The Succession Advantage - Balancing the Farm Financials
Welcome back to our series, The Succession Advantage. Last month, we examined the importance of using the correct tools to improve your family’s communication – a critical step to best position your farm for continuity. This article addresses a stickier side – the financial aspects of succession. There’s the difference between what the farm is worth and what the next generation can afford to pay, add in multiple family stakeholders, some farming and some non-farming children, and it can get messy and overwhelming quickly. It’s a common roadblock, and with farms nationwide worth well into the millions of dollars, it’s enough for many to postpone succession altogether. But coming into this stage, our families have their values aligned - allowing for meaningful discussion with core family values remaining intact and at the heart of this transition.
When it comes to transition planning, it’s often a paradox between harvest and growth. It creates a dynamic between generations – often a sore spot for both – with each generation holding a unique perspective on the correlation of asset value to debt. The cash flow can also be muddy, the farm often paying for most personal expenses. This can be a point of contention if the financials are not “unmuddied” - a line drawn between business and personal expenses. A common conversation from the incoming generation is wondering why their parents need to take so much from the business each month. I also often hear, “I don’t understand why my father doesn’t get off his wallet and buy the next farm,” concerned about how their family farm will have enough land to sustain its operation when losing rented land to high values and people selling.
Financial discussions are never easy – the common theme arises that the incoming generation is eager to grow and expand operations, while the outgoing is concerned about debt and providing equalization to their non-farming children. Gaining clarity on what values align and what vision for success means is critical when entering the financial side of transition.
“You’re always going to have different views on debt or growing the farm forward,” says Neil McDonald, incoming owner of Allensite Farms, a dairy operation. “To me, I can farm with debt and still sleep at night. And that's farming right? You have to kind of be able to handle it all,” he chuckles. Neil married into the Allen family- a true, multi-generational farm family that has been on the land for seven generations and includes numerous stakeholders and shareholders. His wife, Andrea, will be the third generation to own the corporation. Before Neil and Andrea, her parents and uncle owned and operated Allensite alongside her grandfather and great uncle.
Facilitated conversation “helped to force the discussion of topics you often shy away from in the transition process” shared Kelley Allen, second generation of Allensite Farms. And through these discussions, the Allen family was able to identify and align their core values for transition: farm legacy, family harmony, and financial security. With agreed upon values, transition becomes about how one generation can enter and grow the farm business while providing financial security for the exiting generation and equality for non-farming family members. This exercise is paramount in determining the need of the exiting generation and clarifying the farm’s role in providing for it. While in this stage, we encourage families to draw the line in the sand. Treat this like a business, and most businesses need discipline in allocating expenses. This also allows families to clearly define the cash flow required to reinvest in business growth and plan to redeem one generation from ownership. Tools include:
· Income Planning: allows exiting generation to define their needs and the gap amount required from the farm to manage their lifestyle goals. The planning team can then direct the cash flow accordingly to minimize tax.
· Cash Flow Analysis: allows family business to identify areas for growth or redemption.
· Making the Best Use of Your Cash Flow: balances harvest and growth and manages the dynamics between both generations.
· Growth/Harvest Strategy: facilitates discussions and the technical analysis of exiting generation’s retirement income plan.
Kelley, who is currently set to redeem his shares over the course of his lifetime, found income planning helpful. “It looks daunting, but it was a fairly simplistic way of getting through it and understanding what your needs are currently and going forward,” he says. “It made us understand what we need on an individual basis to take care of ourselves, move into retirement, and into the future.” The farm is transitioning to Kelley’s niece and her husband, and the family’s values of ensuring continuity and family harmony stayed the primary focus during the financial stage. “You know what the farm is worth and what your shares are worth, but I think anybody going through this has to be a little bit reasonable,” Kelley recommends to other farm families as he discusses the balance. “You need to understand what is needed for you and the farm to survive.”
For Neil, coming to an agreement with the family as the “in-law”, showcased the family’s trust in him as well as their commitment to farm legacy. “Our situation is different than everybody else’s,” he shares. “But I love reading stories about other families and I hope someone reading this might like this one too. I am proud of what we are doing here, and I appreciate the family giving me this chance.”