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A Springboard for the Future

July 1, 2010
By: Kevin Spafford, Farm Journal Columnist
 
 

While consulting with a local farm family, I became acutely aware that the best solutions to the succession-planning puzzle are often resting subconsciously in the minds of farmers. When asked the right questions, it’s obvious they have a clear vision of the end result and a grasp on the monetary concepts and management principles necessary to get to that point. Once they know their options, it’s easier to make a concise action plan.

Farmers also find it comforting to know that developing a succession plan does not require exact language or a fancy vocabulary. Rough examples will suffice.

To start a discussion about your succession desires, I may ask any number of these questions.

1. Is it important to maintain family ownership of the farm?

This is the watershed question for a family considering farm succession. Without a heartfelt succession intent, the mental angst, detailed conversations and expense of a physical plan is futile. Family members active in the farming operation must agree that succession is a vital goal, that the operation is economically viable and that the current generation is willing to work through the tedious process.

2. Do you intend to create an operation that can be passed to the next generation?

The premise of succession planning is founded on a farm that is financially sound and fundamentally strong. The focus is preserving the family’s most valuable asset, as well as the lifestyle and traditions, for current and future generations.

3. Do you understand the differences in the three sources of business income: profit, equity and satisfaction?

Income is the monetary and emotional return from a job well done. Every endeavor may include returns of profit, equity and satisfaction. Succession planning maximizes returns for the current owner, active family members and loyal employees.

4. Can you transition from daily manager to a leadership role?

Good management and leadership skills take time to develop. With the appropriate education, a growing level of accountability and on-the-job training, leadership characteristics advance. One-on-one teaching and guidance from a mentor enhances the development process.

5. Can you identify the most important skills and abilities necessary for managing your operation?

The last thing a progressive farmer can tolerate is the same ol’, same ol’. Albert Einstein said, "The definition of insanity is to continue doing what you’ve always done but expect a different result." Everything about agriculture in America is changing. The skills and abilities that will lead us into the future are different from those that created our past.

6. Have you identified a leadership mentor for your son or daughter?

This question serves a dual purpose. First, it addresses the issue of providing a good role model for your son or daughter to emulate—someone that he or she can trust. Secondly, it suggests that a parent may not be the ideal person to guide an adult child into a new role with added responsibility.

7. Can you transition ownership to the next generation without draining business capital or obligating your family with note payments in order to securely retire?

Cash flow is the life blood of business. For a farmer, capital management must be second nature. Due to the cyclical nature of the agricultural industry, regular payment obligations can become an onerous threat to business stability. A seasonal or variable expense is easier to manage, and no obligation is even better.

8. Have you created an investment strategy that is separate and diverse from business equity?

For the farm family, equity in the operation constitutes more than 90% of the family’s wealth. It is important to diversify some financial holdings outside of ownership equity. A principle of good money management is diversification; it is more important in the case of a family business owner whose tendency is to reinvest earnings into business assets.

9. Do you need to plan for the financial support of parents, a special needs child or others?

Know your obligations, current and future, and account for them. We now have a new socioeconomic and sociocultural trend to compensate for in our financial plans. The sandwich generation compelled us to provide for our children as well as our parents (as they age). Consider the impact of a single income supporting three generations.

10. Can you create an investment portfolio that you can’t outgrow?

Inflation is a corrosive element that quietly destroys the nest egg of the unsuspecting. Diligent planning and attention to detail when managing investments may be the only remedy. Hedging against inflation, planning for respectable growth and controlling obligations will help create an ample financial reservoir for future use.

11. Have you set a retirement date and a plan for implementation?

Ah, retirement. For most farmers it’s an illusion, for some it’s a reality, but for the ambitious it’s another fork in the road. Establishing a plan for retirement, including a date for it to take effect, prompts good money management, better leadership development, a creative business design and careful planning.

12. For retirement, should you establish a subsidiary operation, a new business or volunteer time and energy to a worthy cause?

As entrepreneurs, most farmers and agribusiness owners are creators. They focus on building something that did not exist—producing a product or service that fills a void in the marketplace. As such, absolute retirement may not be the most attractive alternative as you make room for the next generation.

13. Is your family financially secure in the event of premature death or disability?

Long-term financial security is the primary reason a person risks it all as a self-employed business owner. Contingency planning is critical to enduring financial health. Most farmers have an allergy-like reaction to insurance, but if not for it, farmers would need substantially more in capital reserves. Betting the family’s financial security on the whims of nature is, at best, a long shot.

14. Does your estate plan allow your operation to continue?

The standard estate plan is drafted to minimize the estate tax. It treats the farm as an asset to be equally divided and distributed among heirs. Shared ownership between active and inactive children may become a wedge of discontent. Succession planning focuses on protecting the integrity of the operation, designing a means for only the active children to retain ownership and an equitable distribution of the other assets to inactive children.

15. Are there charitable organizations that represent your philanthropic intentions in the future?

Charitable gifts to a meaningful organization allow you to leave a legacy, reduce estate taxes and demonstrate support for a cause you believe in.

 

YOU CAN SEND YOUR OWN QUESTIONS TO KEVIN AT LEGACYPROJECT@FARMJOURNAL.COM.

 

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FEATURED IN: Legacy Project - Legacy Project 2010 Report

 
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