Would you be OK knowing that after you pass, your cattle are sold, your machinery is auctioned, and your kids list the farm on their way home from the funeral?
Out of thousands I’ve asked, no one has said yes. We all want our legacy to live on through our kids and grandkids, continuing the family business we began or inherited from those who went before us.
But as I work with families, I’m encountering more and more producers who are beginning to ask, “Is the farm or ranch a business asset or an inheritance asset?”
It’s a very tricky question. Often it depends on how important it is to you that the “business” continue.
Focus on the business
Consider the farmer who contacted me with 1,500 acres, 500 cows and four kids who all had successful careers and no desire to farm. Some liked to hunt on the land, but they had no desire to feed cows. He knew what would likely happen to at least part of his successful operation as soon as he passed away — the farm would be sold.
After settling on a 10-year plan, I worked with him to devise a creative compensation package whereby the two trusted employees could each earn 2.5% of the cow herd each year they remained part of the operation. In 10 years when the farmer wanted to retire, the two employees would collectively own 50% of the cows and could get a loan to purchase the rest.
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The farmer decided to leave the land to his four kids, but with a guaranteed lease to the two employees for the next 20 years.
It was important to the farmer that his cattle business continue beyond his death, so we made a creative plan to give it the best chance possible.
Struggle for succession in agriculture
There is a difference between estate planning and succession planning.
Estate planning decides how you want your “stuff” divvied up after you’re gone. Succession planning is about giving the business the best chance to be successful in the future — and making you consider sensitive issues such as financial viability, debt load and fair vs. equal.
One is about the assets, and the other is about business continuity. Holding onto the farm as a business can be a struggle.
Farming and ranching do not generate a lot of cash, but rather, they build wealth over time. However, it is very difficult for one sibling to hold the operation together by buying out the other siblings and remaining financially viable. There just isn’t the cash flow.
It is different from other businesses like a family dry cleaner or hardware store. For instance, if the business is financially viable, the son or daughter who works in the business simply takes over and uses the profits from the business to purchase the parents’ shares while they are still living. Rarely do we have to argue about fair vs. equal with the family dry cleaning business.
But unfortunately, high land values are forcing farmers and ranchers to choose whether the farm or ranch is a business asset or an inheritance asset.
Treating the farm as a business asset has producers asking for alternatives for their future plans. I believe this is creating a growing opportunity for young people who would like to farm.
Admittedly, it’s easier in theory than in real life. Most ag states have a dating site for older farmers looking for successors and vice versa. Building those relationships is hard and takes a lot of communication. But I’m seeing more and more operations get creative with nonfamily members, so their business can continue into the future.
