Farm and small business transition and succession: Now is the time!
Nearly all operators of farms and small businesses aspire to pass them on to future generations, but many keep putting it off until it is too late.
As a Michigan State University Extension dairy farm business management educator, I have worked with dairy farm families for more than 30 years and observed something nearly unanimous among all farms: the most important goal is to pass the farm business to the next generation. Even though most farmers and small businesses have this intense desire, research studies and surveys consistently show most fail to make adequate plans to achieve this important goal. A Farm Journal survey found 80 percent of surveyed farmers plan to transfer control of their operation to the next generation, but only 20 percent of them were confident their succession plan would achieve that goal. An Iowa State University study showed 50 percent of farmers did not have an estate plan and 71 percent of retiring farmers had not identified a successor.
These statistics make it no small surprise that the Small Business Administration reports less than 33 percent of family-owned businesses survive the transition from the first to the second generation and only half of those making the first transition survive the transition from the second to the third generation. This means only about 16.5 percent of family-owned businesses successfully survive to the third generation. A USDA study also predicts about 70 percent of the farm land in the U.S. will change hands within the next two decades. The average age of the U.S. farmer is now over 57 years old. And, from 2002 to 2007 the number of U.S. farmers age 55 and older increased by 17 percent while the number under age 45 decreased by nearly 21 percent. The bottom line is inescapable: more and more farms will be transitioning to the next generation soon.
The landscape is also changing a variety of factors that impact passing the farm or small business on to the next generation such as inheritance and tax laws, an increasing variety of estate planning tools, new types of business entities, skyrocketing land values dramatically increasing estate values, fewer farm children choosing to return to operate the family farm, increasingly stringent environmental rules and regulations, and the fact many retirees in this day and age will spend a quarter – or more – of their life in retirement. All of these factors dramatically increase the importance of farmers and small businesses formulating a farm/business transition and succession plan.
Developing and implementing a viable farm/business transition and succession plan is a major undertaking and should not be taken lightly nor without professional assistance. Developing a viable and comprehensive plan is a challenge because it requires farmers and businesses to wade through a wide variety of laws and regulations and involves something we all resist: change. But, perhaps the greatest challenge is that it involves and requires communication between family members about topics many find very difficult to discuss in an open fashion: death and finances. With this emotional stress it is no wonder there is a great deal of resistance by many farmers and small businesses to develop a transition and succession plan.
The stakes are just too high not to develop and implement a plan. Your death is a certainty. When that occurs, your estate will be passed on whether you like it or not. Even if you plan on your heirs continuing to operate the farm or small business, if you don’t develop and implement an adequate transition and succession plan your heirs may be doomed to failure as they are forced to liquidate assets in order to pay taxes and fees. Lack of planning may also set them up for failure as they are forced to partition assets to satisfy any non-farming heir’s desire to “cash in” their share of the farm or business. Most people also fail to realize it is critical for their transition plan to address the capability of the next generation insofar as the day to day operation of the business is concerned. If your transition and succession plan does not adequately address this issue failure is almost certain. A written farm/business transition and succession plan is also an important instrument for your lender(s). Lenders are much more likely to lend needed funds if your farm or small business has a written and well-thought out plan.
Finally, farm and small business transition and succession are undoubtedly a potential source of conflict among family members. Many families have been torn apart as the farm or small business passed from one generation to another. The existence of a written farm/business transition and succession plan may not prevent this from happening. However, the more time and effort you spend in allowing all of your heirs to provide input into your transition and succession plan the more likely that transition and succession will be a triumph rather than a tragedy. A Farm and Small Business Transition and Succession Planning workshop will be held by Michigan State University Extension in Bad Axe this August.