Successfully transferring a farm business from one generation to the next can be challenging and rewarding.
Succession planning requires not only the transfer of property and assets but also management and leadership, according to attorney Troy Schneider.
He presented the first in a two-part “Professional Dairy Producers of Wisconsin World Class Webinar” series on farm and family business transitions in late November.
One major piece of advice: Start early, said Schneider, a partner in the law firm of Twohig Rietbrock Schneider and Halbach S.C., Chilton, Wisconsin.
“The most successful transfers are when children are starting to step into managerial roles and parents aren’t yet ready to walk away from the farm.”
Schneider identified eight questions he is frequently asked when working with farm families on succession planning.
1. Who do you get to help?
Select a team of advisers who are experts in specific subject matters (banking, taxes, accounting, legal) and experienced in farm transfers and succession.
Look for advisers who will not just “cheerlead” but ask probing questions, provide honest advice and keep the best interests of the family and farm at heart. They should treat you with respect and be up-front about any fees they charge.
“Look for advisers who just don’t focus on the business issues but also take into account family dynamics,” Schneider said.
He also recommends families sometimes consider giving trusted outside advisers decision-making authority. Advisers with that high degree of trust can address concerns or resolve discord that family members might only exacerbate.
2. What do you want?
Parents and children often struggle with what they really want out of a farm succession plan, Schneider said. Prioritize needs and wants, and then tailor the plan to those priorities.
Parents’ objectives generally focus on financial security and adequate income, an ongoing role in work and decision-making, and commitment from the farm successors.
“Often, the parents feel pushed out in a farm transfer plan, but a successful plan will not make them feel that way,” Schneider said.
The objectives of the next generation generally focus on adequate family income and earned equity, participation in decisions and authority in management, and their parents’ commitment to the transfer, with an agreed-upon and well-documented plan and at a price the farm can afford.
“Farms that have successfully transferred from one generation to the next have been able to re-create the energy that fueled the entrepreneurial spirit of the previous generation,” he said.
3. What is our farm really worth?
“It is surprising how many farm owners do not know the value of their farm,” Schneider said. “It is important to have a realistic estimate of value for succession planning, retirement planning, purchase options, buyouts, compensation and many farm business decisions.”
He offers three typical approaches to determine farm business valuation:
- Most widely used, the asset approach calculates the value from farm balance sheets based on market value of underlying assets. Adjustments can be made for taxes and other expenses upon liquidation. This method is seldom appropriate for an operating farm or business that wants to continue operating, Schneider warned.
- The market approach frequently attempts to establish value by comparing sales of farms of like value. He advises against this method, since no two farms or businesses are alike.
- Most appropriate is the income approach, which establishes value on the economic benefits and earnings. This approach reflects not only the farm’s past performance but also the future expected performance.
It provides detailed cash flows, allows for varying capital expenditures and working capital needs, and allows for the cost of capital that includes debt and equity. For example, this method drills down into how depleted the milking parlor or other facilities are.
4. How much tax will you have to pay?
When considering tax implications, Schneider advises dairy farm families to remain flexible due to changing political winds. Documents can be drafted and re-drafted as tax laws change.
“Gift/estate tax planning is only one aspect of succession planning,” Schneider said. “And very seldom are income taxes an impediment to a successful farm transfer.”
Considerations should include use of trusts or limited liability corporations, which not only provide a tax conduit but also address non-tax issues such as probate avoidance, asset protection or divorce protection.
Schneider also advised there are differing tax implications for different assets related to capital gains and depreciation as well as “tax basis,” which includes cash paid plus liabilities assumed. Seek an adviser with a comprehensive grasp of tax laws.
5. What do the children who left the farm deserve?
Parents must be realistic when it comes to wanting all their children to own the business together.
“Co-ownership of farm real estate and other assets by farm and non-farm children is challenging but not impossible,” he said.
“If they cannot, the farm estate plan’s focus should be on ways to allocate farm assets to exclude farm ownership from beneficiaries who will not be involved in the farm.”
He suggests four guidelines when parents are transferring a farm business to one or more – but not all – of their children:
- Be fair, not equal
- Be practical, not emotional
- Do what your children want, not what you want
- Do what makes good business sense
Agreements should allow transactions to proceed without small-minority veto power, allow majority owners the right to buy out a disgruntled owner’s interest at fair terms and plan for buy-outs under special circumstances such as old age, death or disability.
“All parties are generally best served if owners can liquidate their interest when they want out, or the farm owners can ‘expel’ difficult owners who refuse to leave,” he explained.
6. After I am gone, who will manage the day-to-day operations of the farm?
Parents must recognize they will not be able to manage the farm indefinitely. They must change from managers to mentors, guiding the development of persons taking over the business.
“Succession planning is good human resource planning,” Schneider said.
Beyond ownership, succession planning involves transfer of management and leadership responsibilities.
When it comes to management, ability is more important than birthright. Fill key management positions with those who are motivated and have the proper skills, qualities and experience.
When looking at leadership, identify who is best able to succeed you as a leader, the steady force that understands emotions and manages expectations. Leadership development activities often neglect one crucial topic: Transferring a core set of values that ensures the business will not only survive but thrive.
7. After my spouse and I are gone, how do we make sure our farm children all get along with each other?
During the process of succession planning, openly discuss the advantages and opportunities – and not just the challenges of farm ownership and partnerships involving family members.
“We know there are financial risks, but there are also financial rewards,” Schneider said. “Few people get ahead in this world by simply being employed by someone."
"Most financially successful people get ahead by working for themselves or with other people in an ownership structure.”
Working together in a partnership allows each person to focus on individual strengths and responsibilities while sharing decision-making on important matters. It provides an opportunity for the family to preserve its farm legacy and pass on quality values.
It offers the opportunity to build mutual trust and shared experiences to strengthen family and business relationships.
“Most families get to see their siblings at Christmas, Easter and Thanksgiving,” Schneider said. “Farm families shouldn’t underestimate the cool thing it is to work with parents and siblings on a daily basis.”
Challenges must be identified, discussed and dealt with proactively. Personal independence must be balanced with the required interdependence of being a partner. Partners must maintain a high level of trust and open honest lines of communication – and be willing to raise issues that might lead to disagreement or conflict.
Partners must be accountable and accept constructive criticism, understanding that resolved conflicts can often lead to better decisions and relationships. They must be able to deal with personal and business disappointments when goals aren’t met.
They must also educate in-laws about the realities of family and farm to gain their support.
8. After my spouse and I are gone, how do we make sure our farm children get the farm?
Schneider suggested designating durable powers of attorney to maintain the legal transfer process. Consider having “general agents” to manage personal financial matters and “farm agents” with authority to manage and control farm business activities.
Special powers may include the right to guarantee farm loans and to grant necessary mortgages and liens; establishes provisions regarding long-term illness, qualification for benefits and asset protection; and provides direction as to payment of long-term care expenses from personal investments and income versus farm assets and farm income.
Other powers may include coordinating trust provisions with transfer limitations in operating or buy-sell agreements, real estate, non-farm assets and life insurance.
PHOTO: Troy Schneider is a partner in the law firm of Twohig Rietbrock Schneider and Halbach S.C., Chilton, Wisconsin. Photo provided by Troy Schneider.
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