Tips to help save the family business
Start with 1,000 farms; 70% don’t transfer to the 2nd generation. Of the 300 farms left, 90% don’t transition to the 3rd generation. Of the 30 farms 96% don’t transfer to the 4th generation. This leaves one farm, illustrates Brian Hensley of Water Street Solutions with bowls of lemon drops.
Succession planning is personal and emotional, and even a little awkward. At least that’s how Tom Deans felt when he went through the process with his family’s plastics business nearly 15 years ago.
"We have a changing dynamic in this industry with the aging baby boomer and the matures still clinging to the operation," says Deans who is the author of Every Family’s Business. Both generations have an interest in how the stock or equity of the family business transitions.
"For the baby boomers, they feel as if they are trying to start the most improbable conversation," Deans says. "On the other hand, the parents or matures feel like they are opening up a whole can of worms. It’s the silence around equity that causes so many problems."
Communication is Key. "If you’re the one in control, talk with your kids," says Brian Hensley of Water Street Solutions, an agribusiness consulting firm. "If you’re the next generation, talk with your parents, talk with your siblings and talk with bankers and lawyers. Set the example and be proactive versus reactive."
The price that many families pay for not transition planning is tragic, Deans says. The best succession plans leave businesses in a state that allows families to thrive, function and grow.
"Every business comes to an end; make it your idea and make it what you want."
"You have an obligation to your family and an obligation to yourself; there’s nothing worse than running a business that is the value of your net worth and knowing there is no plan for the future," he explains.
No one is inventing new ways to exit the family farm. "What are you doing today to explore all those options," he asks. "I was buying shares in of my father’s business seven years before I joined as an employee. He showed me his finances and shared his business plan; it looked like a great opportunity. After five years of buying stock in the business, he put me on the board of directors. Two years later I became an employee. It was all backwards."
Create Competition. Deans shares a few questions that his grandfather asked his father, and his father asked him. "There are no wrong answers to these questions," Deans says. "There’s only clarity."
What does the business look like in five years? "The person asking the question is the one in control," Deans explains. "Ask this question one-one-one with all the kids, both inside and outside of the business." In short, he says this creates competition among the next generation which drives them to value equity.
Another important question to ask is: Are you interested in buying stock and acquiring control? "One of them will be willing to pay market value," he notes. "This means mom and dad get market price and when they pass it all comes back to the sons and daughters – fair in all eyes. The earlier families can begin these conversations, the better off they are."
Because it’s so expensive for the next generation, farmers often hear experts talk about gifting the farm to the next generation, but Deans says with land prices where they are more and more conflict is created by gifts. "Gifting undermines the family," he says. "The idea of someone getting something for free is toxic and it doesn’t work."
He recommends diversifying assets and removing capitol. "As you get older, the farming operation really is one stock," he explains. "You need to diversify and allocate your assets. As you get older, consider taking wealth out of the operation and spreading it. Loan that money to children – it’s based on market value."
There are all sorts of things farmers can do, Deans says. "When you remove your wealth, you lower the value, thus making it more affordable for the next generation."
The next generation must realize that the early years are the hard years, Deans says. noting that the parents must compensate sons and daughters fairly and for the value they create. We all want freedom, independence and control in a business, Deans says. "If you are 40 or 50 and your father says ‘no’, you might want to consider a different career interest."
It’s estimated that 70% of U.S. farmland will change hands during the next 20 years, Hensley points out, encouraging farmers to assemble a team of experts to begin the process.
Hensley says turn to experts you trust. "You need to have a good attorney, financial planner, ag estate planning expert, certified professional accountant and banker on your team," he says.
"The Farm Service Agency office can be an key component, too. This team has to communicate and work well together." Farmers will need to spend a lot of time on the front end and with preparations and less time as progress is made and signing nears.
"Every business comes to an end; make it your idea and make it what you want," Deans says.
Initiate the Conversation
Sometimes the next generation will be charged with initiating the conversation, which can be uncomfortable. What will they say? Will I be rejected? What are their expectations? Do they value my dreams and goals? Kevin Spafford, Farm Journal’s succession planning expert shares these questions to help you get started on a good foot:
1. Is maintaining family ownership of the farm important to you, and have you thought about how we can achieve that?
2. What conditions are necessary for us to grow the operation to support additional active family members? What conditions might eliminate that possibility?
3. If you were to help me devise a professional development plan to become a viable member of the farm’s management team, what education, experiences, mentors and skills would you recommend I use?
4. In creating a plan for growing the operation and continuing family ownership, who should be a part of the process and why?
5. Which personal/vocational work characteristic do you observe in me that I should overcome to better serve the needs of the farm?
6. When can we visit about this again, and what can we do to prepare for that conversation?
7. What has to happen for you to agree to implement a succession plan for our family operation?
Watch a short recording of Deans' presentation at the 2013 Top Producer Seminar.