The Parallel Tracks of Farm Succession

Posted on: November 27th, 2012 by Richard Cressman

Starting to build a Farm Succession plan can be an overwhelming topic at first. If the process is broken down into two components or parallel tracks it can be easier to get a grasp of what needs to be done. Track #1 is the operational side of the business (managing the business and ensuring the work is done appropriately). Track #2 is the ownership side of the business (who controls the equity and who is responsible for the liabilities.)

Understanding the distinction and differences of these parallel tracks can help demystify the process of building your Succession Plan. In the past when the younger generation started to farm the typical news up and down the concession was that they, “took over, or are taking over the farm from mom and dad”. Today’s farm operations are much too complex to just “take over”.

The Succession Plan, when put together properly, is a roadmap that provides a path to follow for the transitioning of one generation into farming and the senior generation out of farming. It is crucial to view the plan for what it is: It is NOT the process – it gives you the step by step instructions in how to go about the process in the future.

Timelines are the cornerstones of a great Succession Plan: using the above model of parallel tracks, the responsibilities for the operational side of the business can be transferred to the beginning generation over a period of three to five years. For example, the goal may be that the beginning generation works for the first year under the direction of the senior generation without decision making responsibilities. Over the next four years, the Succession Plan could call for an increasing level of responsibilities be assumed by the younger generation each year with the ultimate goal that full responsibility is on their shoulders for the day-to-day operation of the farm (this is just an example of time lines)

Capital purchases etc. would still need to be discussed with the senior generation. This graduated approach allows both generations to adjust gradually versus trying to deal with abrupt changes. It also allows the senior generation to establish their confidence in the beginning generation that the business will be managed with competence. However, it is in this transition phase of management that disagreements and frustration can set in. For the generation entering the business, it feels the process is going too slow. For the senior generation, the process seems to be going too fast. This is where planning and talking is so important! If you are the younger generation and you think Dad is not giving you the responsibilities you expected, refer back to your plan. What did you agree to? Are you on track?

The ownership transfer can start off at a much slower pace and continue to build over time. For some families, the beginning generation may work for a salary for the first one to two years. Depending upon the age of the parents, and what level of income they may have from off-farm sources will depend upon how fast they want to transfer their equity in the business. In some cases the beginning generation will need to out-right purchase the farm, and in other cases there will be a combination of purchase/gifting. Either way it is critical to create a plan that shows the younger generation that they are able to build equity at a pace that equals their input and contribution to the business. Working for a promise doesn’t cut it. Carrots are to be eaten – not for dangling in front of some ones nose. It is not fair and it makes the younger generation feel that they are under their parents thumb.

 

The key points to keep in mind:

  • Management of the business should not be confused with ownership of the business. They are parallel tracks in a Succession Plan. Viewing management and ownership as separate but intertwined entities when designing this Succession Plan will make it easier to address all of the issues.
  • In the past it was a fairly common assumption to believe that each generation was going to end their farming career with a debt-free farm. That is changing. It is becoming more common for parents to plan their retirements using cash flow from their equity versus living off of the equity. Key distinction.
  • As the beginning generation enters their farming career the parents may still be in an expansion mode of their own. Hearing of a 70-plus-year-old farmer thinking of buying another farm in the past turned heads – usually in disbelief, but not anymore. Thankfully age and gender perceptions of who should be farming are rapidly being destroyed.
  • The Succession Plan is a roadmap. It is complete with dates and descriptions of how the succession process is to unfold.


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