Succession Planning: Steps for a Sound Transition

December 2, 2015 01:56 PM
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By: Donald Schreiber, Director, Advanced Consulting Group of Nationwide and Jessica Lehman, Associate Vice President – Business Segments, Growing Forward, Farm Credit Mid-America

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On America’s farms, the average age of owners and operators is now a bit over age 58, and the vast majority of those producers have been working their land for 10 or more years1. It’s no surprise a huge transfer of land will occur in the next few decades. However, an array of data suggests much of it won’t remain in the family. Yet, this is about more than transitioning a business; this is about helping secure the future of rural America. And for those deeply concerned about the future of family farms, those numbers are not an encouraging sign.

Uphill climb for younger farmers

When we talk about succession planning, it’s less than just the assets, and more about transferring family values, business management skills and leadership skills to the right person in the next generation.

But over the past three decades, a confluence of factors has made it harder for young people to successfully take up farm life. Since the early 1980s, the midpoint acreage for farmland rose from just under 600 acres to over 1,100 acres, since larger holdings were able to deliver better return on equity for major crop operations. The most significant increase took place in the nation’s heartland, where acreage-intensive crops such as corn, soybeans and wheat make up a majority of the annual harvest2.During this same period, the number of young farmers has trended steadily downward.

In the accompanying chart, note how acreage owned by producers in the 25-34 and 35-44 age brackets peaked in 1978 and has declined ever since. Conversely, land holdings have steadily increased in the 65-and-over group and remained relatively steady in the 55-64 age range. While farming has always had high barriers to entry, it’s clear sound planning can go a long way to ease the crunch of land, equipment and input costs for younger people who want to carry on a farming legacy.

Chart_OwnedAcresByAge_HR

While those plans clearly involve people, they also need to include a long-term view of how the land will be managed. 

Succession planning: Starting conversations, building blueprints for a sound transition

According to the U.S. Small Business Administration, only 30 percent of family-owned businesses (including farms) survive to be operated by a second generation, and a mere 16.5 percent make it to the third generation3. Since the vast majority of all American farms are family-owned, the kitchen table is often the best place for owners to have early conversations about their legacy dreams. Even for families with young children, it’s not too early to begin planning for succession.

As the next generation moves into adulthood, it’s a good time to start having “family meetings,” during which farm owners can outline their hopes for the farm’s future. More specifically, discussions should cover the core skills needed to own and manage the farm, and review how that meshes with the talents of children who wish to remain on the land.

To help provide structure to these conversations, there are four primary steps to effective succession planning:

  • Farm income. This involves an assessment of current income and projections on whether that revenue stream can continue supporting the next generation.
     
  • Risk management. Assuming general farm liabilities, such as mortgages, equipment payments or land rental costs are covered as part of a farm income discussion, a major risk management consideration is potential medical costs down the road.
     
  • Mentorship and financial independence planning. Owners who have developed good negotiation skills, marketing savvy, strong decision-making and emotional maturity must find ways to translate them into leadership and management training for the farm’s chosen successor.
     
  • Estate planning. First, an estate plan must account for often-varied interests among key stakeholders, such as family members who wish to stay actively involved on the farm and those who don’t.  Additionally, a sound plan will employ trusts, partnerships, insurance policies or other tools to minimize taxes while clearly defining both financial and personal interests.


All succession plans will benefit from outside expertise in accounting, financial planning, insurance and law. To build the right team, seek out recommendations from friends who have moved through recent generational transitions, or consult with a local agricultural business specialist at a local university extension office. Before hiring anyone, producers should conduct personal interviews to ensure they can comfortably communicate with all members of this important team.

Read more here and download the Farm Credit Mid-America Insights Report.

 

Sources:
1Kurtzleben, Danielle (February 24, 2014). “The Rapidly Aging U.S. Farmer.” U.S. News and World Report.
http://www.usnews.com/news/blogs/data-mine/2014/02/24/us-farmers-are-old-and-getting-much-older.
2United States Department of Agriculture (2013). “Farm Size and the Organization of U.S. Crop Farming.”
Economic Research Service.
http://www.ers.usda.gov/media/1156726/err152.pdf
3Ohio State University (May 10, 2013). “Transitioning family farms to the next generation.” Ohio State University College of Food, Agricultural and Environmental Sciences.
http://cfaes.osu.edu/students/about-us/campus-news/transitioning-family-farms-the-next-generation
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