Breaking in the next generation
Planning for transferring a farm can get complicated and difficult quickly, especially if multiple generations are involved and communication skills are impaired, according to farm management specialists.
'It's very important for the younger generation to understand the financials of the farm to really grasp what's going on,' said Kevin Bernhardt, a farm management specialist with the University of Wisconsin-Extension Center for Dairy Profitability and a UW-Platteville agricultural business specialist.
He stresses the importance of starting the ball rolling, despite uncertainties, is if there's an eager young farmer or couple ready and willing to come on board.
Speaking at a recent farm transition meeting in Watertown, Bernhardt suggested starting with an examination of the financial aspects of the farm.
'Is this business big enough to accommodate the next generation? If it isn't, how big does it need to be?' he asked.
Bernhardt said another question to answer is, what does it need to be? That's because expansion isn't the only solution, even though it tends to be the one most farm families gravitate to first.
'Maybe an operation would be better off adding a new enterprise,' he suggested. 'Maybe bringing in some off-farm income by providing a custom service for other farms; maybe considering direct marketing production or doing some jobs on the farm that had been done by someone else in the past.'
Before a farm family decides to make any changes, Bernhardt said it's crucial to carefully evaluate the existing operation to set a baseline.
He recommended looking at the farm as it is now: How big is the farm? How productive are the enterprises? What is the condition of the existing facilities, and would there be an alternative use of the facilities? What is the condition of the machinery and equipment? Is it adequate? Is there enough land base if deciding to expand? How many families would need to live off the farm? How many actual workers would be available? Do these people have the skill sets and work desires to do the job? What about housing? And the big one, is there debt on the current business?
'The analysis will hopefully create a better idea about expansion,' Bernhardt said, 'or allow alternative-enterprise possibilities to emerge.
'Look at the special skills of each person involved and make the best of those skills.'
Besides the financial aspects of running the business, he said there are also personal considerations: Is there willingness on the part of the older generation to share management, sell or transfer the assets? Does the spouse of the younger generation show enthusiasm about joining the farming operation?
In deciding how big the farm needs to be to accommodate another family, it is important to focus on cash flow and do some projections.
'It's not the size of the farm but how it is managed that determines whether a farm will do well when expansion occurs,' Bernhardt said. 'The ability to sell more milk by adding cows may bring in more income, but if it is not managed well, it can result in losses instead.'
What compensation do both generations need for meeting family-living needs and recreation wants, for paying taxes and for saving and investing for the future? The latter includes future business expansion, paying for college for the grandkids, retirement for mom and dad, a new or remodeled house, unexpected medical expenses and even eventually bringing grandkids into the operation.
'These young people have options,' Bernhardt said. 'They need an economic reason to stay on the farm. The parents have earned where this farm is today. They need to continue making a living and want a comfortable and assured retirement.'
If a farm family is feeling overwhelmed about how to financially swing a farm transition, Bernhardt said to just start.
'Take the first steps,' he said 'It's not perfection we're after. It's direction that's important.'