Succession planning is complex for any business, but imagine crafting a plan for a fifth-generation family business with three generations active and multiple business enterprises in three states and two countries.
Carroll Family Farms, based in Carthage, Ill., specializes in hog, corn and soybean production. Carroll Farms Brazil, the international portion, includes grain and cotton production in Bahia, Brazil.
Listen to Carroll discuss his farm operation on the Farm CPA Podcast with Paul Neiffer:
MANAGEMENT TRANSITION
As the operation evolved in the past decade, the family knew they must prioritize transition planning, says John Carroll, a farm partner.
“We have always thought about succession planning in two ways: financial succession and management succession,” Carroll says.
Carroll’s grandfather transitioned out of management 30 years ago. Ten years ago, his father and uncle handed over most of their high-level responsibility Carroll and three first cousins.
“My generation feels fortunate our parents trust us to grow the business,” Carroll says. “We know giving up management control can be difficult. They are still full time in the business but act more as an informal advisory board.”
With the management team in place, the team divided up the operation into entities. The sow farms are an entity, as is the feed mill, the Brazilian operation and so on. Each enterprise has its own balance sheet profit and loss statement.
“We allow each person, to the extent they want, to contribute to labor,” Carroll says. “They can command fair market rates for doing labor. Then, they have the option to manage an enterprise.”
The Carrolls found a way to connect business performance with high-level responsibility.
“Managers are responsible for providing a risk-free rate of return at no cost for their enterprise,” Carroll explains. “The owners don’t have to pay the manager anything for just returning a risk-free rate of return. Over and above that, they get a percentage of the profits.”
The Carrolls tend to use 3.5% for that risk-free rate of return, which represents the interest an investor would expect from a risk-free investment over a period of time.
THINK OUTSIDE THE BOX
This structure is an innovative way to compensate family members, says Paul Neiffer, CPA with CLA.
“If someone wants to drive a combine, they will get the market rate for labor,” he says. “But if they want to provide management, then here’s how you’re compensated for management. If you don’t do a good job, you don’t get compensated. If you do a good job, you’ll be compensated on sharing in the profits.”
