by Sally Colby
No two farm transfers are the same, but there are some basic considerations that apply to every situation. Dr. Alex White, Department of Dairy Science at Virginia Tech, shares some of the most important points for farm families to think about during transition planning.
First, the farm should be a viable business that the next generation can continue to operate profitably. “If we want to transfer to the next generation but our facilities and equipment are out of date, it’s going to take a significant investment to get things up and running,” said White. “Outdated facilities are a major problem for dairy families because it requires a significant investment to update. If the operation isn’t profitable, maybe transitioning isn’t a good choice.”
Another early discussion point should include an overview of the current financial position of the farm and how the transfer will occur. “How and when are we going to do this, and what’s the best way?” said White. “We have to transfer management responsibility and slowly bring the next generation in, mentor them and learn from them. Talk about living arrangements – where you want to live when you retire. Also discuss contingency planning – the what ifs.”
Most aspects of generational farm transfers are complicated because it’s impossible for one or two people to have all the knowledge and insight required. White suggests a team approach. “I would recommend an accountant, an attorney, a lender, an insurance agent and a business consultant who can be a separate set of eyes looking at your operation,” he said. The team should also include family members such as spouses and in-laws who have an interest in the business but who don’t necessarily have to attend every meeting.
The advisory team should all be present at meetings so everyone is aware of goals, the situation and how the transfer will move forward. “If you rely only on your accountant, they’ll look at things from a record keeping and tax standpoint,” said White. “A lawyer will look at the legal side and the estate planning side.” The team should fully understand the business and help the family make good decisions.
“Set up the business meetings, have an agenda,” said White. “Whenever the topic is ownership or something long-term, we invite the in-laws and other family members to show up and have a say. If they decide not to show up, they’ve made a conscious decision. If they do show up, listen to them and take what they say into account because we need to keep the family together.”
Next, gather all necessary information, including a comprehensive farm resource inventory. “Walk around and figure out how much land there is, equipment, condition of equipment, who owns it or what percentage of it,” said White. “Get your financial statement together. Work with your lender to come up with a balance sheet and income statement. Do a cash flow statement – that’s the most powerful statement you’re going to have.” Legal documents such as power of attorney, deeds, titles, wills and trusts should be available for team members who need such information, and designated people should know where those documents are.
Create a timeline for the transition – the process isn’t going to happen overnight unless someone dies without planning. White suggested establishing a probationary period for the younger generation, allowing them to be in charge of a certain aspect of the business. “Slowly expand and mentor them over the next three or four years until you’ve trained them in all the areas,” he said. “Put it in writing to avoid selective memory. Go back and look at the progress you’ve made over time.” Because events such as deaths, births, marriages and divorce can change the direction of the plan, White advised teams to be willing to review and revise the timeline.
“Don’t try to do everything at once,” said White. “Focus on one aspect until you’re comfortable with it, then move on to the next. If you try to solve everything at once, your mind will explode. Take your time, but the earlier you start, the more time you have to do this.” White suggested setting aside a percentage of the business’s routine management meetings to include planning for the future.
Finances should be examined in regard to liquidity, solvency, profitability and cash flow because the business has to be profitable or it isn’t worth transferring. “Make sure debt is structured properly and that you aren’t trying to pay off debt too quickly but not borrowing too much,” said White.
The transition plan should include means by which parties can invest for retirement. White said in the most successful family farm transitions he’s worked with, both parties have retirement income. “The older generation doesn’t need to pull money out of the operation for living needs, which gives the younger generation more management flexibility,” he said. “They don’t have to sell their assets, or they can sell more slowly, which gives the younger generation the opportunity to purchase a piece at a time.”
If they don’t already exist, create written job responsibilities for everyone on the farm, from family members to employees. If a family member in a management role has to leave the farm for a while, perhaps to care for another family member, it’s critical for the others to know what that person has been doing every day on the farm.
Many farms require members of the younger generation to work off the farm for a while, and White said this should be standard for transitions. “They can make mistakes, see different management styles, make new contacts,” said White. “They can decide if they really want to come back and be serious about running the home operation.”
Good communication is a critical aspect throughout the transfer process. “Work with someone to improve the communication in your family and in your business,” said White. “Think about bringing in a mediator – someone from outside the family to ask the tough questions.”
White advised members of different generations to listen and learn from one another. “The younger generation can coach the older generation on technology,” said White. “The older generation should listen – they might learn something new that’s practical for the operation.” Everyone involved in the transition should be able to express individual views and while communicating openly.
Although it’s often difficult for the older generation to let go of what they’ve been doing for years, White urged them to share both their passion and responsibilities. “If you’re going to maintain tight control, the family farm transition is not going to go smoothly,” he said. “We need to be willing to give up some of that. The younger generation should realize how hard it is for the older generation to do this – it’s their pride and joy, their lifetime work, and it’s hard for them to give it up. Look at it through their eyes and try to understand.”