The family farm business is more than a job, it’s a lifestyle choice for millions of Americans. Most farmers or ranchers spend 50 years or more on their farms, where land is taught to be both a lifestyle and legacy. Farming is idealized, romanticized, and who these individuals choose to be. Many farmers are born into and raised on this lifestyle, with incredible value placed on the love, ownership, talent, pride, and history that has been passed from one generation to the next. With this much emotional investment, it begs the question why so many of these businesses fail to plan for the next generation of business and ownership. To put this in perspective, consider these numbers:
- Only 30% of all farms and agribusinesses successfully transition from the first to second generation; of those that do survive, 10% transition to a third, and of the few remaining, less than 4% make it to a fourth generation.
- According to a Farm Journal Media survey, 80% of farmers say they plan to transfer control of their operation to the next generation within 10 years, but fewer than 20% said they were confident they had a good plan in place.
- Concordia University research revealed 81% of family farms have no succession or transition plan. And when asked why, 50% of respondents said it was too soon and 29% said they didn’t have enough time. Another 21% told researchers they didn’t have access to advice or tools and the remaining 13% saw the process too complex or intimidating.
Why do business transitions fail?
If these statistics are the realities, and often involve million-dollar-plus businesses, why do these business transitions often fail? There are many reasons, including lack of planning, accountability, insufficient allocation of capital to the process, and lack of financial direction.
With that in mind we need to point out that succession planning is not estate planning. Estate planning is the paper and financial part of the farm estate planning, and if done well, these planning techniques are designed to mitigate estate tax and prepare for wealth and asset management.
Succession planning, on the other hand, involves the non-tangible assets of a business – including development of management and leadership skills, honoring and documenting the knowledge of the business founder, and providing conversation and clarity for family members throughout the process. It’s important to note that people are key to transition planning.
If there is a family will, there needs to be a family way
Sometimes ag producers get caught in the estate planning trap. When asked about business transition plans, they’ll tell you they have a will. Typically, this response is a defense to avoid some of the real issues – fear, doubt, and insecurity. Recently a banker and ag producer spoke with us about the business transition issue in his family. When he approached his 77-year-old father about several of these issues, his dad told him it was “almost time” to start the discussion.
While having sensitive, challenging, and family discussions are crucial, they can be hard. Working with family means navigating both the professional and personal sides of those involved, including multiple generations, multiple families, in-laws, and other key players who may have dedicated their lives to the businesses. There are many personality issues and family history to be understood, managed, and overcome. It’s important to consider the following when handling family situations:
- Putting words to emotions allows the family to create a plan to deal with what’s ahead.
- We need to honor the legacy of the senior generation and prepare for the process of letting go.
- Up and coming leaders are learning to pave their own way – while adapting to carrying the weight of leading the farm.
- Facilitators in these family business succession discussions are part therapist, trainer, and referee.
Protecting the business with estate planning
Following having these conversations, the business operation will need to be evaluated so that it can be protected and nurtured through the process as well. This is where estate planning becomes key. Estate planning can help everyone feel secure that their business will continue to be successful, assets will be protected, and the business will continue to support the family. Building an estate plan that separates equity from risk, transitions assets efficiently, and meets the needs of all generations is critical to helping all parties feel comfortable.
Tips for successful Family Farm transition plans
- First and foremost, businesses need to get started. The most successful transitions are those that are well planned and proactive – rather than reactive due to a sudden, unexpected need. Producers don’t want to be faced with making these choices only after the occurrence of a life changing event.
- Utilize business professionals to guide the process. Having facilitated discussions to make sure everyone is heard is important. These conversations and related activities are a change-maker in the success of the process. People can feel secure, valued, and understand their own role in the transition.
- Estate planning is not the only piece in a Family Farm transition plan, but it is a crucial element. Estate tax law has been volatile in the past, and the future of the estate tax environment is extremely uncertain, so it’s best to be prepared. There are also many non-tax benefits to consider: protecting assets, distributing assets, avoiding family conflict, minimizing probate, and ensuring estate liquidity.
- Continuing the conversations is as important as starting them. Creating a cadence of accountability is the difference maker. Create a timeline as a reference point and revisit the plan on a quarterly, yearly, or semi-annual basis. Learn to recognize if there are changes in circumstances which require a “rethink” on either the personal or financial side of the business.
As their banker and probably their friend, discuss the succession and transition plans with your Family Farm producers. Just as any commercial lender is interested in understanding the management, engineering, design, and production staff of a large borrowing customer, so should the ag lender. We need to be interested in maintaining the trust of senior existing ag borrowers, while simultaneously building a relationship with, and encouraging the development of, the next generation of borrowers. Encourage all of your farmers and ranchers to start the conversation, while the decisions are still theirs to make.
Have questions? Reach out to our Estate Planning Team today.