Business sales to nonfamily members are more successful than business sales to family members. That fact does not sit well with Wesley Tucker, University of Missouri Extension field specialist in agricultural business.
“I think this transfers over whether we're talking about the family farm or whether we're talking about any type of small business on Main Street,” he explained during MU’s Engaging 4MO webinar. “It's all the same. How do we transition this small business to the next generation?”
Small Business Administration data shows that businesses sold to nonfamily members have about a 70% chance of going on and being successful. “But if that same business goes through a family succession, without being sold, that success rate drops to 30%,” Tucker explained. And the third-generation success rates are about half of that, between 10% and 15%.
However, proper succession planning, Tucker said, gives the next generation the best chance to be successful and survive. Still, it is a complex task full of questions surrounding how to transfer management, and the big question is, why is it so hard to turn the farming operation over to the next generation?
Start a succession plan
There is not a Staples “easy button” for succession planning, Tucker said. The entire issue is complex.
It deals with goal setting, family communication, business planning, retirement and management. However, he says the "it" begins where most people stop — a plan.
“There are the no-planners,” Tucker said. Ask these people if they have a succession plan, and they answer no and justify it with “I’m just not going to die,” he said, “or maybe they don’t intend to get out of farming, or maybe they’re one of those who plan to spend every last cent before they die.”
Tucker said, in farming, most people are not that way. They want to see one of their heirs take over the family farm. “But if you don't have a plan for that,” he warned, “how are you going to make that work?” He said often the very idea of transferring ownership — part or full — is met with reluctance.
Difficult to turn over farm
Tucker said there are many reasons why it is hard for farmers to turn over the operation to the next generation.
“One is, we pour everything back into the business,” he said. “We don't save back money for retirement, so it's hard for us to quit because we don't have anything to live on if we do.”
Another reason is as individuals we tie up a lot of our self-worth in the business. “That's what makes us feel like we are important and valuable,” Tucker added.
And there is the aspect of control. Farmers don’t want to give up control, even to family. “It's just really, really hard for us to give up control of what we built up over to someone else,” Tucker said. He added that many in the older generation say, “He’s just not ready yet,” when referring to the next generation.
He likened it to a true story he heard from John Baker, founder of the Beginning Farmer Center in Iowa. He shared about a senior farmer who was reluctant to turn over management control. The farmer kept saying, “My son is just not ready.”
Then Baker asked the man, “Well, when do you think you'll be ready.” The farmer replied, “In another five years, I think he should be ready.” Tucker said the senior farmer in the story was 96, and his son 72.
“The reality of this situation wasn't that his son wasn't ready,” Tucker said. “It was that the senior farmer just wasn't ready to let go.”
Nonfamily transfers work
The difference between the nonfamily succession rates and the family succession rates is mostly communication because they discuss the details.
“If I am not your son or daughter, and you are going to transition this business to me, we're going to sit down, we're going to write out a business agreement, we're going to talk about when am I going to get paid and what part of the business am I buying this year,” Tucker said. “That's all going to be spelled out in business agreements. Why don't we do that with family?”
The reason: personal feelings. Family needs to communicate, talk about all these details and adjust when necessary, he said.
Plan before too late
Unfortunately, Tucker routinely gets calls that ask how soon he can come to the farm — Dad’s just been diagnosed with stage 4 colon cancer.
“That's not when succession planning needs to start,” he said. “Succession planning needs to start early in how we develop our kids, how we develop them to make decisions and learn to be good managers. We really want to make sure that we're communicating with everyone, not just the kids that want to come back and take over, but also those that aren't because the more communication we can do, the more seamless this process will work.”
He says farmers need to develop a road map and start moving down the path to reverse the trend and make family farm succession successful.
“It doesn't have to be that the older generation has to completely quit for the next generation to move into the business,” Tucker explained. “What we want to do is create a succession plan with actual goals and timelines, of how we're going to get through each of these steps, from where we are today to that finish line.”