent profit margins.
• Only about 17 percent operate with margins greater than 25 percent (USDA, Economic Research Service).

Taking Control with Succession Planning

Unlike labor, safety, and tax laws, which are beyond a grower’s control, succession planning is something family farms can use now to shape their business’ future.

Successful family businesses often trace their longevity back to strong succession planning, which brings:

• A forward-looking perspective: Involving younger generations creates a long investment horizon, helping businesses weather tough times.
• Commitment to quality: With their family name on the door, growers are motivated to maintain high standards and protect their reputation.
• Deep investment: Family members are personally committed, and their passion often inspires nonfamily employees.
• Accumulated experience: Generational knowledge and expertise strengthen decision-making and resilience.

Navigating the Emotional Side

Planning for succession of a family ag business is, naturally, an emotional and sometimes difficult process.

All family businesses have challenges related to family dynamics. That’s why it’s a good idea to involve other professionals who don’t have a personal interest in the business succession. Financial planners, estate attorneys, accountants and others can help keep succession conversations on track if emotions begin to interfere. That includes helping to ensure critical tasks are carried out in a timely manner and updates are completed as necessary.

It’s important to have the support and guidance of professionals who have specialized knowledge of and expertise in the unique rules, regulations and exemptions that apply to farm and ag businesses, such as valuation discounts and certain exclusions, along with insurance products, annuities and the particulars of estate, income and capital gains taxes.

Fortunately, once the initial succession plan is in place, reviewing and updating it annually becomes far less emotional and simply a strategic best practice.

The Basics of a Succession Plan

Fear of the unknown often holds families back. To get started, consider the following elements:

• Business net worth: Assess inflows, outflows, assets, debts, and taxes. Document ownership of all assets and accounts.
• The “secret sauce”: Define the goals, mission, and values that have guided success and should continue to guide future generations.
• Work and skills matrix: Identify roles and skill sets of current and future leaders. Start mentoring and training early to ensure a smooth transition.
• Balanced board: Add independent directors for broader market insights and stronger governance.
• Contingency planning: Prepare for unexpected illness or death with clear role definitions and procedures.
• Transition planning: Establish a timeline for transferring leadership. This may include gifting assets, forming LLCs or partnerships, adjusting banking roles, and cross-training successors.
• Dividend policy: Outline policies that account for both active and inactive family stakeholders.
• Transparency: Keep all stakeholders informed and updated to reduce conflict and confusion.

Safeguarding Your Legacy

The last thing a family wants is for their business to be forced into liquidation by medical expenses, death, or a lack of planning for retirement. By starting a succession plan today, family-owned farms can take control of their future and protect their family’s farming legacy for generations to come.