There are many families who struggle with the logistics of passing down the farm. “It affects almost every country in the world,” Kevin Moore, University of Missouri economist, and instructor for the University's Advanced Farm Management courses, said.
“The transfer of the family farm is something that a lot of families may assume what is going to happen, but it’s not really been planned for,” Moore cautioned. “It’s such a major change in so many facets of the business, there are new people involved, there’s a shifting in responsibilities,” he added.
Evaluating the Transfer
When a family farm is evaluated from the perspective of a transfer from one generation to the next, the current farm managers must look to try to grow business to support the next generation coming in, Moore explained. Some common questions to ask:
1. Is this what we want to do?
2. Can we work together?
3. Will there be adequate income?
4. Is there enough equity?
5. What business arrangement should we use?
“It is likely the family farm had been paying down debt and has been able to secure some sound financial footing, then when the decision to expand comes around, when another generation is expecting to be supported (even if only in part) by the farm’s income, that typically means more debt,” added Moore.
Moore said when the decision to expand to accomodate a son or daughter returning to the farm is made, it is prudent to plan. “One important part of planning is looking at the financial side of things. The family needs to really push the pencil and try to project the profitability and solvency (of the operation), look at the financial risk and weigh all the things that might happen to ensure the best chance for success in the future.”
What are the biggest challenges when passing down the farm?
“Sometimes it depends on the particular operation; I’ve helped kids (students at the University of Missouri) look at the feasibility of going back to a farm where the financial side wasn't that much of challenge, the farm had gotten quite large over the years and had more than one hired hand involved, so the next generation coming back wasn’t a question of size, adequate income potential, etc. So, in that case, it isn’t so much the growth that needs to occur, as planning for transfer. The larger a farm or estate gets, the more planning needed.”
Moore said estate taxes can be quite large, and it becomes vital to have a sound estate plan, and the family must get professional advice so the farm can remain an entity as it was when transferred to next generation.
Sometimes a family’s bigger challenge, Moore noted, might be timing. At what point should the next generation join the operation? When do you take the opportunity? Should it be when the child is immediately out high school? Immediately out college?
“Sometimes you will find the need to postpone a son or daughter coming back to the farm. Maybe for awhile they should get an off-farm job and wait for a time when it looks like financial success would be easier to obtain. With the cyclical nature of agriculture products’ prices, risk needs to be managed, and choosing the best time to grow that operation, choosing the appropriate time for the son or daughter to come back is an essential part of that equation,” Moore stressed.
Structuring as a Business
“Farming is a large-scale business anymore. Many farms have well in excess of $1 million invested in machinery, land, equipment and buildings. On that large scale level, the farm is a financial enterprise that demands financial planning and strategic business planning, just like any other multimillion-dollar business,” Moore said.
But on all scales of farming, having a business plan that’s written down – and runs the whole gamut of personal goals to business goals, is essential, he said. “It is important to get a mission statement developed for the farm. That way, when disagreements between parties arise, everyone can go back to that mission statement, reread it and come back to the table and discuss the issue based on the goals of the business,” Moore explained.
A business plan is a living document that needs to grow and change and develop with the business. Business plans are not just for the large, full-time farmers. A mission statement can also help everyone involved in the part-time farm achieve their goals.
The idea of a separate business, Moore explained, “is to have the business be what is considered this virtual enterprise. It doesn’t own much of anything, but leases dad’s land, leases machinery from dad and uncle. The business gets labor from dad, uncle and from son and daughter, and pays them wages for their labor. It produces crops and/or livestock and generates profits, which can be shared with those who own the business.”
A virtual business, separating out the assets from the business, for example with an LLC, has a lot to do with trying to reduce financial exposure to lawsuits. If the business itself doesn't own many assets, then when a lawsuit against the business arises, the assets aren't owned by the business responsible, so it’s not at risk as much.” However, Moore stressed that insurance is still the foundation of a good risk management policy.
“It really depends many times upon what is the most important facet they're trying to protect. Multigenerational, lots of siblings, maybe protect assets in a capital intensive situation. The goal is to manage risk, facilitate transfers, manage income estate taxes, prioritize and look at different ways to structure the business,” Moore said.
Problems in Transfer
Moore said open lines of communication are the first barrier to implementing a multigenerational farm transfer, and next is determining the family’s business plan for the farming operation.
Where do you want the farm to be 5 years down the road? As a family can you design a farming plan that meets the financial goals of everybody involved? He stressed the importance of including the ideas of everyone involved, when planning for the business’ organization.
If you’ve got one son going back to the farm, often mom and dad feel a special affinity to him, but they want to treat their two other children fairly. How do you split a farm, to transfer to three siblings, but ensure the one child on the farm can have successful operation?”
It is extremely difficult to talk about these kinds of things, but it is so critical, Moore stressed. It’s one thing if everybody’s getting along, but those things change. “One or more of parents die, feathers get ruffled and what everyone thought wouldn’t be an issue becomes an issue. Especially when one sibling is wanting to keep farming when their brothers and sisters own 2/3 farm and their sibling can’t afford to buy them out. Families can end up losing the farm because the kids are fighting over the details.”
There are lots of different resources, attorneys, financial planners and Extension staff and literature concerning the financial and legal concerns when structuring the farm.