By Farm Journal Content Services
If one thing rings true in 2020, it’s not to put off until tomorrow what can be done today. As agriculture grapples with so many uncertainties, make certain the future of your farm stays off that list.
“This has been a challenging year across all areas of agriculture,” says Vince Bailey, Farm Credit Mid-America’s executive vice president and chief credit officer. “Farmers may not be thinking about succession planning now, but this is exactly the time to get a plan in place. Don’t procrastinate and close the window on your opportunity to ensure a successful transition.”
Bailey says farmers commonly have questions about the need for and value of succession planning. Some may fear loss of control in transferring assets. But bigger problems crop up when a farm with no plan passes to the next generation after the operator’s death.
“Succession can be difficult to discuss with family, but it’s best to be transparent,” he says.
Selecting a Successor
That begins with open dialog about choosing one or more successors. Bailey stresses farming as a business, not a birthright. Choose, groom and educate a successor based on the farm’s needs. And working off-farm first positions a successor to bring valuable insights into the operation later.
“Technology today opens up a different skill set,” he says, that creates diversity to approaching different issues on the farm. “It’s an opportunity for new perspectives and people. Something else we are seeing are more women stepping into prominent roles on the farm, and that is fantastic for agriculture.”
Allow successors to transition into leadership and learn from mistakes along the way. “Share expectations openly,” says Bailey. “You want the farm to stay a farm. Don’t rob management for capital, or vice versa, to make the transition.”
Farmers also should meet with their successor regularly to discuss financials.
“Give them some responsibility and have them buy inputs or sell grain. Show them how the pieces fit into the larger picture,” he says. “Have them listen in when you meet with your lender, even if they are not in charge yet. When it’s their turn, they’ll be ready for the right conversations.”
Get Financials in Order
Capital management also plays a critical role in succession planning. Consider using a third party as a facilitator and include your lender, financial advisor, accountant, attorney and insurance agent.
“Your lender should be present so you do not lock up assets that may be necessary for liquidity, future borrowing and ability to grow and expand,” says Bailey. He adds these tips:
- Don’t make plans strictly based on limiting tax burdens. Plan for long-term viability and business continuity so you don’t miss opportunities.
- Plan for cash outside the business to support the retirement of the current owners. Selling land or equipment to the new owner to provide retirement funds can drain cash flow.
- Use a financial vehicle, such as life insurance, to compensate any siblings not part of the operation going forward. Buying out a sibling creates another cash-flow drain.
- Carry adequate life insurance to fill a gap from the unexpected death of a primary owner. If there is no successor in place, the operation will need cash to fill the gap until they are ready.
- Manage debt and cash in anticipation of transition. Growth, specifically late growth for the sake of transition, is not always required or appropriate.
- Plan for long-term, multi-generational growth. Doubling farm size in each generation to sustain more families is not necessarily an appropriate or good goal. A split may eventually be required as the family tree grows.
“When it comes to planning, do not rely on what your neighbor or parent did,” says Bailey. “No single blueprint fits everyone, but everyone needs a plan.”
For a full interview about succession planning with Vince Bailey and Ryan Patton, from Nationwide Financial, check out the video below.