Four Steps to Develop an Effective Succession Plan
Succession planning is more than just transferring the assets of an operation. It’s about transferring family values, business management skills and leadership skills to the right person in the next generation.
According to the U.S. Small Business Administration, only 30 percent of family-owned businesses (including farms) survive to be operated by a second generation, and a mere 16.5 percent make it to the third generation1. Since the vast majority of all American farms are family-owned, the kitchen table is often the best place for owners to have early conversations about their legacy dreams. Even for families with young children, it’s not too early to begin planning for succession.
As the next generation moves into adulthood, it’s a good time to start having “family meetings,” during which farm owners can outline their hopes for the farm’s future. More specifically, discussions should cover the core skills needed to own and manage the farm, and review how that meshes with the talents of children who wish to remain on the land.
To help provide structure to these conversations, there are four primary steps to effective succession planning:
- Farm income. This involves an assessment of current income and projections on whether that revenue stream can continue supporting the next generation.
- Risk management. Assuming general farm liabilities, such as mortgages, equipment payments or land rental costs are covered as part of a farm income discussion, a major risk management consideration is potential medical costs down the road.
- Mentorship and financial independence planning. Owners who have developed good negotiation skills, marketing savvy, strong decision-making and emotional maturity must find ways to translate them into leadership and management training for the farm’s chosen successor.
- Estate planning. First, an estate plan must account for often-varied interests among key stakeholders, such as family members who wish to stay actively involved on the farm and those who don’t. Additionally, a sound plan will employ trusts, partnerships, insurance policies or other tools to minimize taxes while clearly defining both financial and personal interests.
All succession plans will benefit from outside expertise in accounting, financial planning, insurance and law. To build the right team, seek out recommendations from friends who have moved through recent generational transitions, or consult with a local agricultural business specialist at a local university extension office. Before hiring anyone, producers should conduct personal interviews to ensure they can comfortably communicate with all members of this important team.
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1Ohio State University (May 10, 2013). “Transitioning family farms to the next generation.” Ohio State University
College of Food, Agricultural and Environmental Sciences.