Like most American farms and ranches, your operation is family owned. It was probably started by your parents or grandparents. And, like 80% of United States farmers, you plan to transfer control of your business to the next generation.
But surveys tell us that only 20% of farm and ranch owners are confident they have a good plan in place to successfully transition the family-owned business. A common reason for delaying the transition is that those involved just aren’t ready. Or the owners don’t have the time, the right advice or tools. Or the whole process is too complex.
As someone who has operated my family’s farm and cattle operations, I understand those concerns. And, having spent much of my career protecting farm and ranch legacies through careful structuring and estate planning, I also know how reluctant business owners can be to take that first step. But transition planning is vitally necessary. Only 30% of farms and agribusinesses ever make it to the second generation. Of those that get that far, less than 10% survive past the third generation.
Transition planning is doable. There are solutions for every farm or ranch, whether you’re looking to ensure the legacy of your operation, provide for both on-farm and off-farm heirs, or avoid estate taxes.
Working through the process
Your farm or ranch transition process will take time and effort. It’s common for transition planning to last a year or more. Conversations will be crucial and often difficult. For most of you, your farm or ranch is more than a job, and it’s embedded with layers of emotion.
But, with the help of expert transition planners, you can work through the necessary transition steps. Transition experts not only bring experience to the table but an objective view of your operation and the process. They’ll help you determine how to handle sticky issues in a fair manner, such as providing for off-farm heirs. A good transition plan will provide transparency and clarity among family members.
The end result of good transition planning ensures that your operation continues and will thrive. It can allow your legacy to live without you having to sell your land. It puts a structure into place that helps makes sure your wishes are taken care of while helping avoid family fights. It provides income for your life while transitioning the management of your farm or ranch to the next generation.
The process will cover both estate and succession planning. Estate planning is the paper and financial part of the process. This will provide ways for your operation to mitigate the estate tax and prepare for wealth and asset management. Succession planning involves the “people” side of a business transfer. It includes developing management and leadership skills, honoring the knowledge of business founders and providing clarity for family members through the process.
Every farm and ranch has its own unique situation. But there are some basic steps that a transition process will follow:
Step 1—Reaching consensus. You’ll typically start with a “wants and needs” meeting with the senior generation and those involved in the operation. This is where you’ll try to reach a consensus for goals of the operation and what is “fair” from an asset division standpoint. During this meeting, you’ll also discuss how the management work is currently divided and who is in line to assume those responsibilities.
Step 2—Developing the plan.Based on the Step 1 meeting, you and your advisor will focus on developing a plan that meets the operation’s needs and provides for a fair asset distribution. Often, a transition plan can include coaching on the soft-skills transfer involving management and the holes created by the departure of senior members.
Step 3—Implementation. With multiple needs in this scenario, implementation might include:
- Splitting current operations into two separate entities: an operating entity that will operate ranch operations and a landowner who will own the ground.
- Stipulating the landowner with two separate types of ownership—voting and non-voting:
- Voting ownership will be retained individually and controlled by a revocable trust.
- Non-voting ownership can be retained. However, this can also be transferred to trusts to reduce estate taxes and provide for your legacy.
- Giving the operating entity the requirements for ownership, customized to the wishes of the senior generation. Basically, this is usually only the on-farm heirs. This step involves a look at transfer strategies to determine the best method for incorporating the next level of ownership, whether it’s through a gift, sale or other option.
- Developing a coaching plan for the transfer of talent and knowledge to the next generation.
Unless you’ve taken the right steps, the odds are against a successful transition of your family-owned business into the future. Start planning now. The earlier the planning begins, the greater the number of options—and the fewer sleepless nights—you’ll have.
Editor’s note: Maxson Irsik, a certified public accountant, advises owners of professionally managed agribusinesses and family-owned ranches on ways to achieve their goals. Whether an owner’s goal is to expand and grow the business, discover and leverage core competencies, or protect the current owners’ legacy through careful structuring and estate planning, Max applies his experience working on and running his own family’s farm to find innovative ways to make it a reality. Contact him at firstname.lastname@example.org