Anyone who has ever participated in a relay race (or even watched one) knows the race is won or lost based on how well the runners hand off the baton. That’s why relay teams practice those few seconds over and over to make sure the baton isn’t dropped and no one misses a step.
Farm succession planning is a lot like a relay race. When it’s time for one generation to hand the operation over to the next, you need to make sure it’s done right so that everything moves forward smoothly. If not, it can be a mess.
This post will help you understand why a detailed farm succession plan is essential for the continued success of your farm, especially in family-owned operations. If you’re getting ready to hand off your “farm baton”, read on!
What is Farm Succession Planning and Why Do You Need It?
Farm succession planning is a comprehensive process for transitioning farm ownership and management to the next generation. As it’s been said about many things before, “failing to plan is planning to fail.” So if you’re a farmer who is getting ready to retire or looking to sell, you absolutely need to have a solid plan in place before you do.
Many people confuse “farm succession planning” with “farm estate planning.” While they may sound similar, we should clarify some key differences. (The following points are detailed well in an article on estate planning versus succession planning by Farmprogress.com.)
- Estate planning deals with the transfer of things; succession planning deals with the transfer of processes.
- Estate planning is the transfer of ownership; succession planning is the transfer of leadership.
- Estate planning deals with what happens after you die; succession planning deals with what happens after you retire.
Agricultural succession planning is all about farm business continuity. When you’re concerned with the long-term survival of your farm’s operations, it’s in everyone’s best interest to have a solid plan in place long before you need it.
Key Elements of a Farm Succession Plan
A good farm succession strategy includes several essential components:
- Clearly identified successors. The next generation of owners could be family members or external buyers/investors. Regardless of who will be taking over the farm, make sure your documents spell out exactly who will be taking charge.
- Firm financial planning. This is where the farm estate planning we mentioned earlier comes into play along with making sure all of your financial documents and reports are accurate and in order.
- Well-defined responsibilities. A smooth transition of farm ownership requires that everyone involved understands exactly what their roles and responsibilities are moving forward.
- Tax and legal considerations. Many older farmers grew up in a world where a handshake was all a person needed to trust that a deal was done. Today, you need to ensure that every decision is well-documented and legally sound. This includes wills, business documents, and any other legal forms.
When these things are in place, something as meaningful as a generational farm transfer or farm inheritance becomes a blessing instead of a burden.
The Role of Family in Farm Succession Planning: A Smooth Family Farm Transition
One key to a smooth succession is to involve your entire family in the process of the family farm transition. Every member of your family will be affected by it, so it is important that they have a voice (or are kept well informed at a minimum).
Farm succession planning is not just about transferring ownership—it’s about securing the future of your farm and ensuring the next generation is ready to lead.
Family dynamics play a huge role in the planning process. Conflicts often come to the surface, and you should have a strategy to address them in a way that helps avoid disputes, ensuring the farm continues seamlessly.
It would be a shame to profit from selling your farm only to damage your family in the process. Fortunately, it doesn’t have to be that way. With careful planning and clear communication throughout the entire process, you can do both things well.
Consider including a credible third-party mediator to help with the process. Your CPA can even serve in that role.
Developing a Farm Succession Timeline: When Should You Start Planning?
It is never too soon to begin planning for farm succession. In an ideal world, you would run your farm until you are ready to retire. Then, as you look forward to enjoying your senior years, you would get to watch your children and grandchildren continue your legacy on the land you have cultivated.
However, we don’t live in a perfect world. We get injured and sick unexpectedly. Disaster strikes (both natural and financial). In those cases, it’s wise to already have some sort of farm succession timeline in place. That way, even if you need to transfer ownership earlier than expected, no one is caught completely by surprise.
We suggest starting the planning process 5-10 years in advance of when you intend to retire. Create short-term and long-term goals for generational farm transfer, but be willing to adjust them along the way based on an ongoing assessment of when your next generation is ready to take over.
Learn more: “Mind Your Farm Business Podcast – Episode 85: Clarifying a Timeline For Farm Transition” from Realagriculture.com.
Ensuring Farm Business Continuity During the Transition
Imagine trying to change drivers of a vehicle that is moving (or, in this case, a tractor.) Note: We don’t actually recommend attempting either for safety reasons, but it works as an illustration.
That’s what it will be like if you do not plan for farm business continuity during the succession process. Here are a few steps to help you keep your business running smoothly:
- Start training the next generation. Long before you plan to hand the farm over, make sure you involve them in every aspect of the business. Let them gain hands-on experience now that will help them when they take charge later.
- Maintain a healthy cash flow. It’s the lifeblood of any business, especially farm and ag operations. Be sure to check out “4 Winning Strategies on How to Manage Cash Flow” which we wrote about a while back.
- Secure financing now. As you know, farm equipment is expensive and often requires large loans to purchase. Teach your future generation what it takes to secure financing, and plow the way for them by helping them establish good relationships with the lenders you work with.
By doing these and other common sense things as you go, your farm succession strategy can mitigate risks and ensure that the farm stays profitable during the transition.
Overcoming Common Challenges in Farm Succession Planning
Things that are worth doing are rarely ever easy – finishing a degree, raising a family, getting in shape, transferring a farm. So be prepared to overcome some challenges during your farm succession planning. Here are some common issues most people encounter:
- Family disagreements over farm ownership and roles. This is especially true when there are multiple siblings and extended relatives involved in the operation. Make sure that you establish well-defined roles and responsibilities and communicate them clearly on a regular basis. We recommend quarterly (or at least annually) family business meetings for this purpose.
- Financial stress from farm inheritance. Farms come with a lot of financial responsibility, especially tax burdens, that can be overwhelming to young farmers who may not have the experience you do. Be sure to include them often in the financial side of your operation so they’ll be more comfortable with it all when it’s their turn.
- Difficulty finding willing and capable successors. Much of this post so far has assumed that you have a next generation in place to hand the farm off to…and they’re able to do it. If you aren’t that fortunate, most of your time will be spent looking for who that successor will be. Get the word out early and often. Talk with other farmers in your area who may want to expand, talk to their adult children who may be interested, or consider someone already working for you who has what it takes to run their own farm.
To keep things professional (and to avoid family drama), consider bringing in outside mediators or external advisors (such as lawyers and accountants) to help develop and carry out a good generation farm transfer strategy.
Read more: “12 Tips For Running a Family-Owned Business” by Ramsey Solutions.
Start Your Farm Succession Planning Today
Farm succession planning is an important part of your legacy, and a solid farm succession strategy ensures long-term success for your family’s farm. After working for so many years to build a strong ag business, you deserve to make sure the next generation is set up to succeed and grow.
It’s important that you involve both your family and professional advisors in the important decisions you make during this process. With offices all around the West Tennessee area (Jackson, Dyersburg, Paris, Brownsville, Martin, and Milan) we have lots of experience helping farm families make smooth transitions. Schedule a call with one of our accounting and family business pros today to learn more!
