Succession planning is going to take time and dedication. Use this three-step plan to roll up your sleeves and get to work on your own operation
As you will recall, in part one in this series on succession Faith and her husband Juan Tafarm called us, frustrated with the lack of progress on the succession plan for their family farm business.
We have seen the most success in business transition when one of the generations takes the bull by the horns and drives the process. Part two of this series will focus on the numerous business considerations for the younger generation in preparing a potential offer to the retiring generation. This article may give the older generation some insight into the younger generations’ concerns and priorities.
Clarence S. Darrow was arguably the most famous trial lawyer in the U.S. in the 1920s. He once said, “The first half of our lives is ruined by our parents and the second half by our children.” This reminds us that although it is crucial to focus on our own priorities, we have to consider others’ priorities as well. This is especially true in a succession plan where both generations have a vested interest in the other party being pleased with the outcome.
The decisions made in a succession plan today have far reaching effects. If a parent gives too little and has to watch their child struggle and possibly lose the farm, it can be horrific to stand by and watch. Equally, if a child takes or asks for too much and then has to watch their parents live frugally it is hard to enjoy their successes.
To get Faith and Jaun Tafarm on their farm, we used three main steps. These steps can provide the younger generation with clarity.
Step one: Identify the assets integral to the farming business.
In many cases the older generation has acquired assets that may not be integral to the farm operation or, more importantly, necessary for the younger generation to build an efficient business. Many times the younger generation feels they have to take over the entire operation or nothing at all. In many cases the parents don’t anticipate, want or even care if this is the case. Taking over a viable, efficient business is much easier than taking over a business that is over-mechanized and geared to the energy level of a generation that is much older.
This inventory can be further broken down into three categories of assets: land and buildings, machinery, and inventory. Scrutinizing each asset class separately simplifies the process and makes it less overwhelming.
Step two: Determine operation capacity.
The assets indentified in step one will yield an expected net income and expected net cash flow. This, combined with any continuing off-farm income sources is what will be available to the younger generation to be applied towards fixed charge requirements including loan payments, land rent, property taxes and living costs.
Step three: Identify borrowing capacity.
In this step we start by identifying the current financial equity position of the younger generation prior to the purchase of any assets identified in step one. Clearly understanding this position is crucial in determining the ability of the younger generation to borrow capital. Very seldom can that younger generation borrow all the capital required to purchase all the assets identified in step one.
Once the borrowing capacity is clearly understood, the younger generation can develop options to secure the assets. This is often done through discounted purchase prices, vendor financing, asset rental, equity or accommodating security from the retiring generation.
The process is easy but the analysis is not. It takes commitment, time, and dedication.
The moral of the story is that if you make your stew without any meat in it, don’t complain while you are eating it. †