By: Attorney Michelle L. Birschbach
Simply transferring a farm to the next generation is quite easy. Successfully transitioning a farm business for the mutual benefit of all parties involved, however, is much more complicated. It takes time, planning and the weighing of a multitude of considerations.
Step One is to identify the successor. Will the farm be transitioning to family or to a third party? If to family, does s/he understand the commitment it takes to own and operate the farm business? Doe s/he have support and “buy-in” from their immediate family? Can the successor support any bank financing?
Step Two is to identify goals and objectives.
- What are the goals and objectives of the parents? Are Mom and Dad on the same page? How active do they want to be in the farm operations going forward and for how long? What financial needs do they have (i.e., what funds do they need to support their retirement)? What financial wants do they have? (i.e., those desires above and beyond basic support). Do they have any off-farm children they want or need to address?
- What are the goals and objectives of the successor? Are they expecting the farm business to entirely support them and their families financially or are they working off farm? What changes does the successor want to make to the farm business (i.e., any expansions, improvements, deferred maintenance, additional employees, and the like)?
Step Three is to determine if the goals align. Assuming the succession happened, does the farm cash flow? Banks, bills, employees, and taxes have to be paid. Mom and Dad’s financial needs (and wants) have to be satisfied. The succeeding owners goals are equally important. If the resulting succession does not cash flow then goals and objectives have to be adjusted if possible or the succession will not succeed.
Step Four is to consider and address all of the other factors that can adversely affect or successfully enhance any business succession. While not exhaustive, this may include:
- Banks and certain creditors will need to provide permission for the transition to happen or you risk being in default of your lending obligations. Banks need to be satisfied with the transition (and it’s terms) or it may not be willing to release Mom and Dad’s personal guarantees and/or issue additional debt as requested.
- An accountant must be consulted. Payments, debt relief, or even certain restructuring can have significant income tax consequences and/or opportunities will be missed. Additionally, depending upon the size of the business and the parents total net worth, federal and state death transfer taxes (i.e., estate and/or inheritance tax) needs to be considered.
- What protections should be adopted to secure Mom and Dad’s financial payments (i.e., mortgages, entity pledges, and the like)?
- How is business management being transitioned? Can the successors work together or should there be one person in charge and/or a clear demarcation of duties? Has Mom and Dad transitioned all of their knowledge and know-how to the successors?
- If there is more than one successor, a buy-sell agreement should be in place identifying what happens to the ownership based on certain triggering events. For example … Is full-time, on-farm employment a requirement to be an owner? Can an owner’s employment be terminated? What happens upon the death of one owner? Is there life insurance in place to pay debt obligations or a deceased owner’s families? What if an owner just wants out – prior to a retirement age vs. after a retirement age? How will the business be valued and what are the buy-out payment terms (i.e., cash at closing; installment note)?
- All parties should have their estate plan in place to address what happens if a party dies or is determined incapacitated. Designations to or for the benefit of off-farm children should be clearly articulated so there is no misunderstanding.
- Should any “gifts” made as part of the succession be reasonably protected particularly if a successor gets divorced? This could be accomplished with a prenuptial or postnuptial agreement or via the use of certain trusts.
- If Mom and/or Dad end up in a nursing home, how will that be addressed? Is there sufficient cash flow to private pay? Should the risk be insured?
This type of planning can be quite overwhelming because of all the factors to balance. Taking the time and expending the funds and energy to carefully address all of these factors exponentially increases the likelihood of success!
This article is provided for informational purposes only and by its very nature is general. This information is not intended as legal advice.