Business Planning for Your Farm or Ranch - The Organizational Structure
John had a very successful farm operation. He was committed to the work and enjoyed it. His son, Seth, also loved to farm and dreamed of taking ownership one day. Seth was a hard worker, he could do any task John asked him to do. But John never really gave Seth responsibility for managing anything. Seth was an employee and did what he was told, when he was told. Unfortunately, John got sick and never recovered. With no real training, Seth was thrust into the role of making decisions about when to do things and how to do things. What made matters worse, Seth had no experience in managing money. His Mom and Dad paid all of the bills, including most of his personal bills. In his late thirties he still basically lived on an allowance. He was horribly unprepared for what came next. As Seth struggled with on the job training, the farm began to struggle. He thought he knew a lot about farming, but he always seemed to miss some issue or another that John had just dealt with in giving orders. Poor understanding of the big picture led to bad decisions. Bad decisions led to bad outcomes and before long the farm was struggling financially.
With John gone, Seth’s mom, Kym, now the sole owner of the farm saw the struggles Seth was having. A couple of years after John’s death, at Seth’s urging, she went to see her estate planning attorney to update the estate plan to make sure Seth would inherit the farm. When the attorney looked at Kym’s financial situation, he was amazed at how things had taken a turn for the worse. The once vibrant farm operation was now barely above water. He asked her about what was happening and Kym detailed Seth’s struggles. The attorney explained to Kym that if Seth didn’t turn things around quickly, her financial future was in real jeopardy. Of course, this made Kym incredibly anxious. But she didn’t want to upset family relations so she didn’t really talk with Seth about it. Their relationship started to deteriorate. After another six months or so, and after discussing the issue with several of Seth’s siblings, Kym finally came to Seth one Monday morning and informed him that she could not bet her future on the farm. Seth either needed to buy the farm from her for the full fair market value or she would put it up for sale. She wanted an answer by Friday. Even if Kym would have been willing to finance him, Seth was in no position to pay market price for the land. The operation could never sustain it. The farm was sold to another farmer up the road. Now in his early forties, Seth was unemployed, his farming dreams were dead and he was looking for a new career. His relationship with his family was damaged, maybe irreparably.
While the names may change and the facts may be a little different, this is a story that plays out everyday in farms and ranches. Had John and Seth taken the time to create an organizational structure that trained people to make decisions and progress in their roles in a way that minimized the impact if the owner was lost, this situation could have played out so very differently.
Like any business, a family farm relies on many individuals making contributions to the success of the operation. However, there is often a lack of formality in how the organization is, well, organized. The organizational structure of the farm operation:
Provides a level of formality that allows activities of the business to be directed in such a way as to meet your goals.
Establishes the rules, roles, and responsibilities of the various players in your business.
Provides a pattern and path for the flow of information within your farm or ranch operation.
Too many farm transitions are stalled when the parent generation has failed to train the next generation on decision making in the farm operation. Giving your son or daughter the power to make decisions over time will train them both in how to make decisions and in how to delegate decision making.
Early in your business planning process, a key exercise is to prepare an organizational chart that can be referred to frequently and updated as necessary. To create an organizational chart, map out all of the key functions in the farm or ranch operation. Remember, your organizational chart should look something like a pyramid, so it is helpful to start at the base of the pyramid and put in place all of the different blocks. Then move up from there into sub-management and management levels until you reach the top block, the owners. You can subdivide your organizational chart functionally, such as production manager, marketing manager, and financial manager. Or you can divide it based on the product, such as dairy manager and crop manager.
Each block should have a person that is identified as having responsibility for that area of the operation. Looking down will tell that person who he is responsible for and looking up will tell that person who he is responsible to. In smaller operations, one person may fill many positions in the farm or ranch organization, but it is important to remember that no position should be filled by more than one person.
The organizational structure should be established with an eye toward realizing your mission and vision. It should aid in training and onboarding new members of your team. It should make clear to everyone what their responsibilities are and who they are responsible to. It should ultimately provide for the movement of the next generation into higher and higher levels of responsibility and decision making in all areas of the operation. As with everything in planning, the organizational structure should be reviewed regularly and improved. It should be a topic no less often than at the annual meeting of the company. Your organizational structure will become a key component of your farm or ranch succession plan.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.