Passing the family farm to the next generation is what most farmers strive for. However, the statistics present a big challenge with the Association of Retired Persons (AARP) sharing that two out of five Americans over the age of 45 don’t have a living will.
Shannon Ferrell, agricultural economics associate professor at Oklahoma State University, strongly recommends producers not wait until their deathbed before putting together a plan.
“I think it might be a better plan to come up with your estate plan before you’re about to go on a ventilator,” he said at the 2023 Milk Business Conference in Las Vegas, Nev.
Ferrell says the time to start putting a plan together for those who keep pushing it off until tomorrow is today.
“If you haven’t, then you might as well look at every one of your immediate family members straight in the eye and say, ‘you just weren’t worth the effort,” he says.
12-Step Transition Plan
Kansas State Research and Extension offers a 12-step transition planning that can increase the chances of a successful transition.
Step 1: What Matters Most
Identify the core values that lay the foundation for all the planning to follow. These core values reflect the things that are most important to the individuals involved.
Step 2: Identify Wants, Needs, Hopes, and Fears
Often, family members have a difficult time communicating their concerns when it comes to a succession plan. Each family member should address what they want, need, hope and fear might happen when the family farm transitions to new management.
Step 3: Establish Vision/Mission Statements, Objectives, and Goals
Establishing a shared vision provides the guiding philosophy for the operation and reflects the core values identified in Step 1. A vision statement is broad and future-oriented, whereas a mission statement is more focused, contemporary and includes what the business is today.
Objectives move you toward your vision. They should be attainable, represent a positive challenge and be easy to visualize. Goals should be more specific, measurable, attainable, rewarding and have a deadline. Thinking strategically while developing objectives allows business decisions to be made that lead to the realization of the vision held for the business.
Step 4: Human Resource Evaluation
Too many families expect a successor to maintain the operating procedures from the retiring generation. This may not fit the strengths of new individuals and may limit the operation’s potential. Evaluating individuals’ strengths and weaknesses in the farm transition is essential.
Communication is also a must – and that means communicating what the desires of the successor are to help make the transition come together.
Step 5: Who is in Charge?
A common mistake the retiring generation makes is to not let go of the reins. The successor needs to make decisions, even if sometimes it becomes a learning experience. A simple organizational chart diagramming the current decision-making system — and another that changes when the successor is granted authority — is critically important to the success of transitioning the farm operation.
Step 6: Where do We Stand Financially?
This step cannot be overlooked and needs to address whether the business is profitable, solvent, liquid and efficient. Basic financial statements include beginning and ending balance sheets, an income statement, a statement of cash flow and a statement of owner equity need to be distrusted by all involved parties.
Step 7: Do We Have What We Need?
Taking note of all the available resources is needed and includes land, machinery, buildings, financial resources, community support and services and people. Focus on the productive capacity and the usefulness of the resources and think about how the resources help achieve the vision, mission, objectives and goals. Additional investments need to be considered carefully to determine if they are feasible.
Step 8: SWOT Analysis of Internal/External Factors
A SWOT analysis helps identify strengths and weaknesses internal to the business and opportunities and threats from outside the business. In the strengths section, identify the strengths that make you competitive and identify what you can improve, what you should avoid, and what your competitors do better than you.
Also, in the opportunities section consider the trends facing your business, opportunities that are available and things in the community that can be an advantage for you. In the threats section, identify obstacles from outside your business including your competitors, changes in technology, or other outside factors that threaten your business. Identification of all of this is an extension of risk management planning.
Step 9: Evaluating Financial Feasibility
This step involves developing a financial evaluation of your future operational plan. It may involve crop or livestock enterprise budgets, cash flow budgets and partial budgets that show the results of changes in your operation. The questions about your operation that must be answered are:
- Where am I?
- Where do I want to be?
- How can I get there?
Step 10: Developing a Business Plan
A business plan is particularly important for expanding businesses and for farms that are transitioning from one generation to the next. The business plan effectively communicates plans to lenders, investors and partners, as well as internally to family members and employees.
Step 11: Estate Planning & Retirement Plan
There is no forward motion without addressing estate planning. This does not just mean for the retiring generation. The succeeding generation needs to apply estate planning to their assets and liabilities as well.
Step 12: Putting the Plan into Action
Over this timeline, promises made must be kept. There must be respect for the needs of the retiring generation while allowing management to be passed on to the next generation. Transitions will happen, one way or another.
Ferrell shared that 88% of farmers and ranchers have no form of a retirement plan and if you plan for another generation to come back to the farm, then you are going to have to determine how to financially support that.
“Remember if you choose not to do anything, that is a strategy that has a 0% chance of working,” he says.
