Business Of Agriculture: Common Hurdles to Success in Succession Planning

By Rick Hermonot and Jon Jaffe

Rick Hermonot and Jon Jaffe are consultants with Farm Credit East, working out of the Dayville office. Rick has been with Farm Credit for 27 years, and Jon has been with the organization for 31 years.

Succession planning is something most farmers and ranchers know they ought to do to protect the agricultural operations they’ve built and to provide for their families. Unfortunately, it’s also a topic rife with emotion and that requires sometimes awkward conversations, so it’s often postponed. Below are five common reasons why a farmer or rancher will put off their succession planning, along with suggestions to resolve these issues.

1. Giving up control. Agricultural producers work hard every day to raise the animals and crops that feed the nation. Over time, they’ve established a strategy and created processes that have contributed to their success, and it can be hard to imagine turning over the reins. As much as we don’t like to think about it, though, those reins are going to be turned over sooner or later. One way to work through this concern is to establish an LLC with the older generation as the majority decision makers, and turning over management responsibility and ownership to, the younger generation gradually over time as they prove themselves as worthy successors.
    
2. Equal versus Equitable. The question of how to treat all children equitably is a challenging one – parents want to be fair to all their children, yet often can’t see how that can be accomplished when one child is working side-by-side with their parents, taking a minimum salary for decades as profits are reinvested in the operation, and another is working off-farm, earning a good salary and building a retirement fund. The first step in addressing this issue is talking about it, perhaps engaging an outside professional to facilitate what can be a difficult discussion. For example, one way to address the issue is to separate the business operation from the land on which it sits, which is often the single most valuable of the parents’ assets. The operation can then be transitioned to the family member working on the farm, and shares of the land entity can be divided equitably among the children with the farm operation controlling/leasing what it needs.
    
3. Lack of mutual respect. Whenever generations work together, there are communication challenges. The older generation may believe the younger doesn’t respect their values, the work they’ve put in and the risks they’ve taken; the younger generation may believe that the older doesn’t respect their insights, education or the new ideas they bring. This creates a roadblock to succession planning that can be overcome with compromise on both sides. Often communication is the solution, so the older generation learns that the younger does, indeed, respect them and their knowledge, and the younger generation can learn that the older does admire their learning and ideas but is fearful of the perceived risk of implementing them. Once both parties understand that there is a platform of mutual respect, the transition plan can move forward.
    
4. Concern over affordability. Both generations may believe that they can’t afford a transition: the older may think they won’t have enough money to support them through the end of their lives, and the younger may think that they can’t afford to buy out the operation at full price. It’s no secret that many farming operations don’t see large profits as margins may be minimal and revenues are reinvested year after year to improve operations. Effective succession planning is facilitated when profitability is strong, so this is key to a smooth transition. This will give the older generation increased savings, and create a business that the younger is optimistic about taking over. Interestingly, sometimes operations are only perceived as non-profitable, or the younger generation actually can afford to purchase it; a concrete understanding of the actual financial situation is necessary to effective succession planning.
    
5. Lack of communication. Underscoring each of these hurdles is the need for open and honest conversation, but often the generations are hesitant to reveal their true thoughts because they fear judgment. The older generation may actually not want to work so hard anymore, but fear that admitting so will make them look weak. Perhaps the younger generation would prefer not to work on Sundays to spend time with their family, but fear that their father will think they’re slacking. Ignoring these issues will lead to resentment, another roadblock to planning a smooth operational transfer. The solution is to discuss needs and wants openly and honestly, sharing perspectives to create a foundation of understanding. Sometimes an outside facilitator is helpful in these efforts, at least at the beginning. Then regular meetings with established protocols support continued communication.