Editor’s note: The PRO-DAIRY section of the November 2009 edition of Eastern DairyBusiness deals with Farm Transfers. To read the four-part section, visit:
• Transferring a dairy…Getting started http://dairywebmall.com/dbcpress/?p=4769
• Information you need for farm transfers http://dairywebmall.com/dbcpress/?p=4771
• Take the financial pulse of your business http://dairywebmall.com/dbcpress/?p=4773
• Success isn’t guaranteed, but it is possible http://dairywebmall.com/dbcpress/?p=4775
Transferring your dairy business to the next generation is ripe with challenges. But it can be done, bringing families great joy
By Bernie Erven
Every family farm business will eventually have new owners or be out of business. This is a truism that no farm family can ignore. If the new owners are the younger generation, farm families that answer the following five questions can minimize the challenges of a business transfer:
1. How can I tell if our business is profitable enough to provide for the next generation?
2. Are our income and assets great enough to provide for the older generation’s wants and needs?
3. How can I help the two generations get along?
4. What should I transfer? In what order?
5. How do I avoid paying too much income, gift and estate taxes?
These questions force a family to address the critical issues in a business transfer. They identify what must be discussed and suggest a plan for proceeding. A plan, while necessary, doesn’t guarantee success. But don’t let frustration and complexity prevent you from giving the transfer challenge your best shot.
1. Profitability. Jason Karszes in “Take the financial pulse of your business” discusses how families can assess their businesses’ financial soundness.
Let me add that no one measure of profitability answers the critical questions about business feasibility. Commonly considered factors are size, rates of production, labor efficiency, cost control and marketing/purchasing.
Profitability is a question of degree. A farm may be profitable but not profitable enough to satisfy a family’s income requirements. Family living expenses change, as do expectations about lifestyle. A family enthusiastic about continuing its farm may pretend that modest family expenses and drastic sacrifices will be acceptable. They won’t be.
The national Farm Financial Standards Task Force suggested 16 financial measures to help farm families base decisions on hard data and analysis rather than perceptions. The measures are grouped into five categories: liquidity, solvency, profitability, repayment capacity and financial efficiency. Every family planning a business transfer will benefit from having solid information in each area.
2. Income and assets for the older generation. The older generation should make an honest list of its goals as a way to make decisions about income needs and assets. Typical goals include: provide opportunity for children, be fair, minimize transfer costs, avoid disruptions to the business, reduce debt to manageable levels, stay active in farming and make a sound estate plan.
The younger generation must be just as honest and thorough about its goals. Ignoring fundamental conflicts in goals can doom a transfer. But honestly discussing goal differences in a conciliatory manner helps move transfer planning forward.
Greediness, impatience and lack of commitment to continuing the family business can play critical roles in how families transfer businesses.
Since not everyone will get exactly what he or she wants from the transfer, tradeoffs are required. But avoid, if possible, tradeoffs forced on the majority by a minority. A few people determined to get their way “or else” can harm family relations and the transfer process.
Outside advisers can help greatly with goal setting and negotiating tradeoffs. Among other things, advisers can serve as a sounding board, provide technical information, and help evaluate tentative plans, mediate differences and nudge the planning process along.
3. Getting along. Some families will fare much better than others in planning business transfers. Families who have long emphasized communication, openness, trust and shared responsibility for family well-being are likely to have good relationships during the stress of transfer. Those who have failed to communicate, trust and share responsibility are likely to be haunted by these deficiencies during business transfer.
The lesson is clear: Parents must start early in forming a family environment that can become the foundation for business transfers. (See Human relation guides for suggestions.)
4. Order of transfer. Agreeing on what needs to be transferred, when and how is part of any transfer plan. A complete business transfer includes eventual transfer of all assets even if some are from an estate after death.
Farm families with livestock usually start the next generation into an operation with breeding livestock. Inventories of grain, hay and feed are usually transferred next, followed by machinery and equipment. Land and buildings are transferred last, often after the death of both parents, primarily because of tax issues.
Don’t overlook the transfer of intangible assets. These include the formal and informal arrangements with landlords, suppliers, accountants, attorneys and other key outsiders. Make sure the next generation understands the history and background of these relationships and sees their importance.
Transfer of decision-making authority must be planned and carefully timed to avoid confusion. Responsibility without corresponding authority is meaningless.
Families must eventually transfer control of and responsibility for the checkbook, records, and compliance with legal and government regulations. This can be a giant hurdle.
5. Taxes. Income, gift and estate tax provisions all must be considered in transfer planning. Farm families almost always need the benefit of expert tax advice because of the complexity and changing nature of tax laws and alternatives.
Leaving land to the next generation after both parents have died often results in no federal estate tax and little or no income tax. Gifting can sometimes be used in place of a sale of assets to children. Also, leasing farm machinery, equipment and farm real estate to children sometimes can be helpful in the transfer plan.
Two final thoughts
Transferring a dairy business to the next generation will be, in most cases, a huge test of family determination, cooperative spirit, goodwill and trust. From my years of experience with farm families, here are two lessons I’ll leave you with:
Lesson 1: Prepare for, plan for, commit to and expect a challenge that can dominate the family for months or even years.
Lesson 2: A farm family can transfer its business to the next generation with great satisfaction and a sense of accomplishment. It starts with how children are parented and continues through establishing adult relationships with them. Each generation’s goals play a pivotal role. Finally, parents must accept that the transfer is a different stage of their farming careers.
The very fact that the family has persevered and progressed to the point that transfer is now on the agenda should be encouraging – encouraging that the family can meet this challenge just as it has met many challenges in the past.
Human resource guides
There are many things parents can do over time to create an environment in which a business transfer has a good chance of succeeding. Here is list of human relation guidelines for transfers:
■ Have a transfer plan.
■ Start the transfer planning early.
■ Prepare family members for their responsibilities in the business.
■ Treat people fairly, not necessarily equally.
■ Develop managers for the next generation of the business.
■ Strive to gain widespread family understanding of the business’ values and norms of behavior.
■ Make the family part of what is happening through regular and detailed communication.
■ Put the transfer plans and agreements in writing.
■ Use a testing stage for all family members entering the business.
■ Pay attention to and coach daughters- and sons-in-law.
■ Deal honestly and fairly with differences of opinion and conflict.
■ Face the tough tradeoffs.
■ Involve outsiders.
■ Accompany the transfer plan with a business plan.
■ Have written job descriptions and an organization chart.
■ Look for opportunities in the business that fit the strengths of the next generation of owners and managers.
■ Regularly spend time affirming the children in the family.
■ Bernie Erven is professor emeritus in the Department of Agriculture, Environment and Developmental Economics at the Ohio State University. His interests are in farm, agribusiness and human resource management.