April 10, 2010   Inheritance

Are We Helping to Pass on the Farm?

By John R. Baker, J.D.
An interesting quote but, what does all this have to do with farming, farm business suc­cession planning, estate planning and pre­serving wealth? What did Aristotle mean by this? What he meant was that there is nothing intrinsic in a tree, an inanimate object, that, when falling to the forest floor, transmutes it into a Greek trireme with oars and sails and a ram. Obviously when a tree falls to the forest floor it decomposes. No ship, no oars, no sails, just rotting wood.
 
Aristotle could just as well said, “If the farming art were in the land, it would produce the same results by nature.” Simply stated, there is nothing intrinsic in land, equipment, buildings, facilities or machinery that transmutes these inanimate objects into a farm business. As we all know, farming, indeed all businesses, requires management, money and assets and these must be pro­vided by people. Unfortunately the transfer of the farm family business from the owner generation to the suc­cessor generation is thought of and treated as an event rather than a process by which management, money and assets are transferred from the owning generation to the successor generation.
 
When the owner retires, when the owner becomes disabled, when the owner dies, etc., something will happen that will cause the transition from the owner to the successor to take place. The unspoken, sometimes spoken, assertion is, “Someday this will all be yours” Unfortunately, someday never comes. No current estate plan is in place, no documentation of the equity of the successor and no management responsibility or training for the successor and absolutely no discussion with fam­ily or professional advisors. The successor’s career in farming has been as the “farmer’s boy,” the 65 year old “farm laborer” whose 87 year old father has made all the decisions, never retired and allowed or required the successor to learn to manage the farm family business.
 
A 2006 survey of Iowa farmers by the Beginning Farm­er Center at Iowa State University revealed that only twenty-four percent of Iowa farmers have identified a successor for the farm family business and only twenty-three percent of those surveyed indicated they would retire. Of the seventy-seven percent who will retire or semi-retire when asked with whom they had discussed their plans the most frequent response, at 47%, was no one. The second highest response was family and only seventeen percent had discussed their retirement plans with a lawyer. (A copy of the entire report is available at www.extension.iastate.edu/bfc)
 
In the same survey the respondents were asked to rank various management activities and decisions. A re­sponse of one meant the managerial function was solely retained by the owner and a response of five meant the managerial authority is the sole responsibility of the successor. The most frequently delegated management functions were daily operational functions such as live­stock management, recruiting employees and keeping farm records. The strategic management functions are the last to be transferred to the successor. The follow­ing table indicates the percent of the owner/operators of farm family business who have transferred the listed managerial function/decision to the successor. 
 
Managerial functionPercent of Decision/action taken by the operator or successor
Operator Alone
1
Shared by operator & successor
           2                  3                 4
Successor Alone
5
Decide when to sell crop/livestock27273168
Negotiate sales of crops/livestock312135310
Decide when to pay bills442019314
Identify sources and negotiate loans and financing472119211
Keeping farm records451619515

So, why don’t farmers develop a farm business succes­sion plan? Farmers, not unlike most entrepreneurs, do not like to plan; they like to do whatever it is that they do. Farmers like to plant, harvest, raise cows, milk cows, raise pig and all the associated activities involved in farming. Planning is complicated and it is difficult to know where to start. Questions and more questions to be asked and answers: What is the best business entity, a corporation, partnership, a Limited Liability Company and what about wills and trusts and estate taxes? Lastly, succession planning requires considering retirement, old age and, yes, ultimately, death. Not topics that most want to ponder. And all the necessary and urgent daily activities take precedent over the important planning for the long term future of the farm family business and the farm family.

When and how should farm family business succession planning begin? Ideally a potential successor should be identified as early as possible and planning should begin immediately. If the successor is a child of the farmer planning should begin when the child is born. If the successor is not a family member planning should begin when decision the is made to have a successor. Succes­sion planning will not have a detrimental effect on the farm business and will most likely increase profitability and reduce risks.
 
The “how to begin” is a more difficult question to an­swer. The fundamental question is one of values. We never do anything that we do not want to do, but we will do things we do not like to do. We want to do that which we value. The starting point in all succession planning is identifying the values of those involved. If the owner generation values passing on the farm business to a succeeding generation, then succession planning will begin. If the owner generation values retaining ownership and control, then little or no succes­sion planning will take place. Transferring managerial decision making and therefore the control of the busi­ness requires the operating generation to relinquish, to give up, that control and decision making. If the man­agement is not transferred the result is the “farmer’s boy” situation. Does the owner generation value retain­ing managerial control more than transferring the farm business to a succeeding generation? If it is the former, the farm business will, in all likelihood, cease to exist when the owner dies. If it is the latter, the farm business will continue to operate as an independent farm fam­ily business. It is a question of values that is critical in determining factor whether or not the farm business will continue for another generation
 
Obviously, the transfer of management must corre­spond with the competency of the successor to make the decisions that are necessary to manage the farm family business. As with any business, new employees begin with little authority, responsibility and accountability for upper level strategic management decisions. New employees begin with the authority and responsibil­ity to make operational decisions. As their experience and training progress their authority, accountability and responsibility increases. Eventually, after demonstrating competency with the operations of the business they are given the authority and responsibility for strategic deci­sions and, ultimately, for the management and direction of the business.

The timing of the progression from operational manage­ment to strategic management can determine the success or failure of the succession plan. Too much responsibil­ity too soon may lead to poor decisions due to lack of experience and training. And delaying the delegation of managerial decision making authority and responsibil­ity may cause the successor to lose interest in the farm family business or to leave. The generations need to establish a mutually agreed upon time line with defined transition points and definite time periods for transitions to take place. The transitions or tipping points are when the training and requisite transfer of management for a specific task or enterprise should be complete. A time line with tipping points are the objective measures by which progress may be assessed and problems may be discovered so that corrective action may be taken.

It is probably at this point the gentle reader of this article I beginning to wonder why am I reading this and why is any of this important. Perhaps a few statistics will help to make the case for the importance of farm business succession planning. In the United States over 98% of all farms are family farms and those farms own 93.5% percent of all farm land (2005 ERS Family Farm Re­port). There are more than twice as many farmers over the age of 65 as are under the age of 35. In fact, for all farms 26.7% of the owners are 65 or over 65 years old while only 5.9% are under the age of 35. (Structure and Finances of U.S. Farms” 2005 Family Farm report/EIB- 12) And family farms account for 86.2% of the value of all farm production. Clearly family farms have a critical impact on the rural economy.
 
For those of us who live and work in rural America a statistical analysis is not need to tell us the impact of the ageing farm population. We see in it our churches and in the school consolidations due to declining popu­lations in small town and rural communities. We see it in the store closing and ultimate decline of the town and villages that are dependent on the buying power of young families. Obviously not all family farms are not economically viable units due to size or quality of the land. And not all farm family businesses can or should be transitioned to the next generation. Having said that, there are many that are capable of being transitioned to another generation and it is those that we should counsel about more than merely moving the assets to the next generation. We should help these farm family business owners explore the possibilities and consider the conse­quences of developing and implementing a farm family business succession plan. The consequences for them­selves, their family and their community if they merely pass a group of assets to the next generation or if the transition a business to the next generation.
 
The French writer and poet, Antoine de Saint Exupéry stated, “You do not inherit the earth from your ances­tors: you borrow it from your children.” We should con­sider that you do not inherit the farm from your parents; you borrow it from your children. When and how you return it to the successor, whether or not they are a child, is a decision that only the owner can make. Farm suc­cession planning is not easy. It requires commitment of all involved and the discipline to adhere to the timeline and tipping points. And even though it is not easy many farm families successfully complete a farm business succession plan and those farm family businesses will continue for generations yet to come.
 
About the Author
John R. Baker is the Attorney for Iowa Concern Hotline. In 1991 he created the Farm On project which links farmers and landowners with beginning farmers. He is a founder and cur­rent President of the International Farm Transition Network (http://www.farmtransition.org/). In 1994 Baker drafted the legislation that created the Beginning Farmer Center and is its administrator. He developed the AgLink seminar for college juniors and seniors who are returning to farm family business and for their families. In 1995 he created the Farm Savvy farm succession planning manual. In 1999 he and the late Professor Andrew Errington, University of Plymouth, Seale Hayne Faculty, England, co-founded the FARMTRANS­FERS international research project on farm succession and retirement. He was a Co-Principal Investigator on the Farm Land Access, Succession, Tenure and Sustainability research project. He has given numerous talks across the country on the business succession planning process and has lectured in England, Japan, and Canada and throughout the United States. He emphasizes the necessity of understanding connec­tions between the people, plans, the law and the technology used in the business. Baker earned a Bachelor of Science degree in Business Administration, a Masters of Business Administration and a Juris Doctorate from Drake University in Des Moines, Iowa.
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