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Farm Management & Succession

Farm Management & Succession

Farm management & Succession for the next generation:

“What’s the best way for the next generation to learn how to manage the farm?

This is a really good question to be asking as it lets you make plans for how you will go about training the next generation to manage the farm. Often, when that training is left to chance, the results can be a disaster for the farm operation – and family relationships.

How do we train them?

One thing to consider is how they learn best as individuals and we can usually identify this from our observations of them growing into adulthood. These observations will give us knowledge of strategies we can use to train them in the farm’s operations.

For example, maybe your next generation farm owner learns best through direct participation. You may have seen them in the past watching demonstrations that include hands-on activities where they immediately get to try out what they’re learning. They have a need to “get their hands dirty,” and learn well from this method.

They may need to see how things play out in real time, preferably right in front of them. It might be helpful to carve out an area of responsibility for them where they will make all the decisions – and then discuss with them periodically why they made each decision. This way, you’ll find out a lot about how they think through things, as well as areas where they may need more support/training.

Maybe they like to study up on new subjects or tasks ahead of time. They might want to read information or watch videos or presentations about what they will be doing before starting new tasks.

They may learn from observing you, watching how you handle situations or decisions. They may like to hear you talk through your decision-making process so they can understand what you take into account and how you actually go about making the right decisions.

Some might also find it helpful to have a mentor – another experienced farmer or small business leader who is willing to share their hard-won wisdom with a younger person. This doesn’t necessarily have to be you – in fact, it may be even more helpful if it is someone else. But of course, they will always benefit from you as a mentor, as well.

Plan your strategies:

Most future farm owners will learn best from a combination of some of the strategies I mentioned, and there are other things you can do to help them learn and grow, as well. You and your next generation can sit down together, discuss transition strategies, and create a plan together based on how they learn best and where they need to learn more.

Identify what strengths they can bring to the farm especially if they grew up on the farm, but didn’t have much access to how and why you made decisions about farm operations.

Uncovering the assets they may bring as a future farm owner is the key to this process. It’s the way to figure out how they can work with you to determine how they will prepare to one day take the leadership reins.

Once you’ve figured out where their current strengths lie, it’s time to find ways to expand and capitalize on them. It’s even possible that their strengths could currently be underutilized on the farm.

What should we be looking for?

Some of the different areas you may consider to identify their current strengths are-

Their education:

If they have gone through some type of off-farm educational program (whether in agriculture or not), they will bring unique assets to the farm based on that program. Any specialised knowledge they bring may be important, of course, but particularly other skills they began developing, such as problem-solving skills.

Their previous work experience:

It can be helpful to think back about any work experience they had prior to working on the farm. Whether they worked on someone else’s farm, at a job in town or in some completely different sector other than agriculture doesn’t matter as much as their ability to bring those skills into their growing leadership role on the farm. We should consider how they may be able to transfer abilities from any previous jobs they have held.

Their life experience:

This probably isn’t what comes to mind first for most people, but looking back at rough patches or tough obstacles they’ve faced personally can be a way to recognize their levels of individual resilience. That same resiliency, when brought into a farm leadership role, can be an important strength to help carry things through the tough times, because – let’s face it – times aren’t always easy in farming.

Considering each of these areas can also help with planning for areas of training for them as you take a look at the full picture of where they’re currently at in terms of their preparation to take over the running of the farm operations.

Financial Stumbling block to succession planning:

Do you know your farm transition costs?

Imagine: You as the last surviving parent, have passed away and it’s time for the reading of the Will.

As the lawyer reads, your successor will learn they have the option to buy-out their three siblings’ interest in the 400-hectare family farm at a 25% discount from current market value. The farm hasn’t been valued yet, but similar nearby properties have sold for near $12,000 per hectare.     

At first, a 25% discount seems fair considering the sweat equity they contributed to the farm operation over the years. However, it won’t take long for one of the siblings to do the maths and realize a 25% discount on $12,000 per hectare land quickly adds up to $1.2 million dollars when taken over 400 hectares.

Could someone in the family question whether your successor’s sweat equity is actually worth $1.2 million?

On the other hand, it won’t take your successor long to realize a 25% discount on $12,000 per hectare land is still $9,000 per hectare! They’ll be certain you didn’t expect them to pay $9,000 per hectare, especially for land you inherited from your parents for free.

Instead, they may believe the price you had in mind falls closer to $5,000 per hectare. This is where land values were 15 years ago — the last time you updated your wills. 

You probably had good intentions to meet with an attorney to update those wills. Unfortunately, no one knows for sure now, since it was never clearly communicated and just as the last 15 years went by fast, so did the increase in land prices which you probably never dreamt of.

These numbers will shock your successor even further after they meet with their banker and realize the 25% family discount still leaves them (on a twenty year mortgage @4% interest) with an annual payment of nearly $200,000, or $500 per hectare to buy-out your three siblings.

Think about it another way.  A 25% discount off of $12,000 per hectare is $9,000. Now, take off another 25% for the one-fourth of the farm for the inheritance. This lowers the price to $6,750 per hectare. Who wouldn’t jump at the chance to buy a $12,000 per hectare farm for $6,750? But, then you realize you still have to cash flow the purchase at $500/hectare!

What you just read is a common dilemma facing many family farms when it comes time to transitioning the land to the next generation. And it’s largely caused by the disconnect occurring between farmland prices and actual farm income.

This predicament threatens the future of many family farms. It’s why you need to be aware of various succession planning strategies available for family farms.    

The arbitrary 20% or 25% family discount, although very common, may not provide you and your estate plan the flexibility needed to stand the test of time.

But for now, please take time to understand your own family farm transition numbers and how they may impact the likelihood of a successful transfer.

Other Issues to be addressed:

The most important issue is to make sure that you have a succession plan and that you set up that plan as early as possible. We may not like to face our own mortality but it will come to all of us eventually even though thankfully, we don’t know when. When our time is up, or very close to being up, may be too late to effectively organise a succession plan and leave your dependents with a mess to sort out that may end in legal disputes.

You should have a succession plan with everything documented and where required all of the legal steps undertaken and recorded along with your will.

If there are other siblings to be accounted for in settlement of your affairs it will be more important that your succession plan is in place known to all and that you have enough time to allow for the next generation to take control but also to fund the succession from working capital.

The more time that all parties have to adjust to the requirements of your succession plan, prior to your retirement/passing, the less chance there will be costly drawn out legal battles that end up destroying family units.

Another issue that will be addressed by the early planning for succession is the ability for you to gradually pass the responsibilities for day to day management of the farm, over to your chosen beneficiary and allow you to enjoy the fruits of your labours while you are still fit and able to do so. Although at the same time you will be able to offer assistance to your children through the transition phase from your management on to theirs.  

The last bit of advice in regard to the transition through the succession planning and then implementation of that plan is to ensure that each party in the succession process has their own individual legal representation to ensure there is no later argument that may arise regarding the level of or type of advice received.