Farm Succession

This page contains 4 articles on farm succession. One form Keith Esplin that was in the Potato Grower Magazine and three written By Mike Salisbury, CAC of Salisbury Management Services, Inc.

PGI Column

By Keith Esplin

Farm Succession, Not an Issue to Take Lightly

Potato farming has undergone radical changes over the past 50 years. Some of my earliest memories involved furrow irrigating potatoes, hand cutting potato seed, hand pulling weeds (before the approval of Sencor), driving small tractors without cabs, and backing trucks into cellars so narrow that you had to fold the mirrors in to get through the doors. Those days are long gone. I am still amazed at GPS technology that allows a grower to operate the controls of his harvester without needing to hold on to the tractor's steering wheel!

Growers who went through this technological revolution and continue to operate successful farms today are indeed rare. They possess the drive, work ethic, vision, and sometimes luck, that helped them build farming operations that are many times larger than when they first started their farming careers. They learned to adapt and expand their operations to keep up with efficiencies of size that allow them to compete in a technologically modern environment.

These growers who built the Idaho potato industry have another thing in common, their age. Unfortunately life does not go on forever, and these same hard working growers face one of the greatest challenges of their careers: How to transfer their land, knowledge, experiences, even their entire life's work to the next generation. Of course most forward-thinking growers started this transfer long ago, but for many, much remains to be done. Instead of taming the desert, these growers now wrestle with different issues: keeping the IRS from being the largest beneficiary of their estates, transferring the decision making process to the next generation, and planning for retirement.

It was for these reasons that PGI partnered with USDA's Risk Management Agency to provide grower education on Farm Succession. Mike Salisbury, of Salisbury Management Services, provided many interesting insights on this subject to growers at the All Grower meeting on November 14 in Pocatello. He and Glade Williams also presented two workshops at the Potato Conference in Pocatello. Both of those sessions had a high attendance of growers looking for information on this important topic.

Of course there are many sources of information that growers can refer to when making their succession plans. The most important thing is that they plan. If adequate plans are not made to transfer assets, management, and other resources to the next generation the survival of the farm is seriously at risk. This is a process that involves not only the original farming



Navigating Business Succession Minefields

By Mike Salisbury, CAC

Salisbury Management Services, Inc.

The aging baby boomer generation is impacting the farm population as well as the non-farming population. This trend is generating increased interest by these aging farmers to begin to seriously consider developing a business succession plan for their farming business. Well over half of SMS clients are seeking advice and counsel on developing business succession plans. Research has shown that only 3 of 10 family businesses will survive into the second generation and that number drops even more for the success of 3rd generation family businesses. There is an old adage in family business circles that granddad makes it, dad holds it together and the son loses it. However, in our 25 years of practice we have determined that with solid, no nonsense planning, a family can greatly increase its odds of having a successful business succession.

The keys to success for family businesses require solid planning, a no nonsense approach to managing the business, well defined family business boundaries and high standards and expectations for performance by all members of the family business. There can be no dead wood among the owner management team. Accepting poor or mediocre performance can drive a stake in the heart of the family business.

The succession planning process involves 3 major stages. The first of these is the discovery or readiness process. The family needs to review key measures to ensure that the business is ready for succession. This involves a thorough analysis of the financial position and past performance. An in-depth review of key financial measures such as owner equity, working capital, profitability, capital efficiency, and debt repayment capacity is critical to predicting the business's ability to add owners. A study of the family readiness also includes looking at and evaluating the quality of the relationship between the senior generation and the successor generation. A discussion between the generations regarding goals, lifestyles, financial desires and acceptance of the business cultural values is also essential in determining the likelihood of there being long term success of the plan.

If this stage is skipped the result is quite often the lack of a solid foundation for the relationship between the generations. Also, it is important that any hidden agendas are discovered, discussed and a plan developed to resolve them. This is evidenced by the large number of family businesses where the people aren't happy and fulfilled and the business isn't financially successful. If it appears that the participants of the succession team agree that the people and the financial equation are in position for succession then a move to stage two can occur.

Stage two is the plan development stage. Here the succession team does its who, what, where and when planning. The "who" identifies who is going to participate in the plan, both today and in the future. The "what" process discovers the core values of the business, the objectives of the succession, the mission statement of the "new" business and determines detailed job descriptions, organizational charts and personal development goals.

The "where" discussions determine the focus of the business, both now and after succession, and the geographical location of business activity. One of the most interesting things that I observe in today's farm family business succession processes is the lack of proactive, visionary, progressive attitudes among the successor generation. This is a definite change from the young farmers of a generation ago. I will leave it up to the rural sociologists to analyze if this is actually true and why it might be.

The "when" determines the anticipated retirement dates for the senior generation members of the team. This is always an interesting discussion. SMS has a client family with numerous senior members and even more successor generation members. The seniors failed for years to make any concrete retirement plans as to dates and expectations. Then, in November, one of the senior members was forced to retire due to health reasons. That opened the spigot and within 12 months all members of the senior generation had decided that they wanted to retire. This put tremendous pressure on the family, the advisory team and the outside stakeholders. The story has a happy ending, at least to this chapter, all seniors are retired and the succession plan is implemented and ticking along.

This second phase also develops the criteria for successor generation members to join the business as employees and lays out the road to eventual ownership. There are three stages of development for the successor generation that seem to make sense and assist in the orderly and successful transition. The three stages are: Responsibility, Control and Ownership. So the natural sequence is to work as an employee to prove oneself as worthy to go onto the next step where the individual is advanced to a manager status. After experience and success as a manager, the individual can be considered for membership into the successor entity ownership group. Normally, there is an ordered process that includes a mentor, systematic evaluations and a consensus on joining the ownership group. This stage may also outline expectations for educational requirements, full time off farm work experience for a period of time, and a demonstrated value to the business. This is the place where family/business boundaries need to be developed to ensure that business issues are handled in a business like fashion and family issues remain family issues. No farm in today's economy can afford to have dead wood in its ownership ranks.

The key to having the above process work effectively is to have the entire group develop the plan and the implementation process jointly. The plan needs to have buy-in from all internal stakeholders, including all the members of both generations, the spouses and any other family members, including members of the family that are working off the farm.

There is much to be gained to have the plan developed 5 years prior to the first member on the successor generation coming on board. This gives adequate notice to all involved and thus allows for preparations.

Stage three of the planning process is the implementation stage. The plan, now complete, needs to have wheels put under it, it needs a champion from the senior generation to ensure that all the detailed planning gets put into motion.

This is the stage where the process tends to breakdown, mainly from neglect. It is important to keep the plan in front of all stakeholders. A reasonable goal is to have at least one annual review of the plan and update any portion of it that needs attention.

As I learned as a bright, shiny 2nd Lt in the US Army a long time ago, "Proper Planning Prevents Poor Performance". Mike Salisbury, CAC, is a Family Business Coach for Salisbury Management Services, and can be reached at 208-420-9092 or emailed at msalisbury@salisbury-management.com.



Maturity - The Final Phase Of Your Business's Life Cycle

Mike Salisbury, CAC

Family Business Coach

Salisbury Management Services,

a division of AgStar Financial Services

A more and more frequent situation we run across with our client is the producer who is in their early to late 50's with an agricultural business that by any definition has been and continues to be successful. The producer has enjoyed and continues to enjoy what they are doing and they are making some decent money doing it. A strong equity position has been built, liquidity is decent, low fixed costs and solid production practices make them a formidable competitor, and life is good!

Other common characteristics of this scenario are:

  1. the business is stable in terms of no new employees and there are 1 or 2 key long term non-family employees,
  2. there has been and continues to be one owner,
  3. capital purchases are being done at maintenance levels only,
  4. a commodity product is being produced and that product might have previously been a value added product,
  5. over the past 10 years there has been less and less investment in new ventures and new technology,
  6. there is minimal or no growth in the size of the operation (revenue, acreage farmed, etc), and,
  7. there is no one in the family that wants to or is capable of succeeding the owner's management and ownership positions.

Maturity, the final phase of the business's life cycle has been reached. Given the age of the producer and their spouse, "retirement" discussions become more and more frequent as do the anxious feelings, questions, and disturbing thoughts - spoken or unspoken. These questions and thoughts include the following.

  1. Do I have enough money (equity and cash flow) to retire?
  2. For that matter what does retirement mean for us?
  3. If I just quit farming, aren't we going to get killed by having to pay the income tax liability I have been pushing forward since I started in the business?
  4. What will I do to occupy my time? Heck, I've been working in this business for the last 30+ years.
  5. I am recognized within my extended family and in my community as a successful farmer and businessman. What happens to that identity I am comfortable with if I quit farming?
  6. The more I think about this, the scarier it is because there are so many things unknown. So maybe I just won't think about it.
  7. I know I have the option to renew the business and revert to the expansion phase, but at my age, no heir apparent to succeed me, the risk to my equity . . . . . . . . . why should I?

Financial management during the maturity phase of the business life cycle is critical to continued success (enough money and an enjoyable life) as the producer's moves into their 60's and 70's. The first step in the financial management process which will significantly reduce anxiety is to "model" the possibilities - both financial and lifestyle in terms of what you want to do during "retirement". The possibility of lifestyles can be modeled by simply having heart to heart discussions with your spouse and/or other family members. What do you want to do, what does your spouse want to do, what do we want to do together, what do we want to do alone, and so on. Not always the most comfortable things to talk about, but once you get started it can significantly reduce anxiety because you will have more information.

Modeling the financial possibilities is another anxiety reducer. Just understanding the minimum and maximum possibilities will help narrow your choices. Perhaps the hardest part of the financial modeling process is the "ramp down" from the current scale to totally exiting the business. This of course could occur from anywhere from say 12 months to 5 to 10 years. After the "ramp down" projection, needs/wants in terms of cash outflow can be determined and matched against the cash flow potential of your equity position. After all, regardless of your lifestyle choices, there still has to be enough money available to undertake the chosen lifestyle. Let's not forget that in general we are living longer than before. So a second career or some form of earned income from working during "retirement" is becoming more and more common.

Other ideas to consider as you plan for the maturity phase of your business are:

  1. Develop a close relationship with an expanding producer in their 20's or 30's with a demonstrated track record of success on their own. Help them expand their business as you step your business down by gradually transferring acreage over to them. Use this phased approach to help manage your deferred income tax liability for the current assets you are carrying. Use this scale down approach as you manage the transition of your machinery and equipment into liquid assets by sharing equipment with the younger producer or through custom arrangements.
  2. Negotiate and extract the value of transferring your landlord relationships to the expanding producer. What do you think it is worth to that expanding producer to be able to pick up over the transition period 500, 1,000, 1,500 or even 2,000 acres of rented land. You might be surprised. And if your agreement is structured properly with the expanding producer, this income can likely qualify for capital gains income tax treatment.
  3. If you have custom work relationships think about selling and transferring these relationships to another producer. There can be value to that "book of business". And if structured properly, capital gains income tax treatment on this income is possible.
  4. Look hard at any transitional land opportunities to provide equity and liquidity a boost as you near the exit point. On the other hand, be careful about becoming involved directly in real estate development projects unless you have acquired this expertise or are teaming with a trusted partner who has the expertise.
  5. Become a fee based advisor, mentor, or board member for a younger operator who is looking for this guidance. This could be in or out of your local geographic area. With a planned and well executed marketing strategy, those opportunities are out there.
  6. Want some additional return, you like the food industry, but you don't want the day to day hassles, consider providing some mezzanine financing to one or more expanding ventures in the food industry. This can be a tremendous renewal strategy to keep you engaged. Appropriate analysis of the risk inherent in such investments also needs to be undertaken.

Maturity, the final phase of your business. Although it may be the final phase, it can be a prosperous phase, it can be an enjoyable phase, and it can be an exciting phase. A good dose of planning out the alternative scenarios, add a little bit of creativity, and extract the value of those relationships you have built over the past 30 years, and there you have another rewarding phase of your business career.

Mike is a Family Business Coach and is Vice President of Consulting Practice Development with Salisbury Management Services located in American Falls, Idaho who helps agricultural producers keep their businesses healthy and their families happy. He can be reached at msalisbury@salisbury-management.com or at 208-226-5472.



TRANSITION/SUCCESSION ISSUES FOR FARM FAMILY BUSINESSES

Mike Salisbury, CAC

Family Business Coach

Salisbury Management Services

Most families in the business of farming are thoughtful enough to make attempts to anticipate the future of the business when the days of TRANSITION will arrive. Most parents in these families, perhaps without a word spoken, have been struggling with the issues of SUCCESSION. Of those parents, there are quite a number who feel the tension/anxiety each time thoughts of how to divide the business FAIRLY surface in their minds. This article is directed to those who are seeking assistance and guidance in making TOUGH decisions.

Those who are attempting to accomplish FAIRNESS to all involved as transition is considered, and yet to make sound business decisions, might benefit from the fable of the Farmer in the Old Country who stood 6'7" and had a son who was only 6'5". They each pegged the barn scale at 245 pounds. They were taking a small donkey to the market some distance away, and the father was riding while the son walked. There he was, crushing the small donkey, and people along the road criticized him loudly while the donkey struggled. The farmer was shamed, so he got off the donkey and told his son to ride. The criticism increased. As they approached the bridge over the river, the farmer ordered his son off the donkey. He picked up the donkey and began carrying him to the approval of the people. Part way across the bridge, the donkey looked over the rail of the bridge, was frightened by the water, struggled free, but plunged to his death into the river. The moral of the story was "If you try to please everybody, you are bound to lose your donkey!"

Fairness is such an evasive and frustrating concept. The number of farmers who have accomplished a level of fairness acceptable to each family member must have a small Country Club in the Eternal Golden Land, with no waiting to tee off. And the number of farmers that feel that their efforts to accomplish this feat have placed them in the pain of a living Hell, are without number.

How does it feel as you grow older in the farm business when you realize that offspring and or relatives are already thinking of how the pie should be fairly divided? How does it feel when you realize that they may fight whatever the division of assets will be? How does it feel when you are accused openly or silently of showing favoritism in the family? And how does it feel when your children rush to you to criticize their brothers or complain about practices and decisions that they consider unfair, questioning or challenging your judgement?

What is it like to be faced with succession decisions that regardless of how much you struggle to make good ones, you know in advance that whatever choices necessary will cause hurt and/or anger within some or all? Transition and Succession planning often uncovers at least two difficult views that may interfere in the process that is established to complete the work.

"Entitlement" is a word and a concept that threads its way through the lives of farm families and communities throughout the nation. It is commonly seen as a word to describe what a person believes he/she has coming to him/her.

What is the basis for a person's entitlement? There seems to be an unwritten belief that has emblazoned this concept into the minds of people. In England, as an example, children of privilege have nothing to prove, nothing that they must do to qualify themselves for competing in the working world or contributing anything except their presence toward what they receive. They learn from early ages that their needs and wishes will be met by Entitlement.

American Farm Children most commonly are not "Entitled" although through their hard work in the farm business, it is easy to see how they would feel that their contributions to the business should count for something.

"Entitlement" thinking includes "Expectations, Justice, and Fairness". These concepts combine to inject emotions into the Succession planning. Succession Planning if it is to succeed must be founded upon sound, rational, business principles. Among the requirements for planning are thorough evaluations of the resources of a business, indebtedness, and estimating what the future value of crops, livestock, machinery, land, and other assets would likely generate. It also requires developing strategic plans and budgets to determine if the business can provide enough profit to support the families who hope to continue with the business. Of course, the financial needs of the retired and deserving Dad and Mom must be covered by the plan.

A problem often develops if the father has indicated to his offspring at some point that, "Someday this will All Be Yours!" For it "All To Be Yours", however, may require working for sub-standard wages, making personal sacrifices for self and family, and keeping the dream alive that the Succession/Transition will occur early enough in life to be able to make up the losses incurred during the waiting period. If promises have been made to sons and daughters and the business is not prospering, it will likely create some serious problems in attempts to complete a Transition Plan. Is it best to avoid the truth?

Some farm fathers feel a sense of FAILURE and/or SHAME when they recognize that the business will not be capable of successfully meeting the needs of the children. These are painful family situations, and there is NO WAY to please everyone. Start Succession Planning early as a vital piece of a good business.

Mike is a Family Business Coach and is Vice President of Consulting Practice Development with Salisbury Management Services located in American Falls, Idaho who helps agricultural producers keep their businesses healthy and their families happy. He can be reached at msalisbury@salisbury-management.com or at 208-226-5472.