Solving common challenges to farm transfers
Juneau — Planning a farm transfer can be a tough and emotional business.
Although each farm is unique, attorney Troy Schneider has found that most family farms share the same hurdles in developing plans for ownership and management succession. Left unresolved, problems can arise that adversely affect the farm business and relationships.
Schneider, a family farm lawyer with Twohig Law, addressed the most common problems in farm succession planning during "Farm & Family Business Transition," a two-part World Class Webinar presented by Professional Dairy Producers of Wisconsin.
The first challenge is bringing in help. Schneider advised selecting a team based on each member's area of expertise, such as a lawyer, an accountant and a lender.
Good advisors will provide hard, honest advice and will ask probing questions that push you into input, he explained. They will treat you with respect and have the farm and family interests at heart.
Look for advisers with experience and success and, especially important with larger farms, invite subject matter experts, such as someone knowledgeable with tax implications. The best advisors are those who take into account family dynamics, not just the business issues.
Some businesses establish a "Family Council," whose role is to establish the family's goals. It Is a bifurcation structure broken into control versus economic interests, Schneider noted, rather like a family board of directors.
This approach is often appropriate for larger farms, farms with a mix of a few involved and many non-involved family members, or when the succession plan is a longer-term process.
In the business world, people often have directors from outside the owner family. The advantages include bringing in experience or expert advice and providing a means of approving "insider" transactions as an independent third party when deciding certain issues, such as control and wages.
"This can be a mechanism for addressing owner concerns or resolving conflicts," Schneider said.
The second challenge is figuring out what the family wants out of the farm succession. Typically, parents are looking for income, wealth accumulation, a career and legacy. They need to decide their priorities and do a good job of communicating their planning objectives to the farm successors.
Usually, the farming parents' objectives are financial security and adequate income, especially in their old age, complete commitment by their successors and, perhaps, ongoing participation in the work and decision-making. "Retirement is not a given," Schneider observed.
The third challenge is figuring out what the farm is really worth. "There are often unrealistic expectations," Schneider said. "It is surprising how many farm owners do not know the value of their farm."
There is the asset approach, in which value is based on the market value of the underlying assets, but it is seldom helpful for a farm that wants to keep operating. The value-based approach, based on sale of comparable farms, is also difficult because no two farms are alike.
"I would argue the most appropriate is the income approach, because the value of the farm is based upon economic benefit and earnings," Schneider said. "It is a discounted cash flow method that reflects the future of the farm and really drills down into what the farm can really pay."
The fourth challenge is how much the farm will have to pay in taxes, including gift taxes during the parent's life and estate taxes after their death. The taxable issues also pertain to capital gains and cows, feed, structures and land and how they are transferred to the successors.
The fifth challenge is what the children who left the farm really deserve. When evaluating this issue, Schneider said the decision needs to make good business sense. Parents must be fair, not equal, and practical, not emotional.
"Do what your children want, not just what you want," he advised.
In estate plans, parents must be realistic about their estate beneficiaries' ability to coexist as farm owners. "If they cannot, the farm estate plan's focus should be on ways to allocate farm assets to exclude farm ownership from beneficiaries who will not be involved in the farm," he said, advising parents to keep their children's perspective in mind,
Co-ownership of farm real estate by farm and nonfarm children is challenging. "All parties are generally best served if owners can liquidate their interests," he observed.
The sixth challenge is who would manage the day-to-day operations of the farm when the owner is gone. Succession planning for the transfer involves three areas; management, leadership and ownership.
Successful transfers make good use of human resources. For starters, parents must understand that they will not be able to manage the farm in definitely.
Key management positions should be filled by those with proper skills, quality, experience and desire. "Managerial ability is more important than birthright," he pointed out, noting farm managers should be incentivized and rewarded, but not overly compensated.
Key managers need to be groomed. Schneider advised early transfers of ownership interests to motivate and demonstrate commitment. Be sure to delegate work and management responsibilities to build confidence and expose the successor to a broad range of experiences to provide a better and wider understanding of the farm ownership.
For instance, Schneider cited a farm with two operations that used the smaller entity as a "training ground" to let the younger generation get experience and hone their management skills.
"The majority of leadership development activities may be neglecting a crucial topic - transferring the values of the older generation to the younger generation," Schneider continued.
He illustrated with Warren Buffet, the legendary businessman who drives a 10-year-old Lincoln with "THRIFTY" on the license plate. "His commitment to a core set of values and his commitment to transfer that core set of values assures that his businesses will not only survive, but thrive, after him," Schneider said.
The seventh challenge is how to ensure people will get along after the owner is gone. Schneider advised openly discussing the advantages of working together as partners.
"Farm ownership is like a marriage. There will be good days and there will be not so good days," he said."But there is nothing cooler, I think, than farm families able to work with their parents and their siblings on a daily basis for a common purpose - their farm."
It is important to recognize, discuss and proactively deal with the disadvantages of the partnership, which include being accountable to others and subject to criticism, as well as the potential for disappointments when personal goals and expectations are not fully realized.
That said, parents should recognize the value of conflicts and of proactively managing and resolving them. "Resolving conflicts can lead to better understanding, better decisions and better relationships. It all relies on the concept of 'we' vs.'I,' " Schneider said.
He emphasized that the most important aspect is communication, urging farm family members to recognize the need for honest, proactive and respectful communications at all levels. In his opinion, the best way to start to develop communication is to have regular family meetings.
Farm succession planning can be challenging, Schneider said, but it can be done well.
"Farms that have transferred from one generation to the next have been able to re-create the energy that fueled the entrepreneurial spirit of the previous generation," he said. "I truly believe that a farm family will endure depending on how effectively it plans for the future."