If you took our quiz on page 36 of the July/August issue, you no doubt caught us at times with tongue firmly in cheek. No, we really don't expect you to bring your children back to farm so you can spend more time on cruise ships! However, there's nothing wrong with bringing a little levity to the often difficult topic of running a business with family members.
Truth is, wanting to bring generation two into the farm business is easy; succeeding in converting a sole proprietorship farm into a multi-generation business is challenging. Success takes planning, plus a huge amount of give and take among players in both generations.
No doubt you found the "wrong" answers to our Farm Futures quiz pretty quickly. They are easier to identify than correct answers because every farm business is unique, with a unique cast of actors.
The key is coming up with a business plan that fits the needs, attitudes and skills of all the players. A plan that generates adequate cash flow but does not satisfy the family participants will fall short of ideal. Whether it's a two-family farming business or a multi-national corporation, participants need job satisfaction, in addition to financial compensation, to feel like they are contributing. Those are both pre-requisites to getting top performance from all players.
Here's our take on the quiz. "Best" answers are in bold.
Is generation one ready for a partner?
- Mom and dad are expanding. They want someone to manage the new direct marketing division.
- Mom and dad want to ease into retirement. They're willing to turn over both responsibility and authority to make decisions.
- Mom and dad want somebody to do the work on the farm while they spend most of their time on cruise ships.
Our take: Sharing workload typically appeals to parents. But the new person is not a hired hand. After years of calling the shots, are the parents ready to begin turning over management decisions, control, income and ownership? Sharing business income may lower their standard of living.
Is generation two committed?
- Junior, who is single and a recent business school graduate, wants to expand the farm.
- Junior's new bride sees junior's family farm as having a lot more potential than the farm she grew up on.
- Junior's new bride sees junior's family farm and recent ag prosperity as a way to get rich quick.
Our take: All players must see the farm as more than a cash cow. Whether the person in the younger generation is married or not married, uncertainties exist. If the younger generation is not married, is the younger party committed to farming? If not married, use caution. Your cast of players is incomplete. Some chance exists an eventual spouse may not like farm life. If married, does the spouse like farm life? If married, adding another family to the operation may result in a larger cash flow draw for living expenses than adding a single family member.
If doubts exist on commitments, avoid co-ownership of property. A testing stage using an employer/employee arrangement would be easier to terminate.
3. What is your future together?
- Mom and dad plus junior and wife are discussing who will specialize in doing what functions moving forward.
- Mom and dad want someone to take over the heavy physical work load.
- Junior and wife want to push mom and dad out of the way as soon as possible so they can run the farm their way.
Our take: What do you want to accomplish with the business and business arrangement? Do family members have a consistent vision for the business? Only after a careful examination of each party's goals can a family begin to formulate a common vision for the future of the business. The collective goals of all parties will guide the family in developing the business and the proper process for transferring the business. Spend time defining your goals and discuss them with other family members. Suppose conflicts in goals arise. Reconcile them before you commit.
4. Is the pie big enough?
A. The farm currently generates enough net income to support living expense withdrawals of two families.
B. All proposed players are working on an expansion plan to generate enough additional income to service the debt needed to expand, plus support two families.
C. Junior and wife expect mom and dad to equally split current income with them.
Our take: Assuming no immediate growth, mom and dad may not be able to make a 50/50 split. To succeed, a multi-generation business arrangement must be financially sound. The business must:
- Provide the parents with a desired standard of living
- Provide for their economic security during retirement
- Meet the younger generation's living needs
- Generate adequate debt servicing
- Provide capital to grow the business and equity.
5. Are people compatible?
A. Dad and junior have been working together since junior was in grade school. They get along fine.
B. Junior's wife grew up on a neighboring farm. She and Junior's mother share a common work ethic, family, social and religious values.
C. Junior's wife's parents and siblings always come first when junior's wife organizes family activities.
Our take: People relationships are critical to the success of any two-generation business arrangement, both in a family and non-family setting. If the people relationships don't work, the business arrangement won't either.
Families that work together in a spirit of harmony and cooperation are more likely to succeed in business. Mutual respect among parties is important. Problems can arise on housing, spendable income, labor commitments and life styles. Joint participation in managerial decisions, and compromises when needed, are musts for a two-generation arrangement to succeed.
6. Where do other family members fit in estate plan?
- Mom and dad are planning ways to leave non-farm assets to off-farm heirs.
- Mom and dad plan to leave everything equally to their children and let junior figure out how to manage it.
- Mom and dad are devising ways to value junior's contribution and factor that into their estate plan.
Our take: The family needs a plan to eventually shift managerial and financial control to generation two. Magnitude of this issue depends on the nature and size of the business, number of heirs involved and number of years before the parents retire.
Business plans should provide for fair and equitable treatment of other heirs and financial security of the parents. Avoid agreements that unduly favor one family member. Suppose mom and dad have three children. For the last 20 years, two have been working in distant cities. The third has been working on, and helping grow the farm.
Parents typically want to form estate plans that are fair. Fair may not be equal. One approach might be to divide the value of the estate before junior joined the operation equally and split the gain after junior joined, more heavily in junior's favor. Another approach is to value how much junior and his wife contributed to the operation over the last 20 years and then increase their share by that amount.
Formulating a fair asset distribution plan is not easy. A worse move is doing nothing.
Road test the plan
One of the best ways to find out if you have a situation that will flourish in a multi-generation arrangement is to farm together. Testing an arrangement before entering into a more permanent business structure is wise. If you have not tried to farm together, or have done so only on a limited basis, consider a two or three year trial period.