Building a successful family farm business that lasts multiple generations involves distinct challenges. Less than one third of family businesses survive the transition from the first generation to the second, and another 50% don’t survive the transition from the second generation to the third. This means less than 17% of all family businesses make it to the third generation. So, how do you overcome the odds and successfully transfer your family farm to the next generation?
- Accept that you will need a plan. Don’t think that the farm transition will just happen. Realize that you must think about transition and make deliberate decisions. Remember only 17% of family-owned businesses survive two transitions, and survival does not mean those transitions were smooth.
- Identify your goals. Family farm transition can be a daunting project, and sometimes you just don’t know where to start. Begin by writing down your goals. There are endless ways to approach transition but probably only a few ways that actually meet your goals. To identify your goals, think about things that are important to you. Goals could be anything from saving on your taxes to making sure you can continue to have Thanksgiving dinner as a family. Whatever your goals are, your advisors should use those goals to tailor a plan for your operation.
- Don’t try to do it alone; use a team advisor approach. One of the reasons businesses don’t survive transition is because they don’t ask for help. Seeking help from trusted advisors and ag consultants will make your transition more cost effective and efficient over time. Meet with your advisors as a group, and explain your goals to them. They can help you think about legal, tax, and family consequences that might be present in your transfer situation. It is important that your accountant and attorney, for example, work together to create a plan that addresses all of your needs.
- Consider off-farm heirs. If continuation of the family business is your number one goal, you have to consider what is equitable for on-farm and off-farm heirs. Consider which assets should be owned or controlled by those active in the business and which assets, if any, may be owned or controlled by inactive family members. Two mistakes that can cause business transitions to fail are (1) splitting assets equally and (2) not providing liquidity for buyout options. Consider life insurance proceeds or other investments as ways to help fund transitions.
- Plan for an uncertain future—death, disability and retirement. One reason businesses do not survive transition is because they put off transition planning, and something unexpected happens. Make sure your plan addresses death, disability, and retirement. Use buy/sell agreements so all parties know how they can exit the business. Provide leadership and development training to the next generation. Use standard operating procedures to document your daily activities. Make sure those in leadership roles have the proper skill sets because if they don’t, the business will not survive.
- Communicate your plan. Once you have a plan in place, you must communicate this plan with future generations. Explain your plan and your reasons for it to your kids and any key employees. Utilize your advisors if you need help with communication. Remember to be flexible with your plan, and communicate changes you make along the way.
Transition planning is different for every family, but no matter what challenges your face or what goals you’ve set, following these tips will give your family the chance to pass your farm on to not only two or three generations, but potentially many more.
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