Bruce Middaugh, Ag Country Farm Credit Services, Fargo, N.D., has helped hundreds of Dakota farmers with their succession plans. He recently replied to some questions I had about successful transitions
Q: What does a good succession plan look like?
Middaugh: First off, it's written and comprehendible by all the 'players'. Hopefully everyone has bought into the plan and is willing to do 'their end of the job'. I don't mean this in any negative comment, but many of us have seen people say and try to do the 'expected right thing', but in their soul they haven't 'gotten on board'; they won't tell anyone they just won't help with their end of the deal. The plan has a financial component to make sure it works for all players - everyone will have money to live and make their respective debt repayment and achieve their goals.
Q: What are some of the provisions that you recommend?
Middaugh: I always try to say 'what do you want?' If it's too 'pie in the sky' I ask again for a more realistic goal; but we need to steer the plan to meet everyone's goal. As the respective families' equity and net worth rise, the economics get easier, but sometimes other issues become drivers. I'm thinking families where the senior farmer doesn't want to move from the farm. I have no intention of 'moving' dad against his will, but dad may say he wants to move off the farm to meet the goals of the over all unit, but he just doesn't want to leave the farm. Income taxes are always a big hurdle, when assets are sold, there is generally a income tax consequence, of course one way to solve the tax issue is not sell, but then the progress of the transition stops/slows.
Q: Is it important for AgCountry borrowers to have succession plans in place?
Middaugh: Yes, for all farmers, not just AgCountry borrowers. I'm thinking broadly here, it would be nice if we all got to our retirement age and had all sorts of financial strength to get to our goals, but sometimes economic issues, health issues, careers plans of children, etc - change in a very surprising way. All businesses need to look at 'what would happen if I _________' (died, had a stroke, had a serious farm accident); the cows still need to be milked, the crops need to be planted, sprayed, harvested, etc. These are all very difficult issues to face, but a true manager will evaluate these risks, developed a plan and COMMUNICATE the plan to the family. Not doing this can have some very difficult ramifications to the family and farming unit.
Q: What are some common ways succession plans can be structured?
Middaugh: The answer to that question is - if I work with a 100 farmers, there are a 100 different plans. There are many different variables here; what is the debt load, what is the entity structure (there are many different tax ramifications facing a self employed farmer vs. a C corp.. farmer), what are the goals for retirement (a family member taking over the farm vs. having an auction sale and continuing to live on the farm). Along the way we always need to address the issue of fair vs. equal for the faming child and the other non-farming children.