According to the USDA Census of Agriculture, the average age of the U.S. farmer is 57. One of the biggest challenges facing agribusiness is transitioning ownership, a topic discussed during the 2012 Governor’s Ag Development Summit held in Pierre, SD on June 27.
Keynote speaker Gary Sipiorski from Vita Plus talked about succession planning for farmers who are approaching or are engaged in the process of transferring their operations to the next generation.
“The first step is to have a family discussion,” said Sipiorski, who works in Madison, WI and is a meeting advisor for the Professional Dairy Producers of Wisconsin. “Farm families don’t talk a lot about the tough stuff around the dinner table. When you do, take notes. Write down people’s ideas. When Dad tells you not to worry and that the farm will be yours someday, don’t believe him. In this legal world, everything has to be written down. Farmers won’t be able to farm forever. They need to start developing plans for the future, ideally at the age of 55.”
Once the discussion has started, it’s important to organize important documents such as wills, corporations, trusts, real estate taxes and loans.
“Sit down with the lender and clarify what loans the operation has, whose names are on them, how much is owed and what the collateral is,” he suggested. “Good lenders will sit down and explain what is being collateralized.”
Sipiorski’s advice comes from experience. He has been involved in many banking and ag organizations in Wisconsin and nationally and is a former president and CEO of Citizens State Bank of Loyal, WI. He once chaired the Governor’s Task Force on Growing Agriculture in Wisconsin.
“Do a balance sheet for the farm,” he added. “Look at feed inventories, real estate appraisals and fair market values of cattle and machinery. Talk to your accountant and put together a balance sheet to figure out where you’re at. Then, evaluate what’s in the shed. Look at your assets. Are all farm assets needed? Once the personal balance sheets are completed, ask yourself what it costs to put up a corn crop. What is the cost to raise an acre of corn? It’s $550 per acre to raise an acre of corn. Put that in your balance sheet.”
The next step in succession planning is figuring out how to pass on the assets.
“What do we want to do? A land contract? A bank loan? Gifting?” he asked. “What about a cash flow projection? I don’t care what you have in assets, if you don’t have cash flow, it’s not going to work. Make sure you do the cash flow projections; it takes time, but you’ve got to do it. Then ask yourself what can the farm afford to pay in wages? What are lifestyle needs of the family? Can we diversify to create more cash?
“Are there other siblings not on the farm who need to be considered? I will warn you, siblings can get together while mom and dad are alive, but once they are in the grave, it can be a rat’s nest. Parents, make a plan while you’re alive to avoid these pitfalls once you’re gone.”
Sipiorski said that “life is 10 percent what happens and 90 percent how we react to it.” This philosophy can be applied to transition planning. Those who fail to plan, plan to fail. Without a proper succession plan in place, the family operation could be lost to estate taxes, legal fees and sibling fighting. Developing a plan, starting at the age of 55, can help navigate through the most common pitfalls of transitioning the operation to the next generation. The key is to not wait. Start planning now.