By Shannon Ferrell, associate professor in the Oklahoma State University department of agricultural economics, where he specializes in agricultural law.
Ask a producer about their greatest hope for the future of their operation, and most would say to keep the operation together for their family to farm. That’s only natural when you’ve poured a lifetime of effort into building something. But there is more at stake than just a collection of assets when it comes to planning the transition of your dairy to the next generation; there is providing for a surviving spouse, ensuring the continuity of your business and preserving family relationships.
We Can Do Better
Unfortunately research shows only 20% to 30% of family-owned small businesses (including farms) survive a transfer from the founding generation to the next intact. Why is making that transition so difficult?
1. Everything about a transition is harder with a family-owned business. When the business and primary income source is also a retirement fund, workplace, home and future inheritance, it becomes hard to untangle all those bonds for a smooth transfer.
2. Of American farmers and ranchers, 64% have no estate plan. That means the transfer of their personal holdings after they die will be governed by the “default rules” of the state they lived in (intestate succession laws), which in most cases will divide up assets as equally as possible among surviving heirs. That might not sound bad, but it can be a nightmare.
3. A transition can trigger large expenses, and many operations simply don’t have the financial health to endure it. Large medical bills, long-term care in a nursing home, or the debt incurred to buy out heirs who want to take their inheritance and go can serve as the final blow to a farm or ranch, forcing the survivors to disperse the assets and go their separate ways.
Prepare Your Successor
The fourth reason surprises many producers who have had their spouse and kids by their side every day: failing to prepare their successors. In agriculture, we are great at teaching our family the “how” of our farms’ daily operations. But we often forget to teach the “why” behind our whole farm plan and truly groom a spouse or child to smoothly take the reins of both operational management and executive leadership should anything happen to us. Even fewer producers craft and carry out a plan for their successor to take over while they are alive, so the seasoned professional can be there to guide them through their first steps.
Speaking of those seasoned professional producers, many start to realize transition planning is important at the end of their careers, but a plan is every bit as important for young producers. Losing a primary wage earner in a young family can be devastating, so those families need a strategy for handling that contingency.
With a sound plan and a good team, these challenges can be championed. In this series, we’ll cover the five steps critical to successfully transitioning your operation to the next generation: determining where your operation stands today, having some deep (and maybe difficult) conversations with the people who have financial and emotional investments in your operation, creating a plan for the continuity of the business, setting up an estate plan for you and carrying out a continuous process to move your plan into reality. It’s a lot of work, but when it’s done, you’ll realize the dream of leaving a legacy to your family for generations to come.
Succession Plan Takeaways
Everyone needs a transition plan—especially young producers. Only 20% to 30% of farms successfully transition from one generation to the next.
Four reasons farm transitions fail:
- Transitions are more difficult for familyowned businesses.
- No estate plan in place.
- Not financially able to withstand transition.
- Failing to prepare successors.
A successful transition plan involves five steps:
- Determining where your operation stands now.
- Having transition conversations with your stakeholders.
- Developing a business succession plan.
- Creating an estate plan for your holdings.
- Implementing, revising and evaluating your plan.
Note: This article appears in the January 2018 magazine issue of Dairy Herd Management.