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Gifting equity to the next generation

Mark Andrew Junkin for Progressive Dairyman Published on 06 February 2017

It takes millions to get into farming. You either have to win the lottery or you depend on the hefty support of your family, which is sometimes like winning the lottery. Sure, there are stories of guys getting into the industry on their own, but those stories are getting to be rare and often when told are just that: stories.

In order for a young farmer to get into farming in regions where inflation is pushing land values beyond common sense, a clear question has to be asked: Do we want our son or daughter to farm or not? If “yes” is the case, then the son or daughter must be gifted equity in unequal proportion to their wages.

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For instance, if a farm is worth $5,000,000, the son isn’t going to be able to buy his parents out by garnishing $5 per hour from his $15-per-hour wage over a decade. The parents have to subsidize the son or daughter’s purchase of the farm, or else it’s simply not going to be feasible.

A big question should be how do we subsidize our son or daughter to get into farming?

Do we simply take a few million off the sale price one magical day at the accountant’s office when they are in their 30s, or do we make our son or daughter work for it? I’m a big fan of performance bonuses whereby a son or daughter is gifted equity over the 10 to 15 years that they come home and join the family business.

I think this equity should be gifted both for your son’s or daughter’s interest in improving production and also for character.

Due to tax and family law issues, it’s better that equity is gifted rather than earned in most states and provinces. That said, your family can work out “side deals” where you have a written agreement within the family about the systematic gifting of shares that the government perceives as gifting, not earnings.

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I had a farm family that gifted $1,000 worth of shares to their son each month in a performance bonus based on character. They graded their son based on the following factors:

  1. Started work on the agreed-upon time consistently

  2. Kept break times to the agreed-upon length

  3. Routine tasks were completed on schedule

  4. Communicated in a positive way and was enjoyable to work with, contributing to a stress-free work environment

  5. Found time for extra jobs besides routine tasks

  6. Was able to deal well with unexpected issues (schedule change, breakdowns, etc.)

  7. Contributed in a meaningful way to decisions that needed to be made

  8. Came up with time- and money-saving ideas

  9. Treated fellow workers with patience and respect

  10. Found time for off-farm activities

Each of the above criteria should be given a value between 1 and 10, based on how the month went.

After assigning a value to each item, add the numbers to come to the final number, which was (third party) graded monthly. These shares didn’t get gifted until the son had put 15,000 man hours into the operation. Over 70 percent of the monthly reports got a score of 70 percent or greater.

Now the above-mentioned characteristics may seem pretty straightforward, but for this family, several of these points were problems. For instance, the son had a hard time getting out of bed and sometimes took longer lunches. For this farm, they set annual goals that turned the son’s weaknesses into strengths.

Each year, they shifted the goals based on the unique character-development needs of the son. If each year he made 10 improvements to his character – shifting his weaknesses into strengths – then over 10 years, that is 100 weaknesses turned into strengths. That is significant!

Little character flaws like sleeping in or being inefficient with your time can really impact the probability of the farm’s success in the long term.

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It’s better to bring up these character flaws when your son or daughter is 23 than when they are 43 in a stressed farm succession meeting with a mediator while the family is hesitant to place a multimillion dollar asset into their hands. These flaws are easier to fix at 23 than 43.

The bigger thing is that each month there needs to be marked improvement. If in the previous two months’ performance reports it was stated that the son must be consistently at the barn by 5:45 a.m. and he’s not, then in the third month he doesn’t get his performance bonus for that month at all or any month after that until he shows up to the barn consistently on time.

This is because the son isn’t showing that he is serious about being a successor. If several months go by without the successor earning this performance bonus, then he’ll realize that either he needs to change his behavior or else find an off-farm career.

I suggest that your son or daughter has to work between 10,000 to 15,000 hours (or whatever you deem appropriate) for this equity to be issued. They have to prove they are serious about being a successor.

That said, once they’ve earned that right, equity in the farm can’t be held back for silly reasons such as Mom doesn’t like the daughter-in-law or other issues that do happen.

You might think it’s silly that a son or daughter is given $1,000 in equity for getting his or her butt out of bed. I couldn’t agree with you more.

But we all have weaknesses that if turned into strengths can be monumental to the success of the individual’s future, let alone the business’ future. It’s called actualization, and this mindset of “always trying to be better” is critical to creating successful farmers.

Now I ask you, which is better? Making a successor work (i.e., really toil) for $2,000,000 off of a $5,000,000 asset’s asking price or gifting it to him without condition?

I believe that the process of having a son’s or daughter’s weaknesses being turned into strengths through a systematic performance bonus system is worth more than $2,000,000 in itself! Character matters!  end mark

Mark Andrew Junkin

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