(Taken from a presentation to a group of Junior Farmers.)
Getting the next generation started into the business of farming is a monumental challenge facing many rural families. The rapid rising of land prices, equipment, and facilities over the last 30 years has created new barriers for those wanting to enter farming.
Almost every agricultural sector today is facing the grim fact that if current asset values are used, it is virtually impossible to show a positive cash flow when doing a startup budget. The reality check is that parents who are now looking at turning over their farms to their children were able to start their farming careers with a total investment of a couple hundred thousand dollars. Today for one family to earn a living from farming requires the use of assets valued well in excess of one million dollars. Sacrifices undoubtedly will need to be made and somebody will need to subsidize the entry for the next generation.
A successful farm transfer can be problematic if the parents do not have a clear picture of their retirement: where they will live, vacation, what they will do with their time, and most importantly, what all of this will cost. For parents, particularly fathers, sitting down and talking about retirement can be a difficult task.
The younger generation wanting to take over the farm will also need to sincerely ask themselves, “is this really what I want to do for the next 20-25 years? Am I willing to pay ‘the price’ through sacrifices of time and emotional energy to make a farm business succeed?”
This whole process can be boiled down into three fundamental questions that need to be answered by parents and children. (1) What type of financial arrangement needs to be put in place so that mother and father can enjoy a peaceful night’s sleep and not toss and turn wondering if they are making the right decision? (2) Is the dream of the younger generation big enough to continue to pull them out of bed every morning until the debt is paid? (3) Is it eventually possible to put together a deal that will satisfy the answers to questions one and two?
To help parents answer the first question, they will first need to determine if the farm business has the financial capacity to cash flow the debt that will need to be assumed by the children. Secondly, they must assess their confidence in their children: do they feel the next generation is capable of running a successful enterprise? Thirdly, they must determine how to treat each child fairly when it becomes time for the estate to be divided.
These three points can be summarized as: cash flow capabilities of the business, confidence in your children, and the capacity to be fair to everyone.
The younger generation must consider several points when answering their question about their desire to farm. How strong is your passion to be a farmer? Do you have the mental toughness that will be needed? Do you have the ability to work with and manage other people? Is your education extensive enough to help you see the ‘big picture’?
Putting the financial deal together is much easier if everyone has first sorted through the answers to their respective questions. Most farming operations already have access to excellent accounting and legal resources. If you are not confident in your advisers you should seek out individuals whom you deem to be competent.
Farming can provide a wonderful lifestyle. Transferring this lifestyle to the next generation can be done relatively stress-free through meticulous planning. This process takes time and requires patience on everyone’s part to ensure a happy ending.