Agriculture

Succession Planning - How to Make it Work

Many farm business owners avoid succession planning because they don’t know what to do, where to start or how to manage the sometimes strong feelings the topic creates in families. While your farm will have elements that are unique to your operations and your family, there are some common topics that need to be addressed in any successful plan, including:

  • a retirement strategy
  • estate and financial plans
  • a process for transferring to the next generation
  • the ideal business structure
  • the ideal financial transfer

The four common issues that come up involve: communication, the impact on farm finances, non-farming children and divorce or death. 

Tips on Succession Planning

While each farm has its unique issues when it comes to transferring the business to the next generation, there are some common topics that almost all farmers must address.

Communication

The ultimate goal of a succession plan is to allow make a smooth transition from one generation to the next. Good communication is key in writing down a plan that works for your farm.  Many farm business owners avoid succession planning because they don’t know what to do, where to start or how to manage the sometimes strong feelings the topic creates in families. Fear of conflict can make farmers avoid planning and the results can mean disaster for the whole operation. 

Even if it feels hard, you need to speak up if something needs to be said during the planning process. One of the best tips to remember is to use “I” statements, rather than “you” statements, which can often sound like blaming and sets up resistance before the discussion even starts. You can start informally, by talking separately to your spouse, farming children, non-farming children and their spouses to find out what everyone is thinking. The information you get can form the framework for a family discussion.  When you meet as a family, it’s often useful to structure it like any formal meeting with an agenda that covers all the topics that have been brought up in previous discussions. 

Some families ask a neutral person to run their meetings which can help keep people on track and on topic without allowing personal issues to sidetrack the meeting. As the plan evolves, it is often good to bring in trusted advisors, including accountants, lawyers and business experts for help when it’s needed.  Remember that successful communication involves:

  • listening as well as speaking
  • giving everyone at the table a chance to say what’s important to them as individuals as well as members of the family unit  


Impact on farm finances

The best succession plan is the one your farm can afford and doesn’t jeopardize the financial viability of the operation.  At the start of the process, it may be a good idea to talk to a trusted accountant or financial advisor. Accountants can advise on about topics such tax laws, cash flow projections and business structures. Another useful consultant may be your lender who can offer advice on available financing options. Owners should share the financial statements with the incoming generation.  Doing an analysis of past and current financial results helps everyone understand what you’re dealing with and shows how the farm has been performing.

Projections will help you assess how well the farm will do and also help you assess for specific scenarios will also help you plan for and handle unexpected or emergency financing problems. The process can highlight any weaknesses and allow changes to the plan to ensure the farm can remain viable. It is also important to include the family living expenses in the plan as these can have a significant impact on the farm’s finances. This discussion may lead to ideas about current and future lifestyle issues and their implications for the future. Everyone involved with the succession plan needs to understand the financial implications to the farm and accept that there will be need to be some compromise.

Non-farming children

If there are children who have left the farm and don’t intend to return, parents need to consider how you can treat them fairly without compromising the business. Many owners are unsure of how to do this. Before decisions are made, parents need to ask what expectations the non-farming children have. Their answers may surprise you. Parents need to decide what fits best for your succession plan and the farm operation as a whole. For example, it could be that the non-farming sibling gets a quarter of land but must allow the farm to use the land for a defined period (ex: 10 years). After seven or eight years, the non-farming child should be able to tell the farming child if they intend to buy or sell the land outright, renew the lease or allow the sibling to sell the land. This provides the farming sibling with time to arrange financing to complete the purchase. For another example, parents can decide to give a quarter of farmland to each non-farming sibling or to make non-farming siblings beneficiaries of life insurance policies, with the farm covering the insurance premiums. Get expert advice and be as creative as you need to be to find the right solution and avoid sibling conflict after the succession. 

Divorce or death

The two biggest concerns that producers have about succession planning is the impact of death or divorce on the farm. Both could destroy the farming operation if the proper groundwork hasn’t been done. It’s important to plan for succession after a death by setting up a power of attorney. This will allow others to act on your behalf to make decisions about things such as banking, health care, or end of life directives.  Your will must be kept current and adjusted when children reach age of majority, marry, have children, etc. Life insurance can be used to ensure there is a nest egg for your family if you become incapacitated or die. Credit life insurance can be used to cover the term loans and operating credit.  

Divorce creates business challenges and the use of a pre-nuptial agreement can minimize the negative effects. Operations that are incorporated will use common and preferred shares to structure the ownership of the farm.  In a divorce, the former spouse’s shares would revert to the children and the company would buy them back from the former spouse to keep ownership. 

For details and advice on succession planning, talk to your local farm management specialist