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Writing the future of your dairy farm

Progressive Dairyman Editor Andrew Weeks Published on 11 March 2014

From the first generation to the third, transition planning begins with a family meeting

When Stephen Maddox was a little boy, he dreamed of one day owning his own dairy farm. After all, his dad helped manage the family dairy that young Stephen’s grandfather started in 1957. Him doing the same would be family tradition.

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Making his goal a reality started on the farm itself, where he was taught hard work and responsibility, and later attending Cal Poly just as his dad had done. While a college student with interest in the family operation, he was given responsibility to run the dairy’s commercial herd.

“I had to establish my work ethic and decision-making skills,” Maddox says. “I had to show the older generation that I could make reasoned decisions, and they built on it. You are not just given respect. You have to gain respect.”

His father, Doug Maddox, passed away in 2011 and Stephen Maddox today, along with siblings and other family members, operates two dairies – Maddox Dairy and RuAnn Dairy – collectively managing 12,000 Holsteins in Riverdale, California. Around 5,400 of them are milking animals.

Similar to his school days when he was beating his brow to learn what he could to become one of the owners, he is again considering the future of the farm. Only this time that future involves his children and grandchildren. He wonders what part they will play in the dairies’ future.

Farm transitioning is a momentous occasion in every dairy family’s life. It often is wrought with anxiety, impatience and even frustration, but it can be a blessing for those families that have properly prepared for it. Having a plan in place can help ease some of the stress because it allows everyone involved to know what to expect during and after the transition process – and what needs to happen before that time arrives.

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Making a legacy
For some families, deciding on whom to pass the farm is the tough question. Some members may express general interest but make little contribution to the operation, while others put in long hours and, like Stephen Maddox did when he was young, gain respect from the older generation for their contributions and work ethic.

The owner of any business, who has devoted his or her life to making that business profitable, will care deeply about its future, says Greg Squires, manager of Ashland, Ohio-based Dairy Enterprise Services. Their choice of succession will likely be someone with a proven track record of input, decision-making and hard work. It’s about creating a legacy as much as it is about remaining profitable.

“There aren’t many dairy families whose number one goal and priority is to drive money,” Squires says. “What’s on the top of most people’s list is creating opportunities for their families.”

Still, for the older generation, letting go of the business can be difficult. Once the process has started, however, it becomes easier because they begin to see the legacy they’re creating with the next generation.

“It gives them the ability to see the good things that are happening,” Squires says, noting the first good thing to make happen with regard to farm transitioning – and securing a legacy – is to “start a good, meaningful, open and transparent conversation, and then work very hard to put the plan together.”

Family matters
A good place to start the conversation is in a family meeting, says Peter Callan, extension specialist at Virginia Tech. This helps “clear the air” but also puts pertinent parties on the same page.

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“Some people feel they’re entitled to their parents’ estate,” he says. “Most people understand that, legally, children don’t have any claims to it. The best thing to do is have the older generation spell out their wishes to family members – what they want to do with the farm, what their goals are, etc. Holding a family meeting is not easy, but I think it needs to be done so everything is brought out in the open.”

Family meetings allow members to express their interest – or lack thereof – in the farm. Meetings also help bring issues to light, such as if certain members can’t get along.

If there’s conflict between members, going into business together could cost more than family pride; it could cost the business itself if they aren’t willing to work together to make it profitable. In some cases, Callan says, parents are ignorant of such disturbances between their children until the family meeting.

There’s also the assumption by some parents, until the meeting is held, that their children naturally want to take over the family business, when in reality that might not be the case.

“It happens every day,” says Jim Whitt, founder of Purpose Unlimited. “The current generation has a hard time letting go, and the next generation gets into it for all the wrong reasons. They feel obligated to take over, or they might feel it’s a cushy job to take what the previous generation gives them.”

Callan suggests asking a few questions: “Is it a fall-back position, or is that young person hungry? Do they have management ability to not only maintain equity but also to increase equity? Are they willing to put in long hours?

On a crop farm, for instance, if the weather is adverse they literally work from sunrise to sunset just to get the crops harvested and planted. Are they willing to do that? Do they have the work ethic but also the wherewithal to manage the operation?”

Bob Milligan, senior consultant with Dairy Strategies LLC, puts it this way: There’s more involved in the process than transitioning assets; it involves transferring leadership. If the right person isn’t selected to take over the family business, “it can lose equity in a hurry.”

Times are different for today’s dairy. The current owner’s expertise grew with the business – much like Stephen Maddox’s grew with his father’s operation.

“Now you want to transfer it to the next generation,” Milligan says. “Their transition won’t be as the business grows but within the business itself. In reality, that career development isn’t much different than other businesses, where you grow into positions. You don’t usually start out becoming the CEO.”

The owner has to “gradually bring this person in,” Milligan says. “That requires some structure, some ability to make happen key discussions.”

Callan suggests putting the potential new owner on probation for two or three years, providing him a portion of the farm to manage. The person should be able to prove what they’re capable of during that time, demonstrating their strengths and weaknesses and, ultimately, if he or she is the right fit to take ownership.

“Everyone has to be involved,” Whitt says. “Far too often, it’s one generation saying: ‘This is how we’re going to hand it off,’ not asking the next generation what they want to do with it.”

Ask the hard questions. If not in a family setting, Maddox says, then speak with members individually to put them on the same page. Even then it should not be a one-way street. Both parties – the older generation and the younger – need to express their ambitions, concerns and interests, or lack thereof.

Generation X
If you were to look at the record books of farms across the country, you’d notice that many of them have a genealogy much like individual families. That should come as no surprise since farms have traditionally been family businesses – the operation being passed from father to son.

It makes sense that Dad, who loves his profession, wants the same for his children. There often is someone else sitting in the background, however, who one day might also be affected by transition planning: the third generation.

A question for some people is how to prepare the farm, not only for the next generation, but also for the one after that. It’s a question that at first might seem irrelevant and perhaps even a bit ridiculous. How can a 5-year-old be part of a family’s farm transition plan, for instance?

Jim Whitt has the answer. All it takes is a little imagination and goal setting, a determined effort to prepare, and pen and paper.

After engaging everyone in the process – what he calls a “generational approach” – you have to write your operation’s history.

“It’s not just a matter of dividing up the pie,” he says. “What you have to do is write the story for the next generation.” It’s a process done in steps. To begin, the current owner should ask four questions:

• What did the world – specifically, your industry – look like 30 years ago?

• What do you think it’ll be like 30 years into the future?

• What will your organization have to be, do and look like to be successful in that future?

• What will you have to do to get there?

Looking to the past is important, but it’s the future you should be concerned about. “But now you’ve opened a can of worms,” Whitt says, “so now you better go fishing. If you can’t write a compelling story for the future, the next generation might ask why they want to be a part of it.

“It is a cool approach because what you now have is people emotionally involved. It also solves the problem of passing the farm legacy on to not only the next generation but the one after that. … It’ll be drudgery if you don’t start here.”

Callan suggests, however, that planning for the first transition be uppermost in the older generation’s thoughts. If that isn’t take care of first, there’s no sense of looking further into the future.

“It’s difficult to project what’s going to happen some 25 to 30 years from now when that little guy might want to take over the family farm,” he says. “My thing is for the current generation to do the planning so they can position themselves for the future, so the farm will be profitable in their lifetime of operating it.”

Consultants can help
Clement Gervais, a Vermont dairy farmer, is one of four siblings interested in his parents’ business. They incorporated the business in 1995 so each son could participate in the operation. His parents have since retired, and it is the four boys who manage the dairy farm.

“From this perspective, it has been successful with the first transition,” he says, “but the farm has to keep growing.”

There’s a niece and nephew who are interested in the business.

“One of the things we recognize is that unless we start doing something now, make a path that allows the next generation to get in, there won’t be anybody there to take over the farm later on,” he says. “We are at the point right now of trying to figure out how to make that next step.”

One question Gervais has: How do you bring somebody in that has no equity?

“It was easier for my father’s generation, I think,” he says. “When we incorporated, the share values weren’t very much at the time; they were pretty small. But as the farm grew, so did the equity. … When somebody comes in without any equity, how do you get from zero to something meaningful?”

The brothers have now hired a consultant to answer their questions and help them take the next step in making a path for the generation after them.

Timing is everything
A good place to start a farm transition might be at a family meeting, Callan says, but a good time to start may be in your 40s. It’s something you definitely don’t want to put off until you’re of retirement age.

For one thing, you never know what health you’ll be in by then or if you’ll even be around. Besides, farm transitioning is not something that happens overnight. In most cases, the process takes several years.

Milligan suggests the process start the day the younger generation returns to the farm after their schooling. Too often farm transitioning is mentioned as if it is something that happens overnight.

“‘I’m going to go home today and see what Dad wants to do with the farm,’ might be a common statement,” Milligan says. The discussion may indeed start today, he says, but the younger generation shouldn’t expect things to happen overnight. “They forget this is Mom and Dad’s retirement.”

Don’t assume that once you put your plans on paper that it’s the end.

“Organizational development never stops,” Whitt says. “When you stop developing the organization, it stops. You’re done. At some point in the life cycle of a business – any business, I don’t care what it is – people stop. So you have to always be planning.”

Today’s farmer, both old and young, has to be proactive. As you plan, take advantage of developing technology and stay abreast of the changes that happen rapidly in the sector.

As Whitt says, “You better kick it in gear. It’s going to be more difficult as time goes on with more technology and a rapidly consolidating environment. You better get this done in the next five years because consolidation is taking place so quickly that it’ll be a mature industry.”

Plan to succeed
The cliché – “when you fail to plan, you plan to fail” – holds true when it comes to farm transitioning. Still, some families can’t seem to get down to holding meetings, writing their farm’s history or even opening the dialogue. In some cases, Callan says, it might seem better if parents sold the property and dispersed the money to their children instead of creating a farm transfer.

“Some people have run farms into the ground due to mismanagement,” he says, noting that sometimes parents just don’t know with whom to leave the business.

When no plan is prepared, or the farm business is left to multiple family members, the long-term effect could be detrimental to the operation. If one of those members wants to become the sole owner of the property, for instance, he or she then must buy out the siblings. The problem is that such a move often leaves little cash for the new owner to invest in the operation.

“If the person taking over the farm has to buy out family members, taking exuberant costs, he’s really strapping himself with excessive debt,” Callan says. “He’s unproductive, for lack of a better word, because he’s going into debt.”

Andrew Branan, an attorney for The Branan Law Firm in Hillsborough, North Carolina, summarizes successful farm transition planning like this:

• Willingness by the parent generation to emotionally and logically separate the “farm operation” from the land itself, which retains a value regardless of who uses it, this family or another.

• Embrace an understanding that farm transition planning is an ongoing series of transactions – agreements, gifts, sales, even purchases – that operate in a controlled legal framework to transfer sufficient control of assets and equity to the farm successor.

• Engage with legal counsel and articulate the current owner’s goals; gain confidence in why certain decisions must be made for the land to continue to be farmed by another generation in the family.

(“For large operations, parents should share their ideas with those that are actively engaged in the business,” he says. “In other cases, the meeting with the lawyer should be done before having a family meeting, which many times causes the parents to doubt their own ideas of fairness under the inheritance demands and expectations of their children, and this only causes delay in the process, which only increases the risk that something adverse will happen that causes the parents to lose control of the assets.”)

• Recognize, as opposed to simply hope, that an identified successor will be able to effectively use farm assets in a manner that provides income for the parent generation, the other heirs, but also justifies a plan of ceding the farm heir control of the assets when the parents could otherwise divide them equally among all of the children.

(“This final element will be critical in explaining to the family the parents’ decisions,” he says. “If there is no identifiable successor, the parents should take steps to divide up their assets in their estate plan, rather than passing on this burden to their children.”)

“But at the end of the day, not all families can succeed at this, and not all are supposed to,” Branan says. “Land title flows through history, it pools with certain families who make good use of it – sometimes for generations; but our legal system promotes alienability of title, particularly an equal distribution at death, so care must be taken to control where and to whom – and under what circumstances – title will flow.

“The human ability or willingness to farm ends in all families at some point, and every family’s farm is built from neighbors who have let go or lost their land because farming ended in their family. All agriculture depends on it.”

Making a legacy, revisited
Every family has its dynamics. Don’t expect to fix all of its problems.

“We’re still formulizing our plan because we’re still fixing my generation,” Maddox says, “but we have one son who’s earned his spot running the farm operation. … Our passion is still the cows, but he’s running the farm.”

Dairymen want to take care of all of their children, he says, but according to cycle of the harvest, rewards are given to the one who proves him or herself on the operation. It might not make everyone in the family happy, but at least they’re all on the same page.

“The business owes it to that young individual in the front end of his career” to know what the plans are for the operation, Squires says. “It will give them a sense – not the complete picture, maybe – what Mom and Dad’s thoughts and intentions are about how the farm will transcend.”

There’s always hesitancy to address our own mortality, but the subject has to come up sometime in planning for a successful farm transition.

Maddox says his family started several years ago to address the needs of his generation – as well as the second and third generation – by planting almond trees and wine grapes in an effort to “bring in additional cash to help with the family split.”

Not everyone in his family wants to live the life of a dairy farmer, but that doesn’t mean they aren’t interested in its net worth. Only two of his father’s 13 grandchildren decided to return to the farm. That’s OK, he says.

If a young person who has grown up on the family farm decides he or she wants to pursue another career path, wish them success and be happy they are following their own dreams. Maybe they’ll create their own legacy.

The dairy, however, will be in good hands as long as you plan right.

“You have all these kids going to college and following their own dreams,” Maddox says. “You hope they’ll return to the family farm, but if not you hope they’ve at least learned a good work ethic to help them in their chosen careers. They learn that work ethic on dairies.” PD

andy weeks

Andrew Weeks
Editor
Progressive Dairyman

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