About This Episode
Every transition conversation at Ag View starts with three boxes: where the operation has been, where it sits today, and what a perfect world would look like. The middle box takes the most work. Chris Barron calls it discovery, and it usually turns up ownership nobody designed on purpose. One person holds 20 percent of one thing and 80 percent of another. Grandpa did it one way, Dad did it another, and the percentages just accumulated. That does not make them right, only explainable.
What shows up in practice is machinery sitting in all three business units at once, or three or four people farming together with no entity at all. That works until somebody wants out. Barron's answer is a drawing: one box per crop entity in a row, with machinery in its own box above them, trucks in another, sometimes a management business too. Each group gets a balance sheet with market value, the debt against it, and net equity. Dad may own two semis with a loan on one while a son owns a third free and clear.
Net equity percentages become shares in the LLC. If Dad holds 80 percent of the equipment and two sons hold 10 percent each, the buyout number is visible, and each son knows he is buying another 40 percent over time. Gifting covers part of it, with the annual amount between $28,000 and $30,000 per person, and sons often write the money straight back to Dad for shares. Rate adjustments help a little, used sparingly. Most families stall at the talking stage. Plan on a year, take three, and five years on nobody remembers.
“There's more complexity to this. And I think a lot of people don't go down this path because of the complexity.”
— Chris Barron
Key Takeaways
Three boxes, in order: where the operation has been, where it is now, and what a perfect world looks like. The middle one is the discovery work and it takes the longest.
Draw the structure you have before designing the one you want. If you cannot put the current boxes on paper, there is nothing to move from.
Machinery goes in its own entity and trucks in another, both above the crop entities. Commingled equipment is what makes an exit painful.
Shares come from net equity, meaning market value minus the debt attached to each asset, not from whose name is on the title.
Buyout tools include annual gifts of $28,000 to $30,000 per person, sons writing that money back for ownership, and small rate adjustments used carefully.
The attorney makes the structure legal. Ag View's part is running the conversation and supplying an outside view.
Full Transcript
Shay: Hey podcast, today Chris talks about transition and collaboration on the farm. If you've been thinking about either one of these things in your operation, give 10 minutes to listen to today's segment and let us know what you think.
Chris: Okay, so when we, when we meet with a client and talk about the possibility of transition or collaboration, First thing I want them to understand is there's 3 parts to it. The first part is understanding where you've been. So what, what went on in the past, um, as far as the business development and the growth of the operation. The second phase or the second box would be where they're at now. And inside that box of where they're at now, they may have already some separate businesses. Or business units within that, or profit centers. A lot of times though, what we see if it's a father-son operation or father-daughter or mom-son, mom-daughter, whatever, we see a lot of times, I don't know if I'd call it dysfunction, but we see a lot of chaos in there. In other words, that chaos exists because of multiple ownership of different things.
And so, you know, one person owns 20% of this and 80% of that or whatever. And there's no consistency of ownership a lot of times. And so what we try to do is understand where they're at now. So again, the first part is where they've been. The second part is where they're at now. The third part, though, is me asking them the question, if you could draw a perfect world, what would that look like? Where do you want to be? You know, and that necessarily doesn't have to do with time. It may be a, it may be a 5-year process to get there. It might be a 10-year process. It might be something that they could get done in a year or two, but it is a process going from where they've been to where they're at to where they need to go. What I like to do though is, is we look at that second stage. So you have those three stages.
I like to work on that second stage and understand So I call that the discovery portion. And that's me understanding why is it set up the way it is? Because from the outside, I can look at this discovery phase of where they're at currently and think, well, that's not very smart. Why is it set up that way? But a lot of times, you know, because of where they came from, grandpa did this and dad did that and, and whatever happened. There were reasons why it ended up being that way. It doesn't mean it was the right decision. It's just how it happened. And so what we try to do then is take them from step 2 to step 3 to get them to the next step or the next phase of their, of their organizational structure, their business structure, um, in a manner that is professional. It is well thought out and well structured for the future.
Because a lot of times what happened is where they've been, where they're going, wasn't necessarily thinking about the future. And so, so when we're doing that, it's very thoughtful with regard to where— what's this look like, you know, down the road. So in this, the second phase, I need to understand where they came from, like I said, but in the second phase, then what I'm doing in the discovery process in a little bit more detail is I'm drawing a picture of what exists. And so, for example, they may have a farm unit business that is maybe, let's say it's a, it might be an LLC or it might be a C-Corp or an S-Corp, for example, and they may not have any of that structure. They may have a mess. I see all kinds of things and I don't really care what this is.
It's understanding maybe they already have a couple of LLCs, business units, But they typically— what we see is the machinery is co-owned or commingled. Maybe, maybe there's 3 different business units and the machinery's in all 3 a lot of times. Or maybe there's, there's no farm unit, but there's 3 or 4 individuals farming together. And that's fine, probably for now, but when they transition and somebody wants out it's very difficult to develop an exit strategy. So when we get to number 3, what we want them thinking about is what, what can they do to make this system such that if somebody wants out, it's easy to get out. So for example, what I'll do is just explain our model again, and I've shown, shown a lot of pictures of it, but I'll explain it verbally here is is what we try to do is we try to, to draw a box for each crop entity.
Okay, so we'll draw these, these right across in a line. So there's 3 crop entities. What we want to do is we want to, above that, we want to put the machinery in a box, we want to put the trucks in a box, and we may even want to put a management business in the box. But for example, for the time being, we'll just say the trucks and the equipment. How we do that then is essentially we take the truck value and put together a balance sheet and we'll say, okay, what's all this stuff worth? And this is a real simple way of putting it, but what's all this stuff worth? Who has the ownership? And I don't mean ownership just in ownership, but I mean understanding that there's liability, so there's debt. And there's an asset value, so there's a market value, and then there's net equity. And so what I want to get to is net equity because, you know, Dad might own 2 of the semis and Son might own 1.
Son might not have any debt, but Dad might have debt on one of the semis. So I need his— we need their net equity to build what that business looks like. We do the same thing for the machinery and equipment. You may have 2 sons and a dad farming together, and on the equipment portion, you may have, you know, this son might own 10%, this son might own 10%, and the dad owns 80%. Well, what we want to do is understand that those percentages are net equity again, and then we move those percentages into the LLC in terms of shares. Then if Dad says, "I want out in 10 years," you figure out what that dollar amount is, and then he can step out and the sons can buy him out. Or there's gifting, there's lots of other ways, you know, there's rate adjustment. Maybe you change the rate a little bit as to what Dad and the sons pay. You got to be careful how much of that you do.
You don't do a huge amount of that, but there's, there's about 5 or 6 different ways you can do that. But ultimately, the endgame is to have the boys in this situation, if there's 3 boys or 2 boys and a dad, the 2 3 boys each have 10%, you know, they're each going to buy another 40% of the business over time to get dad bought out, you know, one way or another. Maybe dad gifts each of them, you know, dad and mom gift up to $30,000. You can gift somewhere between $28,000 and $30,000 a year now. Maybe they each gift to each of the sons and then the sons turn around and write a check back to dad for that. For that gift money to start buying ownership in that business. So that's a lot more detail than probably what we're going to put in the form here, but that's some of the process.
But it really comes down to understanding where they've been, writing that down, documenting where they're at or where they've been. It's really critical to document where they're at. What does it look like? What's the diagram of their business structure look like right now? And it might just be one box. It might be 5 boxes, but they need to identify what that looks like now, because if they don't know where they're at right now, how do you know where you're going to go? You know, and then once they can design where they're at now, then they can say, okay, this is, this is how we would like to have it set up. And then, and then does somebody want out? You know, does somebody— is somebody legitimately transitioning out, or is this just a collaboration, a long-term collaboration? And then what if somebody wants out that's not anticipated that's going to want out?
You know, what's the exit strategy for everyone involved? And so there's more complexity to this. And I think a lot of people don't go down this path because of the complexity. They talk about it. We need to do this. We need to do that. And it never gets done because they never start to tackle the process. And it has to be clearly understood that it is a process. If you think it's going to take a year and it takes 3 years, who cares? 5 years down the road. Nobody cares, but it's getting, it's getting that process done.
Shay: Podcast, if you have questions on transition or collaboration, please reach out to us at the Ag View Solutions team. You can reach us at cbarron@agviewsolutions.com. We'll talk through the next steps with you or how we can help. One keynote that we wanted to make from today Is it a good attorney is the one who makes all of this happen. We just facilitate the discussion and provide the perspective. We happen to know a few really great attorneys though that we can recommend to you throughout this process. Thanks for listening. We'll catch you on the next Ag View Pitch.