Farm succession plans are living documents

Carole Curtis

Juneau — Transition planning for a farm is not a one-and-done affair.

There are often changes along the way that require action to keep the transfer plan moving forward and effectively meeting both generations’ evolving goals and objectives, attorney George Twohig said during the final segment of "Farm & Business Transition", a World Class Webinar presented by Professional Dairy Producers of Wisconsin.

While a former review of the farm succession plan should be done at least every five years, successful farms give the issue the attention it deserves. "Very simply, the farm transfer should be a matter of ongoing discussion," Twohig said.

He explained that a farm succession plan usually starts by forming an operating LLC, transferring membership interests to the designated successors and signing an estate plan with provisions regarding the transfer of farm assets.

Events that can trigger a review are the need arises to resolve communication problems or conflicts; when there is a change in farm net worth, cash flow or profitability; an expansion or major acquisition of assets; or divorce.

Success often hinges on two big issues. Twohig relayed that 60 percent of all failed farm management transitions are due to unresolved family conflicts and communication problems, and 25 percent are due to poorly prepared successors.

"No matter what you have for a plan, no matter how pretty the plan is, the simple truth is it doesn't work if there are unresolved conflicts or the family is not communicating very well," he observed.

Successful farms have shared quality values between the involved members, a common purpose and vision for the farm's future, and explicit and compatible personal and business expectations. They maintain honest, respectful and proactive communications.

"When you put that together, that's really what creates effective relationships and superior results. That's what resolves conflicts and fixes communication issues, " Twohig said.

The biggest challenge is usually intergenerational differences. People are naturally resistant to change, Twohig pointed out, and acting as the owner does little to prepare parents for acting as partners with the next generation.

For instance, the older generation often lives to work on the farm, while the younger generation may want to limit their work hours. The elders want to pass on their knowledge, but the successors want their parents to mentor them, not to control them.

Dealing with the issues

Effective partnering happens when the parent/leader drops the "I'm here to tell these people what to do" attitude and, instead, adopts, "I'm here to make sure that each person is successful".

To get through conflict problems, parents need to over-communicate. "Consider it as a way to mentor them", Twohig advised.

Quality communication takes place when the parent leads the group to work as a team. "Dad should act as the management coordinator, not the boss," Twohig advised, bearing in mind that the older generation brings experience and the new generation brings potential.

Parents should make it clear that they expect shared teaching and learning, and should be proactive in giving successors responsibility for specific management areas or projects. The successors should accept the responsibility, including personal assessment.

"The differing communication and management styles can be a powerful management team, if managed correctly," Twohig pointed out. "We hope somebody takes that (management) responsibility and we hope it's the parents."

Twohig believes the contribution of successors and of the parents should be evaluated at least annually. "The most successful farms do all the small things right, and those small things require the owners' time, attention and knowledge", he explained.

Managing conflicts

A huge reason farm transfers fail is a failure to resolve conflicts. Ignored conflict does not go away; it accumulates.

"Leadership and conflict management go hand-in-hand," Twohig said. "Conflict needs to be recognized, understood and brought to a swift and positive resolution."

Twohig advocates an interest-based approach, wherein the goal is to find the best solution to the conflict by attacking the problem, not the other person. "Conflict resolution is not convincing the other person that your position is right. Focus on the issue, not on your position on the issue," he said.

Parents need to lead their family into a culture of group motives, rather than individual motives, with the goal of limiting any adverse impact of the conflict.

"Consider how you want others to think about you when the conflict is resolved," Twohig suggested. "How you handle conflict is a statement about your character, principles and values."

Conflict has its benefits. "Often, the most important result is not the resolution of the immediate conflict, but the family's improved skill at managing conflicts," he said.

The review

Set the stage for an effective review of a farm's transition plans by having good background and supporting information. Evaluate the current situation, the farm's financial condition, the present organization and duties, and anticipate future changes.

Begin by immediately dealing with unresolved conflicts and communication issues. "If conflicts are not resolved, all the proper legal work will not make your transition successful," Twohig said.

Review the farm's common purpose and any differences in opinion as to the purpose of farming together. Twohig suggested drafting a mission statement to provide direction and promote shared values and behaviors.

Review common values with a discussion of the values individuals hold most dear and what they believe are critical to the success of the farm and their relationship as partners.

Expectations may differ, but they need to be compatible. Often, family members are reluctant to discuss differences in their expectations, but communication is necessary to work toward developing and agreeing on compatible expectations.

Discuss weaknesses in individual's work and management skills. "You really need to talk about changes and the training and education needed to develop leadership and management skills in the next generation," Twohig said.

Review actions slated for the future, making sure everybody agrees on both the short-term actions and long-term actions and major investments to be make in the farm.

Investments should be evaluated based on their potential to increase long-term cash flow and profitability with reasonable risk, Twohig said. "All of the planning we do needs to be based on budgets, projections and cash flow."

That underscores the need to involve knowledgeable ag accountants and consultants in the succession planning process who will supply accurate, high-quality information and advice, he stressed.

Update and communicate

it's important to review, update and communicate how management and work will be shared with and eventually transferred to the successors. "You want to work toward shared decision-making, clearly assigning work and management," Twohig said.

Also, review, update and communicate how ownership will transfer to the successors, and start discussing alternatives. Determine what the essential farm assets are and make certain the plan covers all of them. "Confirm that involvement will be based on compliance and earned privilege and that ownership will be 'earned'," Twohig counseled.

One of the big challenges is how the elder generation deals with differences in performances, work time, duties, responsibilities and contributions to the farm success. "You may have to consider differences in compensation in the percentage of ownership," Twohig said. "The challenge is determining who will be the farm's next leader or leaders."

Dust off documents

With assistance from the farm's attorney and ag account, review and update pertinent business documents. That includes LLC operating agreement(s) and any leases, options or life estates, as well as buy/sell agreements in the case of death, disability, divorce or negative conduct.

Review and update permitted transfers to future successors and anticipate future transfers.

The review should also assure the surviving spouse's financial security and cover the parents' marital property agreement, which can protect a farm's assets from being transferred to a successor from unintended division in a divorce.

Other documents that should be reviewed and updated as necessary  include the Durable Power of Attorney, Living Trusts, trustee appointments and trust advisors.

Shift with the times

Planning is navigational, by nature. "We set our course, we have our goal, but over time, the world pushes us in a different direction and we may have changes in our goals and objectives," Twohig said.

Recalibration is required to keep the farm and family on a good track into the future. "I suggest to you the review of the succession plan, the updating of the succession plan, has to be done," Twohig stressed. " We need to update documents and update our thinking as circumstances change."

Attorney George Twohig,