The Four Phases of Farm Succession
Often just the idea of creating a farm succession plan is overwhelming. But just like any other big project, it is helpful to break it down into its component parts. Farm succession can really be broken into four separate phases.
Phase 1 - Determine Where the Farm is Now - Evaluating where the farm is now provides an opportunity to step back and look at the operation from a broad perspective. It can help the family determine if the incoming generation understands the operation at the same level as the departing generation. This evaluation will put the family on the same page regarding details about the operation. Finally, it helps set the stage for figuring out where you want to go.
Phase 2 - Determine Where You Want the Farm to be in the Future - Determining where you want the farm to be in the future is just a matter of setting goals with a timetable for completion. You should always be looking at where you want to go in terms of a timeline. Where do you want to be in three years, in five years, in ten years? It is important not to just think in terms of the number of years, but in terms of a specific date. We want to have Tom managing the operation by January 1, 2024, not we want to have Tom managing the operation if five years. This leads to what we call the rolling five problem, you never seem to get any closer than five years away.
Phase 3 - Create a Road Map to Get the Farm to the Desired Destination - The road map is just what you would expect it to be. It is a written document, a farm succession plan, that outlines the steps that need to take place to get from where you are now to where you want to be. The road map should take the parties through the final phase by setting concrete steps and actions. Where Phase 2 establishes a goal for completion of transition, the road map should establish a specific timeline for achievement of interim benchmarks that can be relied upon by each of the parties. The road map will set forth a schedule for regular family meetings throughout the implementation phase to ensure continued, open communication as well as opportunity to make adaptations that may be necessary.
Phase 4 - Implement the Plan – The final phase is the implementation phase. This is the phase where the planning is put into action. This phase can be broken down into four separate stages:
The Testing Stage. The testing stage is the period where the incoming owner and the departing owner work together to determine the compatibility of the relationship. The transfer process will involve the transfer of labor, income, management, and ultimately ownership. While most incoming owners have proven to be great at labor, management remains an unknown. Some great employees can never make the transition to management and ownership. The testing stage allows for the gradual transition of responsibility while the current ownership group remains firmly in control.
The Commitment Stage. The commitment stage begins when both the incoming owner and the departing owner have committed to continuing the farm operation. During the commitment stage, milestones and markers in the farm succession plan are honed and given more depth and understanding. Increased management responsibility should be placed upon the incoming owner. It is often appropriate to begin moving away from a wage-based model to a compensation model that involves sharing of income.
The Established Stage. In the established stage, the successor will be providing more of the work and will have taken on substantial management responsibilities. The transfer of assets should begin during this time. Usually, the transfer of assets will begin with equipment and livestock. It may involve the incoming generation replacing equipment as it wears out or starting their own herd. Land can often be the most difficult asset to transfer and can extend beyond the transition. This can be a time when the process gets rocky. There may be a reluctance on the part of the departing owner to follow through on prior commitments. This reluctance may come from many places including a fear of being obsolete or a fear that there is insufficient income for the incoming owner to succeed.
The Withdrawal Stage. Withdrawal is the final stage. By this point, management of the operation should be fully in the hands of the successor. A plan should be in place to ensure the total transfer of assets. This may occur over time, but it should be locked in order to eliminate the possibility that “the rug” can be pulled out from under the incoming owner. Estate plans should be updated as necessary to reflect any changes that have occurred, and all other legal documents should be in place. As part of this process, a plan should be in place to deal with the possible long-term care needs of the departing owner. The departing owner moves from management and ownership to complete disengagement or a more limited role as an employee of the farm operation.
As your family moves through this process, a Farm Succession Coordinator can be a valuable member of your professional team. The Farm Succession Coordinator is an independent neutral that works with a farm family to help manage and direct the succession process, but not the outcome. While the coordinator is responsible for shepherding the family through the process, the family is still responsible for the outcome.
A good coordinator is like an experienced guide that will help the family work through defining roles, establishing goals, and creating a process that will lead to the family's desired outcome. The coordinator is there to help establish the road map, or game plan, and then help the farm family put a team in place that can execute the plan. If your farm family is stuck, consider utilizing a certified Farm Succession Coordinator to assist you in taking the next step toward successful farm succession planning.
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.