Taking the first step of a farm transition
June 9, 2012
You may have read articles or attended a workshop on the farm transition process. Many of those focus on the actual process of transferring the business and assets to the next generation. But what about the steps necessary before the transfer process can even begin? There are many different options that can work for a farm; however, be warned that there are no pre-set plans that are going to spell out exactly what needs to be done and there is no guarantee, if the plan is followed exactly, that everything is going to fall into place.
We first should define what is meant by outgoing and incoming generations. Outgoing is going to the senior generation that have started on this farm years ago. They could still have 5, 10, 20 or more working years. The incoming generation is going to be their sons, daughters, maybe an employee, or any other young adult who is trying to work into the farming operation.
The first step is identifying a set of goals by both parties. These should include both personal and business goals. Then both generations need to combine their business goals to make one set by which the business is going to operate. These goals need to include how much income everyone will draw from the farm and how that income will be generated.
With the goals identified, it will help determine options that are going to fit the needs and wants of your farm. Typically, the outgoing generation does not want to take on a lot of new debt or work because they feel that have put in their time and do not want to go through that again. The incoming generation tends to have ideas for the future of the operation but they have financial limitations.
What are some options to help bring the incoming generation into the operation without fiscally over-burdening the operation? More often than not, a farm will have to add cows or acres or a combination of both in order to make it possible for the incoming generation to enter to business.
One option is for the incoming generation to take on new debt by themselves. This means the son and daughter need to secure financing to buy the cows and pay for land to produce the feed for those cows. The seniors may build additional structures to house these cows, but the new mortgage payment for this building will be charged to the son or daughter as a rent fee. The other details of who will be paying for the additional milking supplies, increase in utilities, and so on is something that will have to be negotiated. In addition, there needs to be discussion on how the business will be structured. Will it run as two separate entities under one roof or as one business with two appropriate draws based on percentage of inputs?
Another option that might work in a situation where there are already enough cows to handle new partners would be to make the operation a Limited Liability Company. Once that business structure is in place, it would allow the older generation to sell a percentage of shares of the company to the younger generation giving them a stake in the operation. Again, the incoming generation needs to already have or secure financing to buy the shares. In this type of business structure both parties would collect a fair wage and at the end of the year when the financials are done, if the business earns a profit, it then could be decided to reinvest into the operation or split profits so the younger generation could buy more shares. The younger generation should be prepared for the prospect that they may need to work for several years before they are able to purchase a significant share of the business. With both of these options, it gives the outgoing generation cash to put away for retirement or pay down debt. It also gives the incoming generation a source of income when working on the operation while starting them toward a stake in the operation.
Making a farm transition happen takes an overwhelming amount of work and commitment. But if your goal is to see the business continue for years to come, it is something that cannot be put off until the very end.