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Are you preparing your successors?

Progressive Dairyman Editor Dave Natzke Published on 29 September 2017

To start your farm succession plan, you’ve formed a limited liability company (LLC), signed your estate plan and maybe even transferred some interest in the LLC to your successors.

Hopefully, you have reviewed and updated your plan and taken periodic actions to move your farm transfer forward. However, are you also investing time and training to prepare the next generation to successfully take over management and ownership?

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The failure of family farm transfers from one generation to the next are seldom related to the legal documents, according to George Twohig, a partner in the law firm of Twohig Rietbrock Schneider & Halbach S.C., Chilton, Wisconsin.

The most common reason intergenerational transfers fail is due to unresolved personal and management conflicts and communication issues. The second-most common reason for failure is when the successors are not adequately prepared to assume management of the farm, Twohig says.

Selecting successors

An early start to a succession plan can help identify the interest, commitment, capabilities and contributions of potential successors. But your farm’s successors should be chosen based on merit, not just lineage, Twohig says.

Potential successors should be involved because of their competence and as an earned privilege. They must have something substantial to contribute to the operation.

“Successors should want to earn the right to participate rather than receive it because of their name,” Twohig says. “They should be willing to do the work the farm needs to have done rather than the work they want to do. They should have the ability to successfully operate the farm when you are gone.”

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You and your successors must have shared values, a common purpose and vision for the farm’s future, and compatible expectations and management styles. Personal and business expectations don’t have to be identical, but they must be compatible.

Conflicts in personal and business expectations usually adversely affect personal relationships and the farm business. Time spent creating and updating mission and vision statements, and developing compatible expectations, keep everyone moving in the same direction and avoid future conflicts.

You should immediately identify any deficiencies in attitude, time commitment, performance and skills, or if there are problems in communicating or working together.

Success requires minimizing frustrations, preventing sibling rivalries and rooting out negative conduct. If conflicts and communication issues arise, address them immediately.

Shared decision-making

Involve your successors in planning potential management actions, especially those affecting their work or requiring substantial investment. Short-term planning may include allocation of work, management roles and immediate changes in operations, equipment and facilities.

Long-term operating actions may include major investments impacting the overall structure, such as adding a heifer facility, buying additional land or moving to a robotic milking system.

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All investments should be based on budgets and income and cash flow projections, and should be evaluated based on their potential to increase profitability and cash flow at reasonable risk.

Twohig suggests having your ag accountant or other ag financial adviser move your financial information from “tax-based” information to “management-based” information so better decisions can be made.

‘Partnership’ attitude critical

To achieve success, parents should strive to be good “partners” throughout the transfer process. “The leader needs the attitude, ‘I’m here to make sure each person is successful’ rather than ‘I’m here to tell these people what to do,’” Twohig says.

You should lead the group to work as a team instead of maintaining the domineering role of “boss.” The older generation (usually the father) should act as a management coordinator, leading, mentoring and training the successors and sharing vision, financial information and decision-making.

Control should be exercised only when necessary.

Parents should be proactive in giving successors responsibility for specific management areas or projects, with assignments based on the successor’s capabilities.

The responsibility should be assigned focusing on its mission, underlying purpose and the reason why the project matters rather than directing exactly how the project should be done.

The successor should accept that being trusted with a management area or project does not mean he or she has unilateral control but requires acceptance of objective evaluation and willingness to act upon constructive feedback.

Learning is a two-way street

You should make it clear you expect shared teaching and learning. Your successors expect you to share your perspectives supported by your many years of experience.

However, they expect you to recognize their strengths and to coach them as they gain work and management skills, but that you will include them in decision-making.

You should also want to learn from your successors, who may have better knowledge of technologies, recent education and untapped energy to learn and grow. These differences are challenging but can create a powerful management team if managed correctly.

Evaluation of successors

Each successor’s work and management contributions should be periodically evaluated, and the successor should be informed of opportunities for growth and any deficiencies.

Trust is built by identifying and understanding each person’s strengths and weaknesses, recognizing that the group benefits from each person’s strengths while his or her weaknesses are offset by the strengths of another.

Strengths can be broadened and weaknesses corrected through ongoing training and education to develop work, management and leadership skills of the successor generation.

Successful farm managers not only make good decisions on major management issues but also invest long hours in doing the small things right, Twohig observes. Therefore, successors must be evaluated based on their daily work on the farm as well as their management role.

One of the major challenges Twohig frequently sees relates to compensation and eventual ownership.

“Parents tend to make compensation to the next generation based on how much money they need,” Twohig says. “That’s how they lived; they took out the money they needed and invested the rest back on the farm.”

The challenge is compounded if more than one child is involved in the transfer and there are differences in performance, work time, duties, responsibilities and contributions to the farm’s success.

“Differences in compensation might have to be considered if one successor is taking on greater responsibilities or work hours,” Twohig says. “There might even be differences in the percent of ownership of the LLC or other farm assets.”

Parents should avoid unfairly favouring one child over the other. They may feel most comfortable with a compliant successor or challenged by one who is more assertive.

“Those who test us sometimes contribute most to the farm’s work and improving management,” Twohig says. “The real test is who will be the farm’s best future leaders.”

Each successor should also understand his or her contribution will be evaluated and the parents are committed to transfer management and the farm assets on an “as earned” basis.  end mark

Dave Natzke
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