Friday rewind: 4 D's, threats to farm businesses

Shay

Foulk: And it all comes down to this. 2 on, 2 out, bottom of the 9th. The Farmers lead by 1, full count. Here comes the play at the plate, and it's the Ag View Pitch! Welcome back everyone to another episode of the Ag View Pitch. Today you have Shay Foulk with Chris Barron. How's it going today, Chris?

Chris

Barron: Pretty good.

Shay

Foulk: We're, uh, enjoying some Nice wintry weather here. Not quite blizzard conditions, but good to get some snow.

Chris

Barron: It's pretty fun.

Shay

Foulk: Moisture at least. That's the positive way we need to look at it. So today we're gonna have a little bit of a conversation and it just happens that these items all start with D and whether that was by design or how it's kind of developed over time, we're looking at the 4 Ds that are threats to farm businesses. And these are very important with a lot of the operations that we see, normal operations,, that struggle with some of this in business continuity planning and all sorts of different aspects of their business. And we see this not only with operations that are doing things really well that provide threats to the business, but also operations that are struggling a little bit, whether that's transition planning, profit management, or even in particular looking at team health and family decision-making.

These 4 Ds have a huge impact, and the ones that we're going to outline here today are death, divorce, disability, and disaster. So we're going to get started with the first one. Death is obviously inevitable and all operations have to face it. We all have to face it as individuals. It's something that we don't like to think about, but it can certainly have a huge impact with farming operations and continuity planning, can it?

Chris

Barron: Yeah, the big thing with that is when it's not timely, you know, it's never timely, right? You know, it's something that everybody's gonna deal with, like you said, but you know, my quote always is, you know, what happens in your operation if you get ran over by a beer truck tomorrow? That's a kind of a lighter way to look at it, I guess. But you know, we all have to think about if we're gone tomorrow, who takes our place? What is gonna happen to the operation? Do we have Is everybody cross-training? Is everybody backed up in the operation that if all of a sudden tomorrow you're gone, everything can kind of continue on with the business and what's it look like?

Shay

Foulk: And I would hazard a guess that, you know, a lot of people listening to this conversation, when you think of death in an operation, you think of, you know, grandpa or dad, or if a freak accident happens to yourself, but it's not always the case. I mean, we have people that are key business partners that have had younger or junior partners either come down with a terminal illness or something unexpected happens and it puts the operation in a really tight spot because not only does everybody in the team, uh, have to bear with and cope with something that is almost unimaginable in some cases, now they have to figure out how to run the business and take it to the next steps. And if you don't have some of these things that we're going to talk about here properly set in place, it can be an extreme challenge.

Chris

Barron: Yeah, that's for sure. So, you know, if you, if you think about the estate planning, you know, a lot of times people think, well, you know, I'm the older person in here, and so I need to, I need to have a trust and guidance in it and all those things that we'll talk about here in a minute. But realistically, the, the true thing to consider is if you're the older partner or the senior partner in a business, you really need to be thinking about what happens if the younger person something happens to that person that's taking over the farm, you know, do you have a contingency plan in place there? Because you always think the older person's going to die first, and that's not always the case. Occasionally, like you said, terminal illness or an accident or whatever, all of a sudden that person's out of the equation.

Now, if you're the senior partner that's farming with a transition partner, all of a sudden, you know, now you're in business with their spouse or with their kids. Or with somebody else that may or may not even have a clue what's going on with their business. And so these are conversations that need to be had, you know, at the very least. And then, you know, from there it's like, you know, okay, what, what are the doomsday scenarios that we need to think through if all of a sudden this person, that person, or the other person's out of the equation?

Shay

Foulk: And not only with that estate planning of thinking about what if something happens, but having actual guidance. And something that we see operations struggle with a little bit is they say, well, I have an estate plan, but I don't want to run it from the grave. You know, what are your thoughts on that?

Chris

Barron: Yeah, well, you don't want to, but on the same token, you want to have some guidance. So I'll just give you a specific example. Let's say that you've got a senior partner in the operation that is the primary, uh, owner of a scenario. Well, all of a sudden they've got maybe a number of kids. Maybe they have one or two that's actively engaged in the operation, one or two that's not. And so, you know, what, what happens there in the trust if all of a sudden, let's say, the landholding apparatus is going to be evenly distributed between the kids, but the farm or the rolling assets and those things in the operating entity goes to the actively engaged kids. So what's to say that, you know, the other family members could just go rent it to Joe Blow down the road for a higher rent level? Or what's to say, you know, they say, I want my money tomorrow.

You know, you want to structure things in a trust with guidance that allows for everybody to get the most synergy out of an estate and the transition in the way that you'd like to see it. So it's not that you're guiding everything from the grave, but it's that you're thinking about what is in the best interest of everybody. And a lot of times in the best interest of everybody is to structure guidance with timing and with, you know, first right of refusal to buy the land back for the actively engaged people or or, you know, some kind of a guided rent level that's based off of a university average number in that area or whatever, just to structure some things, just to eliminate, you know, conflict later on when all of a sudden you're out of the equation. Because when mom and dad are out of the equation, they're the person or the people that kind of keep everybody getting along.

If all of a sudden they're out of the equation, it can get dicey without guidance.

Shay

Foulk: I would emphasize that you have to be very, very clear in outlining all of the assets and the specifics of this too. It's an emotional thing as it is dealing with estate planning. And when you throw ambiguity into that picture, now you just have a whole lot of turmoil out there on, well, what did Dad mean by this? Or what did Mom mean by this? And sometimes you have to take a step back and think, okay, what did they want for our operation? They didn't want to restrict our growth. But this ambiguity here is bringing into question what exactly it means. And particularly when you have non-involved family members that are not part of the operation, things can get sticky.

Chris

Barron: Yeah. And the key thing is, is, you know, if you're listening to this and there's somebody in the operation that needs to hear this, have them listen to it because, you know, sometimes, you know, maybe you recognize this, you're listening to this, you recognize it, but maybe there's somebody in the operation that needs to hear it from a third party. And we're a third party and we see these conflicts all the time that are potentially, could be devastating to the legacy of the operation just because of a lack of planning. And we just want to see people, you know, plan for the inevitable in this case anyway, and put a structure together and make sure that things can continue on for everybody that's involved.

Shay

Foulk: That's a great segue into the next point, which is having a will in place. And I'm going to go ahead and do a gut check with everybody that's listening to this right now. Have you updated your will in the last year or two? When was the last time you looked at it? Has it been 4, 5, 6, 7, 8 years? You know, things in a farming operation, uh, change at the speed of light. You have new kids, new partners, new business ventures, growth, or changes in the operation. If you've been thinking, oh, we need to get there and update the will, stop listening to this podcast right now and go do it.

Because if you talk to any spouse out there who has lost either a farm partner or their husband or wife as part of the transition planning, having to deal with not having a will and/or an estate plan appropriately set into place, you can physically feel the heartbreak and the challenges that go along with having to overcome some of those things that can be dealt with easily.

Chris

Barron: Yeah, and it's just one of those things that we all have to do, and it's just a discipline thing just to get a hold of the attorney and just review it, get it updated.

Shay

Foulk: And it's not at the top of your list on a to-do list.

Chris

Barron: No, it's not a fun thing, that's for sure.

Shay

Foulk: Make the time to do it. Do the important things. So this leads us into, uh, our second D. It's not necessarily a good segue to it, but the second D is divorce. And when we say divorce, we are not just talking about married couples or spouses or some— somebody that's been living together for a long time. We also mean divorce from partners in operations. So you want to hit on that a little bit, Chris?

Chris

Barron: Yeah, I mean, that's one of the things that we talk a lot about when we work with clients on collaboration or transition planning where, you know, we need to think about, okay, what's the contingency plan if we need to go a different direction? If all of a sudden two parties that are operating together have something change the situation to where it's in the best interest to go separate ways, how do you do that? How do you transition out of that? And so those are just some things that you can write up in a buy-sell agreement. A lot of times people will get in business or they'll, they'll, and I don't even call it collaboration, I call it alliance. You know, they'll form these alliances. So all of a sudden they're working together at various levels. But if all of a sudden one needs to go one way, the other one the other way, they don't really have a plan.

And then that can affect everybody else that's involved in the operation. So kind of a key thing.

Shay

Foulk: And it's not always ugly. You know, it doesn't have to be. It could just be that you went in on a joint venture and that alliance and You know, maybe you're not interested in having ownership in that hog building. So having an exit strategy to begin with is, is super important. And ultimately what we're looking to do here, uh, and another way to evaluate the divorce is protecting the business and the legacy for both parties. You know, it's not a one-way street. You want to make sure that in the case of spouses in particular, that maybe you want to have opportunities down the road for your kids and you don't want to have relationship or communication issues between you and your spouse affect the opportunities that your kids have down the road.

So one thing that I'll go ahead and throw it out there is, is kind of a buzzkill, but sometimes it may be a good fit in your operation to have a prenuptial agreement. And it's a very, very sensitive topic. It's hard for people to think, you know, no one plans on getting married to get divorced.

Chris

Barron: Right.

Shay

Foulk: You know, no one has that plan, but it's a reality. And how do you protect not only the business assets and the legacy that you're building,, but also create opportunities for kids down the road. Yeah.

Chris

Barron: And the key thing there too is, you know, if you're in an operation, I'll give you a specific example. If you're in an operation, you got say a couple brothers, cousins, or whatever farming together, they both have vested interest in an operating entity or equipment entity or trucking or whatever the profit center is. And one person is all of a sudden, you know, out of the equation or whatever, if you don't have some sort of a prenuptial agreement or something, or again, back to that buy-sell agreement, you know, you are in effect in a divorce. I mean, you're going to go two different directions, you know, kind of the definition of that. I mean, you're going to no longer operate together probably because the, you know, the wife probably has no desire to be in business with that other person anymore. So how do you get out of that? How does that person buy them out?

A lot of times we look at term life policies on the insurance side of things to cover in the eventuality something like this would happen. Or if you're parents of kids that are farming together and the spouses, and when one of them is going to leave, what do they leave with? What does that look like and what are the structures of that? And like you said, Shea, that's a really uncomfortable thing. Oh, we're in love, we're going to get married and this is all great and it's blissful. And it is, and that's awesome. But, you know, there are some business things that have to be reviewed and looked at, and it's not personal, it's professional. And it's, it's, you know, you can be in love and still protect. And it's not about those, the two people involved, as much as it is everybody else, you know. So you gotta, you gotta think about the, the why behind why, why is this important.

Shay

Foulk: Especially, uh, one thing that I want to hit on there is, you know, business partners' spouses not necessarily wanting to be in business with something in the event of a divorce and/or in the event of a death too. So we didn't hit on that in that first D. Right. Want to make sure we covered that. Right. The third D here is disability. And disability is an underlooked insurance coverage opportunity, I think, with a lot of the operations that we work with because no one thinks about being down and out for a long time. You know, you're going to farm forever, you're going to be healthy and strong. The reality is, unfortunately, that farm accidents happen and they happen at different severity levels. You might sprain your thumb and not be able to sit down and do your spreadsheets or something like that. Or it might be to breaking both legs and not being able to get up into the tractor.

And if you have a spouse or someone in the operation that maybe doesn't want to run that tractor too bad, or don't have someone that's as qualified to fill that role, you need to have additional plans in the event of disability to the extent that it's not all death and disaster, but there are levels of disability to where maybe the person's incapacitated and can't effectively make decisions for a while. There's some key things that we need to look at there.

Chris

Barron: Yeah, I've told this story to a lot of people, but I had talked to a producer last year after fall harvest and said, "Hey, how'd harvest go?" And he said, "Oh, it was really good and stuff." He says, "Especially the first 2 days were awesome." And he said, "Then I got ran over by a pickup." I was out of commission, you know, and I was like, well, how'd that work out? And he said, well, it was kind of tough because, you know, they had to get by without him in the operation and he was the key person to run and operate the equipment and do everything. So, you know, what's that contingency plan? And when you look at disability insurance and you look at the opportunities there, you really got to think through what's that look like if all of a sudden you're you're out of the equation. It's not just physical either. It can be mental too.

You know, there's all kinds of mental health things to consider. There's all kinds of other issues that we probably sometimes don't think about too, where somebody could be incapacitated mentally as well. And unfortunately you gotta have a, you know, you should have a backup plan for almost any of those eventualities.

Shay

Foulk: And I think just as important as updating the will on an annual basis or a frequent basis is what I should say is also updating a power of attorney. Because you might just be that you have a long-term hospital visit. I mean, look at COVID here. There's a lot of people that have been in for extended stays and not been able to make their decisions. And you might have people in your operation that are totally qualified to do that. If you've effectively been doing some cross-training, which is another point we're going to hit on here quickly, or if you have people that are perfectly capable of doing these operations, if you don't have the power of attorney for them to, buy your inputs or do your marketing or do some of these other things, you could face some real challenges that you don't necessarily need to.

So something you might want to ask in addition to this disability insurance topic is ask your insurance provider what would that look like? You know, what is the cost of the coverage and what would it protect in your farming operation?

Chris

Barron: Yeah, and when you talk to the insurance agent too, there are different ways to look at it and different levels of coverage depending on what the job titles are, what person does, you know, are they primarily office, are they primarily out on the farm doing physical activities? And so, you know, again, like Shay said, you know, go have a conversation with the insurance provider. If nothing else, even if you have coverage and you feel like you're sitting pretty good, that's something to review every year anyway and just look at it and make sure that you're aware of everybody that's employed and that you got sufficient coverage, cross-training, and contingency plans with regard to that.

Shay

Foulk: And Chris, someone might be out there thinking, well, you know, we don't need that disability income. If I am injured in long-term capacity, the farm can support it or whatever else. It's not necessarily about your income. It's about having to pay someone to fill in those roles. Even if it's the $10 an hour jobs or $15 an hour jobs that normally you do, it would take a whole lot of stress to have that additional income off of your other team members to fill in that role and to take some of the slack off of them in case that does happen.

Chris

Barron: Yeah, and it's really important for the key employees too of an operation. Mostly that's where there's a high level of importance here is, you know, is it the accountant? Is it the, you know, I mean, an accountant can get hurt off the job, you know, or the CFO or whoever, you know, in some of these operations. So it's just stepping back and thinking about, you know, what's appropriate.

Shay

Foulk: And with that cross-training, you know, we talk, you just need to be dangerous enough to know what you're doing and to be able to make some of those key decisions. It's not always easy to do the cross-training, especially when it's in the heat of the moment, particularly with field operations, teaching someone else to do what you do, running the books in particular. There's a lot of challenges with that, but it's definitely worth taking the time. So I think we hit on everything on disability there. The last and final D that we're going to cover here today is disaster. In essence, these are doomsday plan— excuse me, doomsday planning scenarios. And that can be financial, it can be weather. If you happen to have a derecho come through your area, or it can just be from business management. Unfortunately, we're all human.

We all make poor decisions sometimes that can have a drastic impact on the operation that we're running. And so there are some things that we need to consider when it comes to disaster.

Chris

Barron: Yeah, and, you know, I'll go to the weather one first. You know, we did see that derecho this year. The interesting part of that is that we saw, I guess, you know, some operations that were insufficiently insured, for one thing, unfortunately. And that's a difficult position to be in. You know, when you look at, say, for example, all of your structures, there were a lot of grain bins, buildings, homes, things that were basically totally devastated. And everything was gone. In some cases, everything was gone. And if you're not insured at a replacement level, you're insured at a cost level versus a replacement. Can you afford that? You know, what does it look like? I mean, a lot of people don't ever step back and think about, well, what happens if everything's gone tomorrow? Do I, you know, would I be able to survive that?

You know, from a financial standpoint, a lot of operations, it'd be very tough. It would be almost impossible to replace you know, maybe even 80% of the assets that you have in place, whether it's grain bins, you know, shop, other outbuildings, and all of the things that you have, if they're all of a sudden gone, you know, what's your insurance level? You don't want to be insurance poor, but on the same token, you want to make sure that you've at least reviewed that and said and asked yourself, what type of level of risk management do I need?

On the financial side of it too, just as an observation, We see almost every year there's a situation where, you know, the crop insurance— maybe somebody's thinking, well, I could save some money on crop insurance, or I could, you know, manage this a little better and, you know, just do a good job of marketing or whatever it is and try to save a little money. And I caution people on trying to save money on insurance because that's what keeps you in business in the midst of a potential disaster. And so you really got to run the numbers and be very careful trying to save money in an area that, that is going to keep you in business if there is a problem.

Shay

Foulk: And as I mentioned earlier, accidents happen. So not only accidents with employees or team members on the farm operation itself, but to include equipment accidents. Trucks are a huge liability area that we've unfortunately seen quite a few disasters with some clients that we've worked with here over the last couple of years. The amount of exposure and liability that you have in a disaster scenario and the steps that you take to remediate or mitigate some of that risk can have a huge impact on your bottom line and make sure that your business continues to run well into the future.

Chris

Barron: Yeah, and that's a key thing. You know, you've got some notes up here for us and, you know, I'm sitting here looking at the equipment piece and, you know, on the equipment and trucking and stuff, a lot of times those businesses are isolated as separate profit centers and then and they feed into the operating entity, which is good and everything, but it's still stepping back and saying, okay, what's the insurance scenario look like? Am I properly insured? Kind of like I just described a minute ago. The other side of that though too is if you're co-owning some things together or you're working together with somebody and you look at that insurance, you know, do you have the same insurance company? Do you have consistency in coverage?

You know, if you have a certain insurance company that you work with and your partner has a different insurance company, you hook your tractor to that other person's grain cart and then you have an accident on the road, which insurance company is going to cover it? You know, now all of a sudden, you know, you got insurance companies pointing their fingers at each other and now all of a sudden you and your partner are at odds because you don't have continuity in that business development that you've created. So when you're developing these business opportunities and you're working with other people, be really cognizant of the fact of how are these things insured? If something goes wrong, you know, do we have continuity and do we have similar coverage? And most importantly, the same insurance company. Very critical when it comes to rolling stock, for sure.

Shay

Foulk: That's a great point. One of the last things that I'll say on disaster planning, as I mentioned earlier, it's a doomsday planning scenario, right? And sometimes that can be extremely overwhelming to people 'cause there's so many factors, especially if you're an operation that has complexity and/or scale of if you are a dairy and something happens to your processing facility, where are you going with that? Or if, you know, you have a cow barn burn down, where are those cows gonna go? Or if your parlor has an issue, are you going to be able to cross-load with other dairies? Dairies in the area and you start asking all of these questions and they pile up and you get overwhelmed. Where do we get started?

What I would say to this and with any of these 4 Ds in general is if you're overwhelmed or don't have a sense of direction on where to go, just get out a blank sheet of paper and start mapping it out. Start mapping out what they are and do something. You know, having a rough estate plan, a rough will, um, you know, making sure that you maybe have enough disability insurance coverage. To at least protect a little bit of income or provide for your family and/or to have a backup in the event of a fire or a tornado or something catastrophic happens on your operation. Start small, implement the little things that we've talked about here, and it will gradually grow on itself to have a good and fully formed plan for your operation.

Chris

Barron: Yeah, the 4 Ds are not something you're going to fix in 5 minutes. There's something that you're going to fix over time. And it's something just like you said, Shea, write down the 4 Ds and then just make some notes under each one of them and just say, here's something I can do, you know, in the event of a death, here's something I can do in the event of a divorce, in the event of a disability, or in the event of a disaster, you know, and just start, you know, and again, the will is a big thing that we mentioned and there's just a lot of things to think about and We want this to be a positive thing. You know, we're not, we're not sitting here saying, oh, this is going to be really bad and you got to protect yourself because all these bad things can happen. Well, no, that hopefully none of these things happen, but it doesn't mean that you don't have a contingency plan.

It just means that you've, you've done your due diligence for your business so that your business and your legacy can continue on in the event something happens. And you don't need to spend a ton of time on this. I mean, there's people out here that help with this stuff. I mean, we work with it all the time, but you know, you can have a conversation with your insurance agent and have a conversation you know, with your family and with your business partners and fix a lot of these things without a huge amount of time.

Shay

Foulk: If you think of it on the grand scale of things, uh, in a 2,000-hour year, which most of us are pulling bigger hours than that, if you spend 1% of your time, if you spend 20 hours working on this stuff, you, I guarantee, will have 90 to 98% of everything completely hammered out and have things set up for success in the event one of these things happen. And it's no happenstance that we are having this conversation. It's 'cause these are the things that we see over and over and over. And what we're trying to do, as we always do here on the Ag View Pitch, is just provide value and perspective and give you some things to think about. If you have additional questions on this, give us a call, shoot us an email. That's what we're here for. And we want to talk through these things.

You know, there's people listening right now that I know have had experience with every single one of these things. Or one of these 4 Ds that we're talking about here that have found ways to improve what they did in their operation and are still searching for ways to improve their operation as we move forward here.

Chris

Barron: That's a good point. So yeah, if anybody needs any, got any questions or wants to discuss anything, give us a holler.

Shay

Foulk: Chris, I'm glad we had this conversation, and thanks everybody for listening to another episode of the Ag View Pitch, and we will catch you next time.