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About This Episode
Chris Barron records this one alone, laying out ten transition and succession steps to think through during fall field work. Step one is naming your team: a CPA who understands the operation, a thorough attorney, a lender, a financial planner who can tell you what income you need to step back on, an insurance agent who knows the whole structure, and an ag facilitator to keep those advisors talking to each other. He suggests keeping a backup lender on the bench.
Steps two through five are documentation. Write the vision for the next five to ten years and test whether anyone else in the operation can state it. Pin down three or four core values, because those become the basis for hiring and for termination. Draw your current structure on a large sheet of paper, every corporation and LLC and who owns it. Then draw the ideal one: an operating entity for the incoming generation, a trucking entity with its own account and insurance, and a machinery company billing per acre.
The rest are gaps and governance. Review the will every year. Look for a missing buy-sell agreement, thin life insurance, and a trust that puts land in but never says whether the farming child keeps farming it. Separate family governance from business governance. Expect tax law to change after trillions in federal spending. Then communicate on a schedule. Barron cites the Family Business Institute: 30 percent of family farm businesses reach the second generation, 12 percent the third, 3 percent the fourth.
“So you have to make business decisions while at the same time being family and governing each differently.”
— Chris Barron
Key Takeaways
Only 30 percent of family-owned farm businesses reach the second generation, 12 percent the third, and 3 percent the fourth, per the Family Business Institute figures Barron cites.
Your team is six roles: CPA, attorney, lender, financial planner, insurance agent, and an ag facilitator whose job is keeping the other five aligned.
Three or four written core values give you a defensible basis for hiring and for termination, and screen out people who would not fit before you hire them.
Draw the current business structure on a large sheet of paper. Barron says partners and employees regularly say they had never seen it that way until it was drawn.
In the ideal structure he maps a separate machinery and equipment company that charges each operating entity on a per-acre basis, and a trucking entity with its own checking account and insurance.
Guard against the four D's with a current buy-sell agreement and adequate life insurance: death, disability, divorce, and disaster. Review the will every year rather than the five or six years he typically sees.
Full Transcript
Narrator: And it all comes down to this. Two on, two out, bottom of the ninth. The Farmers lead by one. Full count, here comes the play at the plate, and it's the Ag View Pitch!
Chris: Welcome everybody to another episode of the Ag View Pitch, and today you're going to deal with just Chris Barron here. Uh, we did want to spend a little bit of time here talking about a subject that we continually run into as we work with producers on cost production analysis and collaboration and those kind of things. And that's the topic of transition and succession planning. And so what we run into a lot of times is, is, you know, just asking the question with growers, what's working in your operation first of all, and then what's not working in the operation. And it's always interesting to to get those things out on the table. And a lot of times there's just dynamics that have to do with just the succession of the farm, keeping things going, good communication, and those sort of things.
So what I wanted to do is just kind of point out, you know, the obvious things that come up are, you know, marketing and, and, you know, labor management and keeping everybody working, or access to the labor market and, and being able to afford the labor and that kind of thing, and manage the, the people and everything. The other thing is the obvious challenges with the financials, the cash flow, and those types of things are always a big deal. And then obviously recently the big deal has been COVID-19, just the uncertainty of what's going on in the economic environment. And so a lot of those things in particular since say 2013 and the commodity prices have been lower, there's just been more challenges in keeping things to cash flow and those types of things. A lot of operations have lost track of the succession or the legacy or where is this business going.
And so what I want to talk a little bit about here for a few minutes is just when you're out in the field or when you're out running around here this season, just want you to, to spend a little bit of brain power thinking about what is the vision of your operation, where is your operation going, in the next, you know, 5, 10 years, and what does that look like? And so what I want to do is go through kind of 10 key topics or activities that I'd encourage you to think about during the fall season here as you work through— if you're listening to this in the fall season here as you work through field work and those types of things, and you got plenty of time to think. So let's get started. The first thing that I think you need to think about doing is identify who is on your team. And so what I mean by who is on your succession and transition planning team is, first of all, your CPA.
So do you feel like you have a good CPA, somebody that really can understand your operation and has, you know, sufficient capacity to be able to make sure that you're making the best tax decisions possible? The next one is having a good solid attorney, somebody that understands the operation, somebody that, that doesn't overdo things, but on the same token is very thorough and comprehensive in their approach as to how they look at your operation and where you're going and how you want to map things. The next one is the lender. It's oftentimes operators have really good lenders, sometimes not as good a lender as they would like, and it's okay to be out looking around have a lender on the bench. So just identify who that person is. The next one is a good financial planner, somebody that is able to understand the financial decision-making of your operation.
But even more importantly, what do you want things to look like in the future? You know, what if you're one who's going to be transitioning out, say, in the next 10 years? What amount of money do you need to make? How, you know, where's that, those funds going to come from? And can you justify bringing the next generation in and still have enough money to support, you know, both generations in the operation and maybe some employees along the way. The next one as part of your team is an insurance agent. Think about, you know, the insurance coverage that you have. Does your agent understand your entire business structure and the exposure you may have if some key person in the operation all of a sudden was I always use the expression ran over by a beer truck, but if somebody was, you know, taken out of the operation, what's that look like?
And do you have, you know, some term life coverage and those types of things to kind of bridge the gap from one problem to a solution? And then the last thing is an ag facilitator. And what I mean by an ag facilitator is somebody that can kind of help bring all of those people together that are on your succession and transition planning team just to make sure that there's continuity in communication between the CPA, the attorney, the lender, the financial planner, and everything with that regard. So, so that's number 1, identify your team. Number 2 is document your vision for the business. And so this is something that a lot of times I'll ask an employee, what's the vision of the operation here? And they'll just kind of give you a blank look. Well, I don't know. So ask yourself, do you first of all know what the vision of your operation is?
And second of all, does anybody else in your operation know what the vision is if they were asked? If they're not, obviously that's probably something you need to be thinking about. Something that you could do in the off season is write down your vision. Write down, where are we going? What's the direction of this operation in the next 5 to 10 years? What's that look like? And involve your family and employees and those close to your operation and help them work through that. Have a conversation around that. Those are things that we can help you with, but just wanted to bring that vision and how important that is up. Number 3 is determine and document your business core values. And so this is one that's real important as well. Because this is how you hire and fire. Okay, so sometimes people will come to us and we'll say, okay, what's not working?
Well, we're having this issue with this employee or this family member or whatever, and they're just not acting the same way that the rest of us want to act. And a lot of times the problem is, is there's never been a sit-down meeting where people bring out and establish their core values. And so there's all kinds of tools online that can help you work through identifying what your core values are. They're within all of you in your, in your business and your operation, but the key is to sit down and map them out. And again, that's something we can help you with, but it's also something that, again, you can go online. There's all kinds of tools for identifying your core values and bringing them out. And then once you have 3 or 4 core values, say maybe it's honesty or motivators or whatever, your core values are, 3 or 4 keywords.
And then when you bring somebody into the operation, you probably never hire them in the first place if they didn't meet your core values, or if they violate your core values, you have grounds for termination. And so those are just some key things to be thinking about. Number 4, map your current business structure. And so this is something that we do when we meet with our clients. One of the first things we do is we say, okay, tell us a little bit about your history. And so sit down and just kind of map out and think through your history. How do we get to where we're at right now? Okay, once you know where you're at right now, then you can say, all right, what's this look like currently if we draw this out? So literally get out, uh, one of the, the big, you know, tripod, tripod papers, one of the big ones, and literally draw a picture of what your business structure looks like right now.
Maybe you have a C corp, maybe you have an S corp, maybe you have a couple of LLCs, maybe it's just a personal operation with an LLC or whatever it is, but literally draw that out, map it out, and look at it and make sure that whoever is involved with you in the operation is looking at that as well. And so that they get a picture of what they see. Oftentimes when we do this process with clients, there'll be 2 or 3 people, either employees or partners or family members, that are sitting there looking at the— looking at what we've just drawn And they're like, well, I never looked at it that way. Well, it's because a picture's worth a thousand words, okay? So you can talk about we have this and we have that and we have the other thing, but draw it out, draw a box and say, you know, this is our C corp. And then who are the owners of this C corp?
Identify those things and write them out on a big sheet of paper so that everybody can see the same thing. And it turns the light switch on on your business, okay? Number 5, which is tied to this, is map your quote unquote ideal business structure. If you were to draw a picture of your perfect world, what would that look like? Okay, well, that's really the next step, because if you want to transition or have a succession plan that's successful, it's time to map out what would you like to see. That's part of your vision. Okay, so it's drawing out, okay, maybe Junior's coming into the farm and Junior needs to have Junior's own LLC or own operating entity, and so It's drawing out that operating entity for the next person, or maybe it's an employee that needs to have a segment of the operation, and then how does that flow?
And some other things we look at are, you know, do you have a trucking entity that's separate? A lot of operations do, but a lot of times they aren't always thinking through all of the important key points like, you know, having its own checking account, having its own insurance, having you know, literally having it be a separate business structure. And so those things become apparent when you start to map out what an ideal world would look like. We also like to structure a machinery and equipment company that charges on a per-acre basis to each of the operating entities. And so that's really a key thing. And just, just some more details that we won't get into a lot in this podcast, but map out that ideal business structure, what that looks like. Number 6, review and update your will. This is a real quick one. When's the last time you looked at your will? A year? 2 years? 5 years?
10 years? Sometimes, sometimes, uh, I don't have one. Well, that's okay, but get on it. This is one of the real important ones that we see missing a lot of times, or one that's not reviewed oftentimes, probably 5, 6 years as an average. Well, Reviewing the will every year is really a key activity. Number 7, look for gaps in your current plan. You know, so what do I mean by gaps? I'm just going to throw a couple of key things out there and ask you, do you have a buy-sell agreement? What's that buy-sell agreement look like? What's the last time you looked at the buy-sell agreement between the entities or between the family members? You know, maybe you've got owners that are not actively engaged in the farm. They don't know what's going on on the farm. And maybe somebody says, I need cash, or we need to do something different here.
And all of a sudden, you know, you, yeah, you get a black swan thrown at you from another family member. So lack of a buy-sell agreement, uh, is a key one. Insufficient life insurance. What happens if somebody is killed in the operation or disabled? Or what if there's a disaster? What if there's a divorce? Okay. Think about what things can you get insurance for. Some things you can't get insurance for, but back to the buy-sell agreement, you can cover issues, uh, with those 4 D's that I just described— divorce, disaster, and, and those types of things. So be thinking about that, you know, death and disability. Those, those 4 things, those 4 D's are really critical. And then Also, outdated will or trust. A lot of times what we see is, you know, the operator will say, yeah, I have a trust. Well, what is the guidance of the trust? Well, I don't know, I just have the land going into a trust.
Okay, well, there's, let's say for example, there's 3 kids. There's 1 kid farming, the other 2 are not actively engaged in the farm operation. Well, what happens when mom and dad are gone? And that land is in a trust, does that actively engaged person get to continue to farm it? Do they not get to continue to farm, or what's that look like? You know, so a lot of times the trust is established, but then there's not clear enough guidance, or it's not current enough. So maybe there was two brothers farming together, one of them leaves the farm, now there's only still one left there. So as things change, you have to keep this succession and transition plan, uh, you know, alive. It's a, it's a living, breathing document and a living, breathing process to make sure that you stay current with all that. Um, number 8, define and document your family governance versus business governance.
Okay, that is a key one. All right, you know, how you make decisions with the family and how the business decisions are made are entirely different. If anybody listening to this wants a guide on this, I would be more than happy to send it to you. There's tons of stuff online though too, and there's other companies out there that work specifically on that if you have a very difficult time with family. Sometimes family is the issue, and it's a governance thing, and it's managing the farm operation as a business. Just because your last name is the same as Dad doesn't mean you get something over somebody else if if it's not the right thing for the business. So you have to make business decisions while at the same time being family and governing each differently. Number 9, stay current on tax law changes.
This is something that with where we're at right now, we're right in front of an election. Maybe when you're listening to this, election's already over. It doesn't really matter who is in charge or who the president is or which administration's there. With the amount of trillions of dollars that the United States government has spent, there will be changes in tax law. There will have to be. And so stay very current on that, and the structure of your business may need to be different than it is today. And so just be aware of that. Number 10, the last thing: communicate the details of your— to your family. Okay, this is probably next to identifying your team. Probably the most important thing, communication. Talk this stuff through with your family, with everybody that's in your operation, and have some regular meetings.
Have an annual or a biannual or a quarterly meeting to communicate where this process is at. Not just how are things going on the farm annually, which is very important, how are things going in the business annually, but okay, next order of business, Where's this thing going? What's our vision? What are our core values? Where are we at? Uh, just some key things, and hopefully this is helpful. Again, a real quick review. Number 1, identify your team. Number 2, document your vision for the business. Number 3, determine and document your business core values. Number 4, map your current business structure. Number 5, map your ideal business structure. Versus what your current structure is. Number 6, review, update your will. Every year should be reviewed. Look at, look for gaps in your current plan. Uh, number 8, define and document your family governance versus business governance.
Number 9, stay current on tax changes. And number 10, communicate the details to your family. Very important. Hopefully this was helpful. I didn't want to make a real long one, but I want to make sure that when we talk to farmers, as I said in the beginning of this, every single time either the lack of or insufficient planning and transition is one of the key things. And if you think about it, you know, according to the Family Business Institute, 30% of farm family own businesses survive to the second generation. Only 12% of those same family operations or businesses make it to the third generation, and only 3% survive to the fourth generation or beyond. And what we want with our clients is we want our clients' legacy to continue on. We want the farm to go on, we want you to be successful, and we want you to, to be able to plan for success and have a happy family for farm life.
So with that, that's all I've got for today. Hopefully this was helpful. If you have any questions, please give either myself, Chris, a call. 319-533-5703 is the best way to reach me if you have any questions on any of this kind of stuff and just want to talk through things. Let's just have a conversation. Also feel free to call Shay if you want to get a hold of him as well. He can talk through these things with you as well. So Again, hopefully this is helpful and we look forward to talking to you next time. Thanks for listening and we will catch you again next time on the Ag View Pitch.