This guide is written for a farm business owner starting to contemplate what might happen to their business after they retire. What tools are available to business owners who want their business to continue after retirement and, eventually, after they pass?
Before you read this guide, we want to ensure you are in the right place. If you haven’t considered planning for retirement, start with our Farm Succession Planning Basics. If you’re ready to dive into the legal tools to help you make a plan for passing the farm business on, this guide is for you. Alternatively, you may prefer a multimedia learning experience in which case we recommend taking the self-paced course, Legal Tools and Relationships for Farm Succession. The guidance here will help a farm business sustain itself through the present into the future. The pointers in this guide will help whether you pass the farm on to a family member or another non-related farmer you know (or hope to find!). The guidance covers topics from wills to trusts, Medicaid, and using business agreements to organize succession. This guide will address many potential succession plans!
A quick note on vocabulary that we will use throughout this guide. We will use the phrase “retiring farmer” for farm business owners starting to contemplate retirement and think about how their business might be transferred to the next generation. This does not mean that you need to be exceedingly close to retirement or that you need to completely retire from working in the business once the succession plan begins. And, for the flip side, we will refer to incoming farmers as “aspiring farmers.” Of course, farmers who take over a business will likely be skilled and established farm managers in their own right (and may have already owned farm businesses in the past). We aren’t choosing this moniker to exclude anyone but to develop a shorthand way to capture two classes of people–the folks transitioning out of the farm business and those transitioning into the farm business.
That said, this guide is written in a way that speaks to the retiring farmer. Aspiring farmers can still learn from this material. Still, we’ve assumed that the retiring farmer will be making many initial decisions about how to structure the succession plan, and we have written this guide with that audience as our focus.
At the outset of this journey, we want to be clear that farm succession isn’t easy. Success is less common than we would like. One primary reason that farm transitions have a high failure rate is that the investments required to support a successful succession project—from relationship building to attorney’s fees—need a fair amount of assets. When we say assets, we do not mean only money! But, we believe that the process of farm succession is a project for stable farm businesses that can survive a transition in ownership and into the future. How do you determine whether the business can withstand the transition?
We are going to help you assess that right here in this introduction! We’ve set out a few key questions that can give you the framework to evaluate how prepared your business is to weather a transition to the next generation. The first of these is about the monetary value of the farm business. A hard-to-escape reality is that enough resources must be available to support the succession process. Not only that, but the farm business must be profitable enough to justify the expense and effort that will go into the transition. Will the new farm owners be handed a business capable of financially sustaining their family needs?
A related key question is about the assets available to the retiring farmer to fund retirement and potential long-term care costs. Are farm assets at risk of being liquidated to pay for the retiring farmer’s living expenses and medical needs?
Money, of course, is not the only factor, and, in the end, it might not even be the most important. The third key question concerns a huge asset often overlooked– one’s relationships. To effectively manage a farm business transition, the business owner needs to develop and maintain a relationship with the incoming business owner. Beyond that more personal relationship, further relationships with people in the agricultural services industry will ensure a seamless transition.
And finally, the fourth key question inquires about the retiring farmer’s goals and values. There might be values that the business holds that have nothing to do with money or interpersonal relationships, such as land conservation, wealth-sharing, or a commitment to sustainable farming. These are the more intangible parts that create the identity of a business and will be more or less critical depending on the retiring farmer’s goals and values.
So, let’s dive in!
Key Questions to Consider
Key Question #1: Can the farm provide the retiring farmer and the aspiring farmer with sufficient resources during the transition?
There is a difficult proposition at the root of this inquiry. That proposition is that – the farm business may not provide a financial return to the aspiring farmer. Most aspiring farmers are looking for an enterprise that they can operate as a primary (or secondary) source of income. The business may not provide much personal income if the assets are fully depreciated and profits are minimal. There may still be reasons to pass the farm business on, but it certainly does change the calculus for the aspiring farmer. Rather, many farmers with declining businesses chose to sell all their assets rather than pass on the operation as an ongoing enterprise.
The business’s financial health determines if succession or liquidation is the right decision. Honest, intentional, and financially detailed conversations with your co-owners, family members, and/or future owners will help chart the best path forward.
It is difficult to determine a business’s monetary value, as it considers the farm’s assets, the liabilities, whether the business is turning a profit on operations, and the less tangible ‘goodwill’ of the business. Goodwill refers to the business’s good reputation and standing in the community—a valuation of the company’s brand.
The first step in determining the monetary value of the business is to take a deep breath and really dig into the organization’s finances.
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How much, if any, profit is accruing annually?
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How much debt does the company hold? Is it actually held personally by a member of the business rather than the business itself?
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What is the value of the assets? Does the business have a current list of assets and their value? If not, it is time to create one.
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Of the assets that are farm equipment—how much life is left in those items? Have they been fully depreciated? Will the incoming farmer use the equipment, or will there be significant changes in the type of farming and the equipment utilized (this might not currently be known, but forecasts and assumptions could likely be made)? These factors can decrease the initial perceived value of equipment.
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Land assets are often the highest value of all the farm’s assets. How is the land titled? If there is a business entity, does the business entity own the land, or is the land held personally by one of the business owners and leased to the business? Is the land paid off? What are the annual property taxes?
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Does the farm business have strong brand recognition? Is that brand dependent on one person or a group of people? Can a path toward altering the brand for the upcoming transition be devised? How much is the customer base and brand recognition worth?
Regarding arriving at a number, there are many standard business valuation techniques. The formulas vary in complexity. Some formulas may incorporate the sales price of similar businesses in your area (peer analysis), a projection of future earnings, or how much owners and stakeholders have invested into the business. It can be challenging to use peer-based analysis for small and mid-sized farms as many don’t get sold, and even if they do, the information on those sales is difficult to obtain. Formulas based on income and projections of what income may be in the future are based on assumptions and require a stable income history to work. And finally, investments into farm businesses are typically equipment and labor, not cash that would help value the company. No single formula will likely work perfectly for a small farm business. Nonetheless, mathematical formulas can make what promises to be somewhat of an emotional process a little more objective. Having a third-party professional who understands accounting will be immensely beneficial as well.
Farmers already working with an accountant or bookkeeper should ask that professional for advice on a valuation formula. Another resource is the U.S. Small Business Administration, which offers free small business mentors through their Service Corps of Retired Executives (CORE) Business mentoring program. These volunteer executives and experienced business people can help explain valuation formulas for businesses and devise a business value. SCORE is available nationwide.
It is unfortunate that at a time when small farms are dwindling, it can make the most financial sense to sell off a farm rather than have it live on into the future. The following few Key Questions will help clarify what the future looks like for your farm business.
Key Questions #2: What financial resources are needed to support the retiring farmer for the rest of their days?
Part of succession planning includes end-of-life planning for the retiring farmer. This key question can be emotionally complex but important. What needs to be determined here is how the retiring farmer plans to cover living and medical expenses during their retirement. Are savings, investments, or an insurance policy in place if the retiring farmer needs long-term care if they become disabled or can no longer care for themselves?
Long-term care costs are impossible to predict, but they tend to be quite high. Most people rely on nationwide and regional averages when calculating what long-term care costs they might face in their old age. The Administration on Aging, part of the US Department of Health and Human Services, estimates that at least 70% of people who are 65 today will require long-term care in some context. The average stay in a long-term care facility is 3.2 years, with 20% of residents requiring care for five years or longer. You can see the average cost of care in your region using the tool on this website.
Using averages is the only way to estimate whether retiring individuals have the resources they need to self-fund retirement and potential long-term care. This estimation is essential because some people will need to rely on Medicaid to cover the costs of their long-term care. The catch is that Medicaid is a federal program designed to pay for medical care for people who cannot otherwise afford it. To qualify for Medicaid, people often (and this does vary by state) cannot own more than $2,000.00 in assets. This low threshold means that many people must sell or give away many of their assets (including farm assets) well before the need for long-term care arises. This need can interrupt well-laid succession plans or be a difficult prospect for farmers to face. There are also tax consequences to selling and giving away assets. Be sure to read the Medicaid and tax sections of this guide to fully understand the risks facing farmers who aren’t in a position to pay privately for their long-term care.
Key Question #3: What relationship-based assets does your business have?
Relationship with a Successor
The most critical relationship-based asset you will have as you contemplate a business succession is your relationship with the aspiring farmers coming in and taking over the business. This is a complex relationship to develop and maintain–many things have to go right, and many folks will need additional support to build that relationship.
Aspiring farmers could be a previous employee who has shown much promise or a talented farmer you met through a farm link organization, an agricultural conference, or other event. You may know this person very well because they are related to you or are already co-owners with you, or it could be a person you recently met. There are so many options! The hard part is finding the right person at the right time. We’ll have to leave this relationship development to you, but know that if you have a strong contender in mind for succession, you are lucky! Your most crucial relationship asset is in place. If you haven’t yet found the right successor, it is time to start networking with organizations that specialize in matching retiring and aspiring farmers and attending agricultural events in your area.
You might also be somewhere in the middle–you have a successor in mind, but they are determining if their spouse would be willing to move with them to a rural location. Or you might just be in preliminary discussions with a previous employee to determine if this makes the most sense for their career and personal life. This can feel tenuous, but you will likely have to speak with a few potential successors before finding the right one. Don’t delay these conversations!
This guide will give you preliminary guidance on creating a succession plan once you have, or as you look for, a suitable successor.
Professional Relationships
Next on the list of priorities is a good team of professionals to help you through this process. As mentioned above, a trusted accountant will ensure you have accurate revenue/expense records, projections, and business valuations. A financial planner is another professional that you can engage. These individuals focus on retirement planning and will be well-versed in tax planning and management of any investments (like land). Eventually, you’ll need the services of an attorney, so if you don’t have one you routinely work with, it might be time to start looking. An attorney familiar with farm succession and tax issues will be most helpful. This individual can also ensure your assets go where you want them after you die. See the final section of this guide for more advice on finding and working with an attorney.
If you are currently paying off loans, you must involve your lender in this process. Lenders can help explain if debt can be transferred to the incoming farmer, your options for any financing needs for the succession (for land or equipment), and how a change in ownership might impact your current mortgage. You will likely need to speak with your insurance agent to determine if you have (or need) an insurance plan (like life insurance or a disability policy) that could assist in the succession.
Farm consultants are available to help with this process. Many of them are experienced and adept at assisting retiring and aspiring farmers to see eye to eye and hammer out a lot of meaningful and challenging conversations. A good consultant can see the big picture and direct you to a more niche professional when they are needed. There is even a certification program for farm succession coordinators run by the International Farm Transition Network. These certified coordinators have to go through focused training to become certified.
Key Question #4: What values are attached to the farm?
One of the most important questions at this stage is: why? Why is it essential for the business to continue? What values do we want to preserve by transitioning the farm?
Many farmers want to preserve the history and heritage embodied in their farms. Others want to protect a legacy of land stewardship and conservation of environmental values. Still, others wish to honor customers and growing markets with continued supply. Knowing the “why” can help shape the farm’s transition plan. The aspiring farmer also has a “why.” Why do they want the farm? Is it to earn an income doing a job they are passionate about? To live a family lifestyle that reflects their environmental values? Something else?
In the best case, everyone agrees with the central values the farm preserves for the future. But very often, folks assign different priorities to different values. Sharing different values doesn’t have to be a barrier to success in and of itself. But, when these differences are unspoken or wrapped up in assumptions, they can make communication difficult. Being upfront about our values and where they match or diverge can help ensure everyone’s values get the honor they deserve.
Try This: How Ready is Your Farm Business for a Succession Plan? (Freely timed or ~20 minute exercise)
Answer the questions below to assess the farm’s readiness for implementing a succession plan. Do not worry if the answers aren’t what you “want” them to be–this process is about seeing things clearly and learning what action steps to take next! Each question is followed by three options. Check the box that is closest to how you evaluate your farm’s situation. Each option is accompanied by action steps designed to move you forward in your succession journey.
Key Question #1: Can the farm provide the retiring and aspiring farmers with sufficient resources during the transition?
The farm’s value is strong, with moderate to high cash flow, and it would be a marketable business if I were to sell it.
Checked box #1: In this case, you’ll have flexibility in how you structure your succession plan! You could gift or sell your business to a successor. A sale might help fund your retirement. Your next steps are:
Ensure you have all business assets, liabilities, and valuation documented and that records are organized and ready to pass on to the aspiring farmer.
If the farmland is part of the succession plan, have the land appraised and make a clear plan for the transfer of the land as well as the business. Will the land be sold as part of the sale of the business? Will it be a separate transaction? It might be helpful to speak with an attorney to fully understand your options in regard to land transfer.
Read the rest of this guide to determine if you want to pursue succession through a will, a trust, or the business governance document–or some combination of those options!
Checked box #2: In this case, first get the answers to the four questions posed in the text of the guide above. You can’t move forward without knowing what the financial outlook of your business is. Your next steps are:
Hire professionals (if needed or wanted) to help assess the business’ health. The points we made above will help you with this but are not a substitute for a detailed financial analysis and consideration of the business’s strengths.
Document the findings of the financial analysis and keep good records!
If the farmland is part of the succession plan, have the land appraised and make a clear plan for the transfer of the land as well as the business. Will the land be sold as part of the sale of the business? Will it be a separate transaction? It might be helpful to speak with an attorney to fully understand your options in regard to land transfer.
Read the rest of this guide to begin to consider your succession options.
Checked box #3: This may impact your ability to sell the business if that was part of your succession plan. Your next steps are:
Work with professionals to make sure your analysis of the business is accurate. Financial planners and professionals with experience in succession may have a different analysis of the financial health of the operation.
Even if the financial health of the operation doesn’t make it marketable for sale, the business can still be passed on! The business can be gifted via several legal tools discussed in this guide.
If there is farmland as a business asset, have the land appraised. Consider selling the land to cover any debts or liabilities and help fund retirement.
Key Question #2: What financial resources are available to fund the retirement and potential long-term care costs of the retiring farmer?
Checked box #1: Great! This gives you a lot of options in designing the succession plan. Your next steps are:
Read the rest of the guide to decide how to handle the farm’s succession. You won’t necessarily need to consider qualifying for Medicaid but may need to consider the impact of estate and gift taxes.
Having your retirement and potential long-term care costs covered allows you to choose more freely whether you want to sell or gift your portion of the business and/or land while you are alive, or if you want to hold onto it until after you pass. Again, consider gift and estate taxes when making this decision!
Checked box #2: No problem, let’s look at what some of your next steps could be:
If you haven’t yet done so, look at the average cost of long-term care in your region by using the Genworth Cost of Care Survey tool. Make a savings goal based on this average (only you, and potentially a professional you hire can make a personalized guess as to how much to save for these potential costs).
Hire a financial planner or other professional to help you determine your retirement and long-term care savings options.
After completing research and talking with your chosen professionals, decide if you will save to meet your retirement and long-term care financial goals or if you will need to design your succession plan to help you qualify for Medicaid to cover potential long-term care costs.
Checked box # 3: There are still options for how you can move forward! Your next steps are:
Determine if you have assets that could be sold or used to help fund retirement or long-term care costs. Triage these assets so that you know which assets to sell off first if it comes to that.
Consider structuring a plan that would allow you to qualify for Medicaid (which would require action sooner rather than later).
Key Question #3: What relationship-based assets does your business have?
Checked box # 1: Wonderful! Your next steps are:
Write down the relationships you have, and pinpoint which ones will best serve you during your succession journey.
Schedule an appointment or a coffee date with one or more of the folks you have identified.
Checked box # 2: This is a good place to be. Your next steps are:
Identify anyone in your network who has created a farm succession plan, and ask them out for coffee or tea!
Ask as many people in your network as is necessary for you to get good references for professionals who can help you with your succession journey.
Checked box # 3: If this is the case, then it is time to start networking with some new folks. Your next steps are:
Research what agricultural service providers exist in your area that know about farm succession. Attend their events. If you can’t find anyone locally, find whoever is closest to you doing succession work, and call them for a reference for someone closer to your location.
Sign up for farm succession trainings, and ask a lot of questions! Get in touch with farmers who have been successful and ask them what they did and what professionals they relied upon.
Consider advertising that you are looking for a farm successor on local farming listservs or other appropriate places.
Key Question #4: What goals do you have?
There aren’t checkboxes for this question because answers can go in so many different directions! Take some time to discover your overall objective for your land and business. Are you primarily concerned about the land being sold and developed into a subdivision? Do you want to participate in the landback movement? Or do you really want to support the next generation of farmers? Take some time to reflect and write down what your goals for your business and land, if applicable, are.
These bigger-picture goals aren’t the focus of this guide, but here are some quick resources to help you with various goals! This is an incomplete list, but hopefully, it will get you started with innovative ways to help you reach your overarching objectives! Otherwise, we suggest you keep these goals in mind as you read through your succession options explained in this guide!