Cooperative Extension Successful Farm Business Transition David Goeller Transition Specialist Joe M. Hawbaker Attorney at Law Cooperative Extension Business Life-Cycle IntroductionGrowth MaturityDecline Business Phase Strategic Effort Penetrate & Grow Protect & Defend New Opportunities Divest Time Source: Wadsworth Cooperative Extension Business Life-Cycle Introduction Growth Maturity Decline Time Source: Wadsworth Introduction Growth Maturity Decline Time 1st Generation2nd Generation Cooperative Extension Business Life-Cycle Introduction Growth Maturity Decline Time Source: Wadsworth Introduction Growth Maturity Decline Cooperative Extension Age of Nebraska Farm Operators Age * Adj. 2002* Adj. Under 34 13,436 22% 35 64 Over 65 Total Source: Census of Agriculture, NASS Cooperative Extension Age of Nebraska Farm Operators Age * Adj. 2002* Adj. Under 34 13,436 22% 35 64 38,030 63% Over 65 Total Source: Census of Agriculture, NASS Cooperative Extension Age of Nebraska Farm Operators Age * Adj. 2002* Adj. Under 34 13,436 22% 35 64 38,030 63% Over 65 8,777 15% Total Source: Census of Agriculture, NASS Cooperative Extension Age of Nebraska Farm Operators Age * Adj. 2002* Adj. Under 34 13,436 22% 35 64 38,030 63% Over 65 8,777 15% Total 60, % Source: Census of Agriculture, NASS Cooperative Extension Age of Nebraska Farm Operators Age * Adj. 2002* Adj. Under 34 13,436 22% 12,609 21% 35 64 38,030 63% 37,056 61% Over 65 8,777 15% 10,839 18% Total 60, % 60, % Source: Census of Agriculture, NASS Cooperative Extension Age of Nebraska Farm Operators Age * Adj. 2002* Adj. Under 34 13,436 22% 12,609 21% 8,877 17% 35 64 38,030 63% 37,056 61% 32,735 62% Over 65 8,777 15% 10,839 18% 11,311 21% Total 60, % 60, % 52, % Source: Census of Agriculture, NASS Cooperative Extension Age of Nebraska Farm Operators Age * Adj. 2002* Adj. Under 34 13,436 22% 12,609 21% 8,877 17% 5,531 11% 35 64 38,030 63% 37,056 61% 32,735 62% 33,532 65% Over 65 8,777 15% 10,839 18% 11,311 21% 12,391 24% Total 60, % 60, % 52, % 51, % Source: Census of Agriculture, NASS Cooperative Extension Age of Nebraska Farm Operators Age * Adj. 2002* Adj. Under 34 13,436 22% 12,609 21% 8,877 17% 5,531 11% 35 64 38,030 63% 37,056 61% 32,735 62% 33,532 65% Over 65 8,777 15% 10,839 18% 11,311 21% 12,391 24% Total 60, % 60, % 52, % 51, % 54, % Source: Census of Agriculture, NASS Cooperative Extension Age of Nebraska Farm Operators Age * Adj. 2002* Adj. Under 34 13,436 22% 12,609 21% 8,877 17% 5,531 11% 3,782 8% 35 64 38,030 63% 37,056 61% 32,735 62% 33,532 65% 33,390 68% Over 65 8,777 15% 10,839 18% 11,311 21% 12,391 24% 12,203 25% Total 60, % 60, % 52, % 51, % 54, % 49, % Source: Census of Agriculture, NASS Cooperative Extension Average Age of Farmer by County Under 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 BusinessAssets Succession Plan Financial Viability Goals Retirement Plan Estate Plan Estate Plan Cooperative Extension 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 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 $100,000 $85,000 $15,000 $5,000 $20,000 $100,000 20% Cooperative Extension Financial Feasibility Worksheet % Profit Margin 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? 20% $20,000 $40,000 $60,000 $300,000 Cooperative Extension 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 older party younger party time Short Transfer Period 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 PC Business P & C Business P C Cooperative Extension SPIN-OFF APPROACH Business C C C P P P Cooperative Extension Business Succession Plan The Transfer Stages Testing Commitment Established Withdrawal Cooperative Extension Business Succession Plan The Transfer Process OwnershipManagement Divide Income Labor Cooperative Extension Business Succession Plan TestingCommitmentEstablishedWithdrawal 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 TestingCommitmentEstablishedWithdrawal Job description for young person? General hand or specialize in an enterprise? Each person settles into areas of work that they excel in. Equal sharing of labor, senior partner may begin phase- out. Senior partner may help out in busy seasons or no longer contribute labor. Transfer of Labor Cooperative Extension Business Succession Plan TestingCommitmentEstablishedWithdrawal Wage only Wage plus incentive Income from wage and share of income based on capital contribution Income primarily based on capital contribution Senior partners income from rental of land and/or share of capital Division of Income 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 TestingCommitmentEstablishedWithdrawal Day to day decisions. Work into one enterprise or function. Take over an enterprise or a function, such as marketing. Equal management responsibility Senior partner phases out of active management. Transfer of Management Cooperative Extension Successful Farm Transitions Ownership Transition Plan Gift Sales Inheritance/will Timeline Cooperative Extension Business Succession Plan TestingCommitmentEstablishedWithdrawal 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. Transfer of Ownership Cooperative Extension Successful Farm Transitions Ownership Transition Plan Order of Asset Transfer Operating Inventory1 Breeding Livestock2 Machinery3 Buildings & Facilities4 Land5 Cooperative Extension 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 Cant 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 Dont write a will or transfer plan. Let the children worry about it after youre gone. 2. Avoid planning or making decisions 3. Dont 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 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 lifes 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. 10 Ways to Sabotage Family Estate Transfer Plans 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 I.Activities Crisis Management Deadline Projects II. Activities Planning Relationship Building III.Activities Some Calls, Mail, Popular Activities IV. Activities Time Wasters Busy Work Urgent Not Urgent Not Important Important