Personal Financial Requirements
A consideration with farm transition planning is for current and succeeding owners to specifically identify what their own family’s personal financial requirements will be in the farm succession plan. For example, if the current owners need a reliable source of retirement income, what will be the source of that income? Will it come from equity in the business, income generated by ongoing operation of the business or will it come from private financing that the succeeding owner is expected to obtain to purchase a share of the business?
“What is the feasibility of achieving the financial goals of all family members?” |
In farm succession plans involving family members already working in the business, the succeeding owner’s equity interest in the farm business can be increased by profits earned over time, by gifts of assets from the current owners, or one of the many various combinations thereof. Business AND personal finances and the ability to achieve personal financial goals must be addressed and contemplated if you plan to successfully pass down the family farm business.
A plan that follows the “Things will all work out” methodology is usually fraught with future challenges. Imagine that! The size of family farms today and the amount of money involved deserves a little more consideration. Don’t you think? |
Time Horizon
Another essential element in your farm succession plan is a clear plan for the timing of turning over management and ownership control of the business. It may be a certain date, or contingent upon specific conditions that must be met. This certainly need not be done at one specific point in time, but can be done gradually over time. This will assist the current owner in meeting needs for reliable retirement income and the succeeding owner in using current profits to finance the transition, rather than rely solely on commercial financing of a pre-determined purchase price or the gifting of assets from a generous senior generation owner.
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The current owner usually continues to be involved in the business and can assist in meeting the challenges that all businesses confront from time to time. The succeeding owner then uses this time to continue to learn management decision making skills while a mentor remains for guidance and wisdom, but not necessarily for making the decisions.
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“This isn’t a one and done kind of scenario. Experience demonstrates that the best farm transitions involve a specific plan and allow time for everyone to methodically transition their roles within and outside the business.” |
Allow Room for Changes
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Although any plan anticipates a successful outcome, it is not unrealistic to think that your family farm succession plan may need to be revisited from time to time. Therefore, your plan should include an opportunity for everyone to make mutually agreeable changes if certain things happen. It needs to be flexible. For example, what if the succeeding owner dies or becomes disabled or some other event occurs that affects the business’ ability to fulfill the promises made in the agreement.
Does your current transition plan have flexibility to adapt to unforeseen changes in circumstances? |
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