Farm succession decisions require long-range plans

Undoubtedly, one of the most critical — and delicate — issues facing family farm and ranch businesses is the transfer of the operation to the next generation. It’s a process that is difficult to undertake, for practical and emotional reasons, but the topic of retirement and succession should begin years in advance, experts say, and it has to start with the simple issue of whether children want to succeed their parents on the farm or ranch.

“In early planning, families have to talk about ‘if or when’ children and/or their spouses are going to succeed their parent or parents in the business,” says Danny Klinefelter, professor and Texas Cooperative Extension economist. “Parents, don’t assume the kids want to take over the business, and kids, don’t assume your parents are going to turn it over to you — that has to be discussed.”

One positive aspect of early planning is that it allows the child to be developed as a successor, giving them time to become deeply familiar with all aspects of the operation, both internal and external. Professional development is key in farming and ranching, just as it is in any other field.

“If parents have multiple children who might succeed them in the farm business, they need a development or selection process. In the past, this was primogeniture, or the eldest son inheriting the operation. That’s not the case any more, though — it’s more a question of who is the ‘right’ child or child’s spouse to take over,” Klinefelter says. “Though one child might be a great cowboy or corn farmer, excelling at production is not all that it takes to have a successful farm business. It takes that, plus the business attributes of a CEO.”

If there is going to be a “selection” among children and their spouses, parents should not leave their children in the dark about their choice of successor.

“Once a decision has been made, it needs to be put out there. Otherwise, you’ll face anger, hurt, and possibly lose the other children’s participation in the business altogether,” Klinefelter says.

After initial decisions are made regarding who will take over the operation and how it will be done, families should begin formalizing the plan and get it down on paper. Klinefelter suggests reviewing the plan as a family each year and updating it to reflect changes in circumstances since the last review.

“Every five years, it might be helpful to bring in an outside party to review the plan, whether it is a management consultant, attorney or another producer who has experience in succession planning,” Klinefelter says.

The more conflict that exists in a family, the more they need to seek advice and assistance from a professional management consultant experienced in working with closely held family businesses.

“Texas has some good ones, but they aren’t cheap and it’s not a one-time fix,” he says.

In planning the transfer, Klinefelter advises consulting with an attorney regarding the “four Ds” — death, disability, divorce or someone deciding they want out of the operation.

“Another option in succession planning is looking outside the family,” Klinefelter adds. “If family members aren’t interested or suitable, it might be worthwhile to seek an outside person who is interested in taking over an established business wholesale,” he says.

While there is no way to truly separate family and business when it comes to succession planning on family farms and ranches, Klinefelter encourages parents and children to think through what each issue means to the family, and then what it means to the business.

“Two of the most important things to remember are communication and being proactive rather than reactive,” he says.

Klinefelter is organizing an educational program called “Planning the Return to the Farm or Ranch.” It is scheduled for Jan. 26 and 27 and Feb. 23 and 24, 2007, in Temple, Texas. For more information about attending the program, contact Klinefelter at (979) 845-7171 or [email protected].

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