October 19, 2023
When conducting lender conferences and schools, more participants are concerned about the transition planning process of their customers. The lenders state that a transition plan is more than an estate plan which transfers the assets and develops an LLC, partnership, or corporation. Their customers say they want a quick fix for the transition planning process which often takes time, guidance, and outside assistance. Recently, a banker from the Midwest asked, “What are the first five questions that need to be answered in the transition management process of farm and ranch businesses?”
Is the business profitable?
First and foremost, is the business profitable? A three-year accrual adjusted income analysis is required. Be careful of developing a transition plan based on an income statement from a Schedule F tax form. These statements are often highly inaccurate of true profitability as a result of depreciation, expense, and revenue manipulation. If the business is not profitable, how much side income and revenue, off-farm employment, or “gig” income is needed to make a positive cash flow for the next generation?
2. Is the senior generation ready to pass the baton?
Management handoff is the next critical step. Is the senior generation ready to pass the baton? If so, in what areas and what levels of passage? Is the junior generation capable of filling the gaps left by the seniors? If so, do they have the liberty to attempt new strategies and ideas?
3. Will the senior generation continue to take a withdrawal from the business?
Will the senior generation continue to take a withdrawal from the business and at what level and for how long? On average, a sixty-year-old has one thousand weeks remaining of active retirement. This could be the equivalent of a $1 million annuity for retirement years.
4. What is the status and involvement of off-farm siblings?
Next, what is the status and involvement of off-farm siblings? How and at what level will they be compensated? Are there insurance products available for their share? A third-party facilitator can play a large role in asking questions and providing guidance in this area.
5. Are you going to hire a coach or facilitator to guide the business through the transition process?
Finally, the banker needs to know whether they are willing to hire a coach or facilitator to guide the business through the transition process, which can take multiple years. Do they see this as an investment rather than a cost?
More lenders are confiding in me that transition risk looms as probably the biggest risk for even the most successful small businesses. The potential cost is not only in money, but relationships within the family, community, and with the agricultural lender.
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