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Tips for Transferring the Farm to the Next Generation

This article comes to use courtesy of UVM's Across the Fence Program
This article comes to use courtesy of UVM’s Across the Fence Program

From the Editors:  Farmers are staying on the farm because, well, they’re farmers.  True, machinery has made it easier to work longer, and the economic incentives are greater than they’ve been in years.  But maybe the most important reason is that being a farmer is not just a job.  “That’s who they identify themselves as,” says Mike Duffy, an agricultural economist at Iowa State University.  He adds “They’ll leave horizontal.”

If you’re not one of those who plans to leave the farm or ranch horizontal, and you have a son or daughter interested in following you in the family business, you might be looking for some tips and hints about how to move into retirement while successfully passing on the farm.  Bob Parsons, University of Vermont Extension Agriculture Economist, specializes in helping families make the switch.  Here are his recommendations from a February 21, 2012 episode of  “Across the Fence.”

Bob Parsons in the field with the next generation of farmers and ranchers. Photo Courtesy of University of Vermont
Jeff Carter in the field with the next generation of farmers and ranchers. Photo Courtesy of University of Vermont

Numerous Extension educators and lenders have worked with farmers over the years and have seen many family farm business transitions work and many fail. From these observations, I want to present some steps that we have observed to more likely lead to a successful transition. There are some things that should occur before any family member should return to the farm to join the family business.

In phase one, they should have some post high school education. It does not matter if its business education or technical production but expanding education and exposure to others is important. Also in phase one, work somewhere else for non-family for at least a year. . It’s important to learn what it’s like to work for someone other than Mom and Dad. Another farm, away from home, even the military provides the younger generation with a different view of the world.

Phase two involves a trial work period of at least one to two years with Mom and Dad that ends with an honest evaluation by all parties. Business is business. Being of flesh and blood does not give one a right to be in the business. Deciding a business arrangement would not work does not expel them from the family. The toughest part for farm families is to separate business and family. It’s not easy but essential if the business is to remain viable. When evaluating the trial work period, you must consider spouses and other children that may be involved in the business. This can be nerve-racking if there are multiple children who want to be involved in the business and it’s obvious that they will not get along. The family has some tough decisions to make.

There are several other points that also reduce spousal and personal conflicts:

  • Have the younger generation live out of sight of the parent’s home.
  • Any labor contributed by spouses/significant others is compensated with fair wages.
  • If the business has multiple children involved, it may be best to let them own their own homes instead of being provided by the farm.
  • Keep private affairs private. What matters are affairs that affect the business.

All of these recommendations can be difficult to practice but remember we are running a business as partners, not as parent/child. If the trial period works out, it’s time to get down to the nitty-gritty of developing a roadmap for the entry of the younger generation into the farming operation.

The Richardson's, father and sons, talk about the days work at the family farm that is in the process of being transferred to the younger generation.
The Richardson’s, father and sons, talk about the days work at the family farm that is in the process of being transferred to the younger generation.

This third phase begins the path to management and ownership. This does not necessarily mean the planned departure or exit of the older generation. It’s important that the younger generation has a road map so they know what should occur when. They are on the path to business partner and possibly sole ownership. They are not signing on to be a lifetime laborer with a possible reward that they may be owner someday.

One step that is quite common is that the younger generation is given some authority to make production or marketing decisions in at least one area of the business. No one learns if they are not given the opportunity to make mistakes. It also allows them to specialize and become the expert in one part of the business. For example, the younger generation could take over the livestock production, crop production, or some aspect of the marketing.

Farmers who have experienced successful transitions say it’s important to get the younger generation on the road to ownership by allowing them to start building equity in the business. And this should be considered as part of their total compensation. Having ownership makes them realize what they are building. Paying some amount, even at a deep discount, is also reported key to understanding the role of debt in building equity.

Brothers James and Gordon own the farm jointly. Gordon's 2 sons are continuing farming, while their brother and James' daughters are pursuing other careers. Transfer of the land is the most difficult issue the family faces.
Brothers James and Gordon own the farm jointly. Gordon’s 2 sons are continuing farming, while their brother and James’ daughters are pursuing other careers. Transfer of the land is the most difficult issue the family faces.

Phase four involves advancing toward management and ownership. After a few years, the younger generation tends to take charge of at least one area of the farm business and needs to gain a view of the entire business. This often involves bringing them into the money side of the business if this has not already been shared. Get them involved in purchasing decisions, marketing decisions, and meeting with lenders. If they are to become the business manager someday, they must become aware of the financial constraints and challenges of the business. In numerous cases, we have seen farm business transitions fail at this point. The younger generation may be running the production side of the farm but have never been brought in to the financial side of the business. Some parents seem to do this due to fear of losing control. Remember, the idea is for the farm to be a viable business. To be lasting, it has to be profitable, and owners need to understand where the business finances stand. Remember, sharing does not mean stepping away. Successful transitions have a younger generation that realize the older generation has knowledge and experience that money can’t buy.

Phase five is becoming majority manager and owner. In this phase, the older generation is scaling back due to age and possible physical infirmities. The younger generation has gradually taken over more decision making and managing the business. Also by this point the generation operating the business is now a significant owner of the business. Land ownership often varies depending on strategic estate plans. What is common in this phase is to have another generation beginning Phase One. It’s also common in Phase 5 to see the older generation still active in some part of the business, either operating equipment, operating the sales center, keeping records, or serving as a reliable “walk around” manager, solving problems as they arise, from labor to mechanical to public relations.

For farms that succeed in transitioning the farm business to the next generation, there seems to be one characteristic. These phases are followed but in such a seamless manner that it’s often difficult to determine when one ends and another begins. Many of the operators in phase 5 cannot determine what year any stage began. For the older generation, they have gradually handed over management and ownership without feeling they were forced out.

Successful transitions have also kept the business separated from family. Growth is common as all businesses need to grow to provide income for additional family members. No one is holding a job just because they are family. They have a business agreement that has been followed and adjusted as needed to meet changing market circumstances.

The five phases are found to be common in successful transitions. It does not mean that this is the only way for success … but consider how they may work for you. Business transitions take more than 20 to 30 years so be sure you make it as smooth as possible.

If you’d like to see this complete episode online, click here, and scroll down to the 2/21/2012 episode, “Proper Planning for the Transition of the Family Farm.”

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Bob Parsons
Bob Parsons
Dr. Bob Parsons has been an Extension Economist with the Department of Community Development and Applied Economics at the University of Vermont since 2000. He works in the area of farm financial management, dairy farm management and marketing, farm succession and other farm management issues. He's made lots of videos about working through farm transfers and successions that you can see here:

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