How do I transfer this farm on? Where do I even start?
David Baker of the Beginning Farmer Center at Iowa State University hears that question regularly. In his role as Farm Transition Specialist, he has found communication and planning to be the key component to a successful farm transition plan.
“It’s not a book I can hand you,” he notes. “Every family and every situation is different–and what they have to accomplish to have a successful succession plan is also different.”
Baker believes the first step in the process is deciding what the owner wants to do with the farm. “What is the vision?” is the question he urges his clients to use as a starting point. “If the vision is to have the business still running 20, 30 even 40 years from now, we can start on that right now.”
He acknowledges that these discussions can be difficult–but contends these same conversations will dramatically change the outcome of the transition plan. “It’s an awkward topic,” he says. “But we need to know what’s in an estate plan that will affect the business. If there are five children, how are you going to run a business with only one fifth of the assets?”
If the plan is to simply continue ownership in the family, with the land divided up at the time of death or else rented out or sold, the process simplifies itself to legal document creation. “Get a lawyer, write it up, and get it done,” he notes.
But if the goal is to continue the business, you need a plan, he asserts. For this, the business must identify the successor--and transfer the assets, the management and the money. “You don’t do this with just a swipe of the pen,” he states.
Baker breaks down his suggestions for successful transitions to specific steps, which he really likes to see in a written form.
First, decide if you want estate planning or succession planning. “You can have estate planning without succession planning–but you can’t have succession planning without estate planning,” he points out.
Then, talk about it as family unit. Figure out what you want,” he states bluntly. In the nine years that he’s been working with farm transitions–with his role occasionally turning more to that of a mediator between generations--Baker continually sees the importance of communication. “Are there other family members? Are they aware of a son or daughter coming back to the farm? Sit down and discuss this stuff. When we assume things, conflict comes up. When communication goes down, conflict goes up.”
After you determine what you want for the business, the next step is to decide how to structure the business with the successors. A key component of this process, Baker has learned firsthand, stems from knowing the roles and expectations for all involved.
He recommends identifying what each person likes to do, and structuring around their strengths. “Some people really like to work with livestock, others with the crops. One person is good with talking to the banker,” he says. “Determine what makes sense for your specific operation, including taking into account the education and skill set that each person brings to the business.”
The generation that is leaving needs to know what they are going to do, he asserts. The stories of farmers leaving their day-to-day roles on their operations and suddenly finding themselves with no point in living have hit home with many, and no one wishes to feel unneeded.
“A big part is determining what everyone is going to do. We need to make a distinction between “retiring” and “dying,” he says. “Most people go on and pursue other things–traveling, hobbies, maybe even another small business, or visiting friends, family, grandkids, or maybe attending baseball games. Part of this is making sure that the older generation is also looking forward to something other than a rocking chair.”
“They can feel like they are being pushed out,” he summarizes. “But we are asking them to mentor. They have to feel comfortable with their successors, and let them make some mistakes.”
As a part of that transition process, he recommends that the plan include a trial of a year or two, a time of joint-decision making, and a period of letting the successors make the decisions, with the out-going owners still available for more direct consultation.
Due to the complexity and variables in each unique transfer, Baker does not necessarily feel any specific time frame is correct. However, Baker has found that four to five years is a good time frame for happier transitions.
“A trial period is a great idea; it makes sure that the younger person really wants to do this. The older generation needs to have time to back away from their career, too,” he says.
The time frame also allows for the large issue of how to transfer the assets. “Young people typically don’t have all the capital that is needed to come into this,” he points out. Depending on the state, various tax credits may be available, or options for gifting assets.
He urges the family conversation to cover this topic–so that people have thought it through when they write up the legal documents and consult with the necessary tax advisors, lenders, CPAs and lawyers.
Another part of the structuring discussion will necessarily center around how the next generation will earn their money. Should it be an hourly wage? Gifts of money? Salary? An incentive plan? Profit sharing? Share leasing? Creation of a limited liability corporation with stock sharing? What makes sense for your operation and your family situation?
Putting the time line down on paper remains critical, in Baker’s opinion. He stresses that noting who is responsible for completing each task means a much higher likelihood of completion.
Chart specifics could include steps such as meeting with a lender to determine the options available in your specific situation. Another step might be as simple–and as important–as notifying the neighbors or long-term renters that the next generation is coming on. Each step represents another movement forward on a long-term process.
“I encourage them to have a chart, with approximate time lines, the activities and who is responsible for the activities. They can go back and review it from time to time, celebrate what they’ve done, and then take the next steps.”
Baker urges all parties to think through their transition dreams and goals as early as possible. “You can never start too early planning for the future, but you can start too late,” he says. “I don’t know how many times I’ve worked with a family where the father has just discovered he has a terminal disease and we have just a few months to talk it out. It is next to impossible to bring that next generation in, and talk it over, and make sure everyone is comfortable in that short period of time.”
Jill Stahl Tyler is a freelance agricultural journalist from Brattleboro, VT.