Leave a Legacy: Succession to an Unrelated Third Party

April 27, 2012 11:39 PM

How should we, the Smiths and the Johnsons, transition ownership and management of a family farming operation from the retiring owners to a next generation of unrelated aspiring owners?

The Smiths are in their mid-20s and looking for a farming opportunity of their own. Ben is a third-generation farmer who also works off the farm in an agricultural enterprise. Sherry has multiple degrees in agriculture and works in her field of study.

Through their local state "farm link" service, the Smiths connected with an experienced farm couple who are considering retirement. The Johnsons don’t want to liquidate an operation that took a lifetime to build. They want to pass their farm to a couple of young aspiring farmers.

The Johnsons are majority shareholders of their family operation. The farm is held as a subchapter S Corporation in which the Johnsons’ four children each hold a minority interest. None of their children have expressed an interest in farming.

Congratulations to both families. You’ve embarked on a life-changing adventure. The key to success in your situation is good communication. Both parties must be able to discuss tough and sometimes contentious issues in an open and rational manner. This process will present challenges that only a burning desire for success will overcome.

I suggest you start by defining common objectives. What do you want to achieve? Think in terms of growing the operation, financial security and making sure the leaders/owners in the next generation are prepared. Though there’s a generation gap, completely different personal needs and career objectives, the four of you must be able to focus on specific goals to move forward.

Partnerships require constant attention and clearly defined roles and responsibilities. Each party to the alliance must focus on creating and maintaining good working relationships.

Though it may seem repetitive, clearly defining roles and responsibilities for each party will help avoid conflict. Thinking ahead, what role will the Johnsons play in the farming operation as the Smiths gradually assume ownership?

Finally, by defining a decision-making process, each party will know how decisions will be made, who’s accountable and whether the other party will be consulted. Many arguments can be avoided by making sure everyone knows how decisions will be made.

The Johnsons will need to:

  • hold a family meeting to explain their intentions and invite input.
  • detail the process, including a timeline and specific milestones.
  • introduce the Smiths to the family and have them share their questions and concerns.
  • make sure the business is structured correctly, including the operating agreement and buy-sell provisions.

Together, the families should:

  • write a business plan to grow the operation moving forward.
  • create job descriptions and establish salary and benefits at market rates.
  • create an employee review process and professional development plan.
  • agree on a conflict resolution plan.
  • establish a timeline for authority of management transfer and ownership transition.

Specifically, the Smiths need to:

  • commit to professional development, including mentor/protégée rela-tionships, classroom education and experiential learning.
  • relocate to the operation and learn to work together.

Don’t expect miracles. Like courting before marriage, learning to work together to pass the farm to an unrelated next generation will take time.

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