Sitting down at the table and hashing out a succession plan is not easy. It is also never done in one sitting.
Instead, it is an ongoing conversation that should span a lifetime, or at least as long as the farm operation is running. Many financial planners and coaches agree you should have a box of tissues with you because there may be some very tough conversations to be had.
Elaine Froese is a farmer, certified coach and author, who has been helping farm families work together in harmony for over 30 years in their everyday operations and with their transition plans. She strives to help these families communicate and understand each other better. Froese says the most important tool a family can have when walking through a succession plan is the ability to communicate and listen.
What are the next steps when you have everyone at the table?
Froese says the first thing is to ascertain everyone’s willingness to be at the discussion.
On a scale from 1 to 10, if one person is a ten and another is a two, then it is not going to work. The important thing here is to engage with the person that is a two and find out why they feel that way; see what can be done to get them to a place where they are ready to have a conversation. Having a farm family relationship coach can assist with that.
Froese says if everyone is on the same page, the next important thing to do is to have a financial planner who can go through everything.
She urges people not to wait until age 70 to work on this step –- the younger you are when you get a planner, the better you will position yourself when it comes time to pass the farm operation on to the next generation.
Before heading into this conversation, you need to think about your intent and then discuss it with all of the parties involved to find out what their intent is. Where do the founders see the farm going? If the vision is to keep the farm intact, what does that mean for everyone?
If that is the plan, it’s important to know that it will not be divided up like a pie. This means figuring out how the business will be passed along to the children who are staying on with the operation and how to compensate the children who decide to have careers off the farm.
Froese says the first step in this process is to make sure the ones passing on the farm are taken care of through their retirement and final years.
“Go to a financial planner and be sure that you’re good till you’re 102.”
Froese says in her experience, the parents don’t think of themselves as much as they should. After you are looked after, determine what the ownership of the farm business is going to look like after it is passed along. Again, this is where a financial planner, accountant and lawyer can help in making that a reality.
If the farm business is remaining intact and being passed along to farming children, what tools are available to compensate non-farming children?
Froese says the most commonly used are cash and insurance.
She has heard of situations where land has been passed on to the non-farming children on the condition that there is a strong long-term rental agreement for farming children. This is a conversation Froese says you should have with your financial planner. They can look at your situation and help assess what options will work best.
Financial transparency should be an everyday practice with the next generation. “Share the balance sheet, show them the cash flow and how tight the margins are,” Froese says.
The more everyone understands how it all works, the more likely the conversation will yield results because everyone can come from the same base knowledge.
What if it fails?
Remember, if someone is at a “2” on their willingness to talk, and no amount of conversations or meetings with financial planners is changing that, it will alter your succession plans and you must be ready to pivot.
Froese has seen several situations with different families over the years.
In one case, she says the farmer building the succession plan decided that they didn’t want to pass the farm along to the next generation. So, the farmer planned with his financial planner and they moved forward with selling the farm.
In another instance, one of the farming children and their spouse decided they couldn’t work with one of the siblings, so they decided to leave the farm and start their own operation. Froese says this turned out to be a huge relief for them moving forward.
It all came down to every family member determining their “intent,” moving forward, and then working from there.
Remember, the best tools to have at the table as you work through the succession plan with your family is the ability to communicate and listen.
Parents –- or the people passing the farm along- – need to ensure their needs are taken care of through their retirement and final years.
Transparency is key if everyone at the table is to have an equal stake as you work together.
Determine if the intent is to keep the farm intact. If it is, determine how the income streams will look and how the ownership will look once the business is passed along. Then determine how the non-farming children may be compensated if you decide to go that route.
And finally, if it doesn’t feel suitable to everyone involved, then the people passing on the farm can look at other options, or the next generation can look at other opportunities outside the farm.
However, none of this can be determined if people don’t sit down and talk about these issues. The more discussions and the earlier, the easier it is for everyone to decide what works for them and what doesn’t.