(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.
The corn had been planted for about three weeks and was nicely out of the ground. The farmer I was talking to is approximately 32 years of age and he and his wife have been in the transition process with his parents of assuming the ownership and management of the farm. (I will call him Joe) They milk over 180 cows and Joe’s parents are starting to move into the background as far as the workload and management goes.
Joe asked me whether spreading dry fertilizer on the standing corn would be a better option than side dressing liquid 28 percent nitrogen. Joe’s father had always used dry fertilizer in the past and their crop yields were some of the best in the neighbourhood. There was no doubt the dry fertilizer program had worked in the past. I asked Joe what he thought would be the best for the corn crop. He said he would like to side dress the 28 percent nitrogen but his father wanted to spread dry fertilizer because it could be done a lot quicker. The culture on this farm is that they do all of their own fieldwork and custom workers are very seldom hired. With a lot of cows to milk, extra labor is a short commodity.
I asked Joe if there would be a big difference in the yield using liquid 28 percent nitrogen versus dry urea. He said the concern he had was that spreading dry fertilizer on ground that might not get moisture could cause a loss of nitrogen. We stood looking at each other for a few moments and then I asked him what he thought the decision should be regarding liquid side dress nitrogen versus spreading dry nitrogen. There was about 20 seconds of silence and then he said, “I think we will spread dry nitrogen this year”.
I think Joe made an excellent decision that day and this is why. He did not agree that his father’s choice of fertilizers was the best, but he also knew that it had worked very well in the past when father was the sole decision-maker and that using dry fertilizer for another year would not have negative repercussions for the farm.
In Joe’s case, his father is giving him a significant amount of responsibility in managing the herd. Father has given up almost all input into what goes on in the barn. However, when it come to managing the cropping program, father’s confidence in Joe’s ability is increasing, but in the case of the dry fertilizer versus the liquid, father still wanted to have some input – yes he still wanted control.
Joe decided not to argue over how to fertilize the corn this year.
As I walked across the yard to leave, I thought to myself, “Joe is a young person who is willing to set aside what he thinks is the best decision this year for the cropping program, and not challenge his father”.
In Joe’s case it has been amazing how he and his father have transitioned the management of the herd – it has been almost seamless. Production has continued to rise as Joe has assumed more responsibilities.
Joe’s secret is that he never forced his his views on to his father if they were contrary to what he knew his father wanted to do. On the other hand, his father has felt respected by Joe and has continued giving Joe more responsibility.
Next year I will be surprised if Joe is putting dry fertilizer on their cornfields. Dad will have had another year to think about the value of side dressing and with Joe’s enthusiasm for that type of fertilizer dad will probably be making the suggestion to go liquid himself.
My wife and I had just helped celebrate our granddaughter’s first birthday. One year earlier we had received a phone call at 1 a.m. in the morning from our youngest daughter informing us that she had just given birth to a baby girl – our first grandchild. Seven hours later, I was sitting in a chair in the hospital room holding our little 6 lb. 5 oz. granddaughter. It was a surreal moment. As I was trying to balance my tiny granddaughter in my arms for the first time, standing right next to me and monitoring my every move was her mother. 31 years earlier -she- was the little 6 lb. 7 oz. baby I was trying not to drop as I held her for the first time.
As we drove home from the hospital after having met our granddaughter for the first time, I started to think back to what I had learned about parenting. I reflected back on the childhood of our youngest daughter who had just become a mother herself. Our youngest daughter was never a child who created a lot of problems for her parents, but she always seemed to be in the middle of sibling squabbles with her two older sisters. Even in kindergarten she had been sent to the principal’s office for drawing blood when she clawed a fellow student for not being willing to share the toys.
It was this same daughter, at the age of two, who taught me the most fundamental of parenting lessons. These lessons were learned at our supper table. Our two-year-old sat in her high chair. Her four-year-old sister sat to her right at the end of the table. Her six-year-old sister sat across the table. Once the food was served, the two-year-old would frequently throw food or utensils at one of her sisters – always precise with her timing when her mother and I were looking the other way. Scolding her had a minimal effect. Telling her to straighten up? Also, minimally effective. Taking her food away? Again, virtually no effect. She would make faces at her siblings and they would point at her and say, “Mom, see what she just did?” The two-year-old was quick and cunning.
Her mother and I were getting frustrated and running out of solutions so we embarked on a new plan and this was where my lessons started. As soon as an altercation took place at the table I stopped eating and would get up from my chair and without saying a word, walk around the table and pluck the two-year-old out of her high chair. As I walked into the living room with her in my arms, she would be kicking and squirming and protesting. Eventually, she would slowly start to relax. I would then look into her eyes and tell her that she was a wonderful person but the behavior she had just exhibited at the supper table was not appropriate and unacceptable. I explained as best I could in a language that a two year old could understand that she had two choices. She could return to the supper table and change her behavior or she could head off to her room and I would bring her supper to eat by herself before going to sleep. Then I would put her down on the couch and leave her to decide which of the two choices she was going to make. Without exception, she would return to the kitchen to finish her supper without incident. This scenario happened two to three times per week. And went on for a few months.
So what were the lessons I learned from our youngest daughter? I learned that even two-year-olds can make good decisions for themselves when given the appropriate guidance. (It would have been nicer if she would have made the decision to behave without having to leave the table but that was the process we had to go through with her to eventually reach the point the family could all eat supper together without the drama). She obviously did not like the consequence of eating alone in her room so she chose to rejoin her family and change her behavior – at least for that particular evening. Both as an adolescent and as a teenager, our daughter would always push back if her mother and I pushed our ideas too hard. However, when we gave her the responsibility for making her own decisions after explaining what the consequences would be, there was much more harmony in our home. There were times that she made choices where the consequences were not what she anticipated but she still lived with her decisions. At times this was difficult for us as parents to watch.
In conversations with her now as a young mother, our daughter has said that our confidence in her to make good decisions for herself at a very young age without being told what she absolutely had to do, has been a very fundamental cornerstone in how she is now mothering her own daughter. She also said that the most important thing that has stayed with her is that she understood that we as her parents would enforce the consequences of her decisions.
Life is all about making decisions and living with the consequences. Running a business, whether it is a farm, or another business in the city, is also all about making decisions and living with the consequences. Parents who want to protect their children from the consequences of life, or the consequences of the business world do their children no favors.
When I look at my own life, it is those difficult events where I learned the most. Experience is a great teacher. Protecting our children from experiencing the negative consequences from the decisions that they made may make us feel better – at least in the short term, but it does not give them the opportunity to learn and understand how to take responsibility for themselves.
I love the analogy of learning how to ride a bicycle: It is all about getting on the bike and pedaling until we lose our balance and fall off. You get back up and make the decision to try again. Scrapes and bruises are part of the process. But once you have mastered the ability to balance on two wheels that skill will stay with you for life.
Life is about choices and consequences. Even a two-year-old can begin to make good choices for themselves if we as parents don’t flinch when the going gets challenging.
Farm succession can be defined as the “passing of ownership and management from one generation to the next”. In the past this process may have been called, “passing on the farm, or dad is finally letting go or the son is taking over.”
Family members can and do react in a variety of different ways when they hear the words farm succession. For some, particularly the younger generation (successor generation), there is excitement and anticipation. When it comes to parents, you never can predict how they will respond. Mother may be dreaming about travelling and spending more time with friends, family and grandchildren, father on the other hand may be dreading slowing down.
Farming is no longer a lifestyle that automatically provides a good living. Farming today is big business, it requires the ability to make difficult decisions, the ability to change and adapt, and the ability to develop and maintain a mental toughness for dealing with the day-to-day stresses.
To generate one income from farming often requires an investment of $1-$3 million and in some sectors even more. To have over $10 million invested in a farm business is no longer exceptional.
Over the past 13 years, I have had the opportunity to work as a communication coach with families going through the succession process. Some families do it very successfully – it is virtually a seamless transition from generation to generation. Other families struggle to make the transition work. Why the difference? One word – Communication! In families where communication takes place naturally, or is formalized through meetings, the succession process has a much greater chance to take place in a seamless manner. When communication among family members is a struggle, and there is no formalized meeting structure, succession can become a dragged out process. In this environment when decisions do get made, they are often made out of frustration and not well thought out.
Good decision making requires excellent communication.
How do you start the process of Farm Succession?
It can be helpful to distill the succession process into three very basic, but pointed questions:
As mentioned, these questions are basic and pointed, but they must be answered for a successful succession to take place.
To answer the first question, please seek out the advice of your accountant. The numbers must work before you even start thinking about succession.
The answer to the second question is more difficult to quantify. The following are some best practice suggestions for the successor generation:
1. Pursue a post-secondary education at the diploma or degree level. A degree in business or at least significant business courses will serve you well. Take up employment away from the farm for a minimum of three years. Live away from mother and father. If you want to come home on weekends and holidays to help out, great.
2. Consider working for more than one employer during this period.
3. Start talking about your interest in coming home to farm while still holding down your job away from the farm. Dream about how you would like to run the farm. Draw up businesses plans – yes more than one plan is good. Do budgets. This can be a time to do a lot of “fantasy farming” without fear of making mistakes. But please do not be tempted to short-circuit this experience away from the farm and come home early.
What is next? Trusted advisors are essential. Your accountant is going to be the cornerstone to the success of your succession process. Having faith in your accountant is essential because you need them to provide tax advice, create shareholder agreements, critique budgets, give advice on life insurance needs, provide direction to your lawyer, and answer the many questions you will have. They are the heart and soul of the process. You will also need the involvement of your lawyer, insurance agent and your lender(s). I have also seen situations where other trusted farm advisors such as veterinarians have been asked for advice. Also, do not discount the value of talking with other farmers.
My first experience with farm succession was as a successor – my brother and I took over a 60 cow dairy farm from our father in 1975. We expanded to 125 cows over the next 15 years. That is when I had my second experience with succession – I transitioned out of the partnership. My brother and I still operate a seed business together that has been part of the family since 1975.
I am frequently asked, “Do we need a communication coach/facilitator?” Even though farming is big business, when it comes to making decisions, particularly around the topic of succession, EMOTIONS frequently trump logic. For example, mother may have a different opinion on how the non-farming children should be treated regarding inheritances than what father does. A non-farming child may feel that the parents are favoring their sibling who is going to stay on the farm. A daughter-in-law may feel that her husband is more dedicated and a harder worker than his younger brother. In another situation a daughter-in-law may feel that her contribution on the farm is not being valued by her in-laws. If there are situations like this that you are facing, engaging a skilled coach/facilitator maybe an excellent decision. Everyone needs to be listened to. More importantly they must feel they have been listened to. Getting everyone’s thoughts and feelings out in the open at the beginning of the process before sitting around the board room table in the accountant’s office can eliminate a lot of frustration and surprises. There is often a perception that if there is conflict before succession has taken place that succession will solve the problem. Wrong! Conflict is going to happen. It is how families deal with the conflict that is critical. Acknowledging that conflict is part of business and creating strategy to deal with it should be part of the succession process as well.
The final question: Can a deal be put together that will allow mother and father to sleep peacefully each and every night? The succession process can take two to five years to put in place. One of the reasons is that mother and father frequently need this time period to feel comfortable that the successor generation has the ability, the required skill sets, the passion and commitment to carry the business forward. They want to see results. The security of mother and father’s golden years are dependent upon a thriving business.
It may seem a bit radical to conclude an article on farm succession with this thought, “in certain incidences selling the farm might be the best decision for everyone”.
If mother and father agree that they will be able to sleep peacefully each and every night after this deal gets finalized, you are well on your way to having a successful transition of your farm business.
In the past 15 years the term Farm Succession has been tossed around in many farm circles. Government programs have been spawned to address this topic. Consultants have written articles and held seminars on the topic.
Farm families have been confused and many have tried to ignore the topic of transition. Some farm families have moved forward and addressed the legal, financial, and emotional issues in a positive way. On these farms the transition from one generation to the next has been virtually seamless. It just seemed a natural extension of the day-to-day operations of the farming business. On other farms it becomes a tug-of-war between the generations with much emotional and mental energy expended.
To get a handle on this complex topic distilling the Farm Succession process into three basic questions can be helpful.
Regardless of how difficult or complex the transition process is, it always seems to come back to these three questions.
The answer to the first question is obvious. You must start with a financially viable business or be able to expand it in a profitable manner to support all the individuals who are going to be a part of it.
The second question addresses the passion that the younger generation has – do they have what it takes (passion, desire, ability, and know-how) and be willing to get out of bed each morning and make it happen? Running a business takes more than just a dream. It takes the dedication to block out the distractions and forge forward.
The third question is the most challenging to address. Far too many times when the cash flow is tight, mother and father will under estimate or lower their retirement dreams and expectations to allow the younger generation to carry on the business. The other part of this question is whether the parents are totally confident in the ability of the children to make the business a success. It is not uncommon when parents are confronted with the question, “do you have any doubts whatsoever that your children can make this go” to hesitate before answering. It is this doubt that can cause parents to lie awake at night hoping and praying they have made the right decision in passing on the farm versus selling and having a very comfortable financial retirement for themselves — and providing a substantial inheritance for the children.
Yes, it is simplistic to distill the transition of a farm business into just three questions, but these questions do drive home the key points many families tend to skirt around when addressing this massive topic.
From my experience sitting at kitchen tables I do believe the most important question is the third one, “can a financial deal be put together that will allow mother and father to sleep peacefully each and every night for the rest of their lives?”
I have been working with my parents full time for 12 years. I have been married for three years and my wife works off the farm full-time.
The farm business is financially successful and we have gone through a significant expansion in the past three years. Over the past five to six years I have taken on full responsibility for making sure all the work gets completed, but my father will not let go of the control and because he has to be involved in all of the decisions.
He is almost 65 years old and in declining health but when it comes to talking about my future in the business he just refuses to talk. I love farming but I am not sure how much longer I can tolerate not knowing what the future is.
For what it’s worth, you are not alone. Letting go of control can sometimes be the most difficult thing particularly for fathers to do. You mentioned that your father is almost 65 years old.
This indicates that he is probably been farming for close to 45 years and there is an excellent chance that he was making serious management decisions at a very young age. If your father and possibly mother will not sit down to discuss the future, you ultimately will have to make a decision.
Do you confront them with an ultimatum (and this is a very extreme undertaking) that things need to be addressed and that you cannot continue on the way things are going. If you do elect to take this route, there can be serious ramifications.
Father might take it as if you are challenging his authority and digging his heels even further. On the other hand it is possible that he is waiting for you to really challenge him. While this sounds ridiculous, it is a real possibility.
Another option that may work for you is to sit down with father and asked him about what it was like when he was getting ready to start farming and how he and your grandfather worked out the transition. What you are trying to do here is turn the tables and find out from father how things transpired when he was in your possession.
You may find that he went through a struggle to get control and has a belief system that supports a young person needing to stand up to the older generation and give that ultimatum so that he will have proof that you have what it takes to make the financial and management decisions.