Successful Farm Business Transition

Successful Farm Business Transition David Goeller Transition Specialist 402 472 0661 dgoeller@unl.edu Joe M. Hawbaker Attorney at Law 402 558 3540 mjbaker@radiks.net Cooperative Extension Business Life-Cycle Introduction Growth Maturity Decline Penetrate & Grow Protect & Defend New Opportunities Divest Time Source: Wadsworth Cooperative Extension Business Life-Cycle 1st Generation Maturity 2nd Generation Maturity Time Time Source: Wadsworth Cooperative Extension Business Life-Cycle Maturity Maturity Introduction Time Source: Wadsworth Cooperative Extension Age of Nebraska Farm Operators Age Under 34 35 – 64 Over 65 1982 13,436 22% 1987 1992 1997 1997* Adj. 2002* Adj. Total Source: Census of Agriculture, NASS Cooperative Extension Age of Nebraska Farm Operators Age Under 34 35 – 64 Over 65 1982 13,436 22% 38,030 63% 1987 1992 1997 1997* Adj. 2002* Adj. Total Source: Census of Agriculture, NASS Cooperative Extension Age of Nebraska Farm Operators Age Under 34 35 – 64 Over 65 1982 13,436 22% 38,030 63% 8,777 15% 1987 1992 1997 1997* Adj. 2002* Adj. Total Source: Census of Agriculture, NASS Cooperative Extension Age of Nebraska Farm Operators Age Under 34 35 – 64 Over 65 1982 13,436 22% 38,030 63% 8,777 15% 60,243 100% 1987 1992 1997 1997* Adj. 2002* Adj. Total Source: Census of Agriculture, NASS Cooperative Extension Age of Nebraska Farm Operators Age Under 34 35 – 64 Over 65 1982 13,436 22% 38,030 63% 8,777 15% 60,243 100% 1987 12,609 21% 37,056 61% 10,839 18% 60,502 100% 1992 1997 1997* Adj. 2002* Adj. Total Source: Census of Agriculture, NASS Cooperative Extension Age of Nebraska Farm Operators Age Under 34 35 – 64 Over 65 1982 13,436 22% 38,030 63% 8,777 15% 60,243 100% 1987 12,609 21% 37,056 61% 10,839 18% 60,502 100% 1992 8,877 17% 32,735 62% 11,311 21% 52,923 100% 1997 1997* Adj. 2002* Adj. Total Source: Census of Agriculture, NASS Cooperative Extension Age of Nebraska Farm Operators Age Under 34 35 – 64 Over 65 1982 13,436 22% 38,030 63% 8,777 15% 60,243 100% 1987 12,609 21% 37,056 61% 10,839 18% 60,502 100% 1992 8,877 17% 32,735 62% 11,311 21% 52,923 100% 1997 5,531 11% 33,532 65% 12,391 24% 51,454 100% 1997* Adj. 2002* Adj. Total Source: Census of Agriculture, NASS Cooperative Extension Age of Nebraska Farm Operators Age Under 34 35 – 64 Over 65 1982 13,436 22% 38,030 63% 8,777 15% 60,243 100% 1987 12,609 21% 37,056 61% 10,839 18% 60,502 100% 1992 8,877 17% 32,735 62% 11,311 21% 52,923 100% 1997 5,531 11% 33,532 65% 12,391 24% 51,454 100% 1997* Adj. 2002* Adj. Total 54,539 100% Source: Census of Agriculture, NASS Cooperative Extension Age of Nebraska Farm Operators Age Under 34 35 – 64 Over 65 1982 13,436 22% 38,030 63% 8,777 15% 60,243 100% 1987 12,609 21% 37,056 61% 10,839 18% 60,502 100% 1992 8,877 17% 32,735 62% 11,311 21% 52,923 100% 1997 5,531 11% 33,532 65% 12,391 24% 51,454 100% 1997* Adj. 2002* Adj. 3,782 8% 33,390 68% 12,203 25% Total 54,539 100% 49,375 100% Source: Census of Agriculture, NASS Cooperative Extension Average Age of Farmer by County Under 51 51-53 54-55 Over 55 Cooperative Extension Is there a Successor? Farm/Ranch Income may leave the area Unintended Consequences: Community Businesses Churches Schools Cooperative Extension What to do with the Farm/Ranch? Do you want to transfer the ranch/farm as a “business” or simply as a “group of assets”? A. Transfer Plan B. Estate Plan Cooperative Extension FARM Business Succession Plan Financial Viability Retirement Plan Goals Assets Estate Plan Cooperative Extension Estate Plan Successful Farm Transitions Goals  Older Generation  Retirement lifestyle (money needed)  Nonfarm heirs  Residence  Younger Generation  Lifestyle (money needed)  Growth of business  Attitude toward debt  Ownership vs. renting  Family time vs. work Cooperative Extension Successful Farm Transitions Communication Regular business meeting throughout transition period Talk about it, then write it down Share with non-farm family members Surprises cause problems Cooperative Extension Successful Farm Transitions: Financial Viability  Cash Farm Income Cooperative Extension Nebraska Farm Income & Expense Thousands $700 $600 $500 $400 $300 $200 $100 $0 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Source: Nebraska Farm Business, Inc. Gross Cash Income Cash Expenses Net Cash Income Year Cooperative Extension Nebraska Cash Income & Family Living Expense $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Thousands Net Cash Income Family Living 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Source: Nebraska Farm Business, Inc. Year Cooperative Extension Nebraska Cash Profit Margin 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Source: Nebraska Farm Business, Inc. Year Cooperative Extension Successful Farm Transitions: Financial Viability  Farm Efficiency  Expenses  Purchases (shop around)  Bang for the buck  Quantity/early pay discounts  Income  Production, production, production  Marketing  Quality Cooperative Extension Successful Farm Transitions: Financial Viability Farm Efficiency Assets earning their “keep” Investments paying their interest New paint disease Cooperative Extension Successful Farm Transitions: Financial Viability Farm Debt Structure Long term vs. short term loans Interest rate Principal payments Cooperative Extension Successful Farm Transitions: Financial Viability Family Living Cost Retiring family Farming family Off-farm employment Farm/Ranch Size Cooperative Extension Financial Feasibility Worksheet Farm Size: Gross Farm Income (Line 11, Sch. F) Operating Expenses Farm Efficiency Net Farm Profit (Line 36, Sch. F) Depreciation (Line 16, Sch. F) Cash Available For Principal, Growth, & Family Living Gross Farm Income (Line 11, Sch. F) % Profit Margin Cooperative Extension $100,000 $85,000 $15,000 $5,000 $20,000 $100,000 20% Financial Feasibility Worksheet % Profit Margin 20% What If You Increase Family Living Expense To $40,000 & Make Term Principal Payment Of $20,000? Principal Payment Family Living Total How Much Gross Farm Income Is Needed With 20% Profit Margin? Cooperative Extension $20,000 $40,000 $60,000 $300,000 Successful Farm Transitions Business Succession Plan Can you answer yes to these questions? Are the Parents ready for a partner? How committed is the child to farming? Is the business large enough? Do you have a Common Vision of your future together? Can you live and work together? Are the non-farming children supportive? Cooperative Extension Business Succession Plan TRANSFER PERIOD Short Transfer Period older party younger party time Cooperative Extension Business Succession Plan TRANSFER PERIOD Long Transfer Period older party younger party time Cooperative Extension Business Succession Plan TWO BASIC CHOICES Multi-Person Arrangement Spin-Off Arrangement Cooperative Extension MULTI-PERSON APPROACH P Business C P&C Business P C Business Cooperative Extension SPIN-OFF APPROACH P Business C P Business C Business P C Business Cooperative Extension Business Succession Plan The Transfer Stages Testing Commitment Established Withdrawal Cooperative Extension Business Succession Plan The Transfer Process Ownership Management Divide Income Labor Cooperative Extension Business Succession Plan Testing Commitment Established Withdrawal Labor Timeline Management Timeline Income Timeline Ownership Timeline Cooperative Extension Successful Farm Transitions Income/Labor Transition Plan How will income & labor be split? Enterprise Shares Wage Combination Timeline for split income and labor Job description Cooperative Extension Business Succession Plan Transfer of Labor Testing Job description for young person? General hand or specialize in an enterprise? Commitment Established Withdrawal Each person settles into areas of work that they excel in. Equal sharing of labor, senior partner may begin phaseout. Senior partner may help out in busy seasons or no longer contribute labor. Cooperative Extension Business Succession Plan Division of Income Testing Wage only Wage plus incentive Commitment Established Withdrawal Income from wage and share of income based on capital contribution Income primarily based on capital contribution Senior partner’s income from rental of land and/or share of capital Cooperative Extension Successful Farm Transitions Management Transition Plan How will management be split? Enterprise Whole farm Farm activity (marketing) Timeline for management transition Learning or testing phase Completion date Parent/child relationship vs. business partner Cooperative Extension Business Succession Plan Transfer of Management Testing Day to day decisions. Work into one enterprise or function. Commitment Established Withdrawal Take over an enterprise or a function, such as marketing. Equal management responsibility Senior partner phases out of active management. Cooperative Extension Successful Farm Transitions Ownership Transition Plan  Gift  Sales  Inheritance/will  Timeline Cooperative Extension Business Succession Plan Transfer of Ownership Testing Commitment Established Withdrawal Buy livestock or start a share arrangement. Buy machinery Increase share of ownership --Purchase --Gifts --Inheritance Senior partner sells or gifts shares of business. Leases, sells or bequeaths land. Cooperative Extension Successful Farm Transitions Ownership Transition Plan Order of Asset Transfer Operating Inventory Breeding Livestock Machinery Buildings & Facilities Land Cooperative Extension 1 2 3 4 5 Successful Farm Transitions Ownership Transition Plan Tax Consequences Business structure Sole proprietor Partnership Corporation Limited Liability Company Trust Cooperative Extension Successful Farm Transitions Ownership Transition Plan Insurance Life insurance Disability insurance Nursing home insurance Cooperative Extension Successful Farm Transitions Retirement Plan Timeline of farm involvement Where will money come from? Where will you live? How will you account for non-farm heirs? What will you do? Your will is your contingency plan Cooperative Extension Retirement Income Options Operating heir can rent land from parents Operating heir can purchase land from parents on long-term land contract Land rental payments or land purchase payments can be retirement income stream for mom & dad Can’t pay partner land rent if land is in partnership! :-) Cooperative Extension Someday Son, This Will All Be Yours Cooperative Extension 10 Ways to Sabotage Family Estate Transfer Plans 1. Procrastinate Don’t write a will or transfer plan. Let the children worry about it after you’re gone. 2. Avoid planning or making decisions 3. Don’t discuss the subject of estate transfer. Keep information from younger family members. This is a sure way to increase family conflict. 4. Blame others for problems. Stay angry. 5. Do all you can to block the younger generation from any involvement in goal-setting or decision making until they are middle aged. Source: Fetsch Cooperative Extension 10 Ways to Sabotage Family Estate Transfer Plans 6. Refuse to listen to other family members’ viewpoints. 7. Hold on to total control of the family business. 8. Assume others know what you want. Avoid discussing your wishes about transfer with family members. 9. Make sure all your sense of worth, your identity, and life’s meaning come solely from the business. Resist transferring to the next generation. This way they have the least influence and the most stress. 10. Pay no attention to wake-up calls like a farm/ranch accident, illness, death, or major choice point by an offspring. Source: Fetsch Cooperative Extension KEYS TO SUCCESS  Strengthen Family Relationships  Improve Communication Skills  Recognize Individual Differences  Management Participation = Learning  Decision Making  Encourage Diversionary Activities  Separate Housing is Required Cooperative Extension KEYS TO SUCCESS (continued) Fit the Agreement to the Situation Develop a Written Agreement Update the Business Arrangement Make it Work Attitude Cooperative Extension Time Management Matrix Urgent Not Urgent Important I. Activities Crisis Management Deadline Projects III. Activities Some Calls, Mail, Popular Activities II. Activities Planning Relationship Building IV. Activities Time Wasters Busy Work Not Important Cooperative Extension