What happens to the family farm when the lineage stops?
Sale is the easy answer, but I would rather push a different narrative. In an environment where land values continue to outrun the stock market, and are an inflationary hedge much like gold, why would retiring farms sell? Currently, there is a consistent 2% to 3% return on rental values, and the original asset has shown appreciation rates of about 10% in most years. Even if the family does not want to continue the farm, this investment should be passed down like cash. Everybody else in the world including Bill Gates is investing in land, why would we, as the original stewards, get out of it?
I was lucky enough to be around public accounting when one of the first joint ventures was created. Back then, it was not for the same reasons as today (tax minimizationavoidance, succession, and transition). One of the first agriculture joint ventures was done so that the aging farm could continue to be part of the growth of agriculture. Today, that land is still held by the original joint venture members who have long left the area. They have a 10X return on their land and have also participated in a decade of agriculture where a large wealth shift occurred from farm profitability. This planning was way before its time in my eyes.
Let’s explore how we create a business legacy where family is not involved in operations.
This is the first option because I have yet to see it be done in Western Canadian agriculture (not that it hasn’t, just that I have not seen it). Bring in external c-suite employees (CEO, COO, CFO), and create a self-managing operation where you can sit on the board and entrust the day-to-day to others. Before we find all the reasons it won’t work, let’s identify how the majority of businesses around the world have succeeded. I always use the line, “Agriculture is not different”, and there is no actual reason this cannot be accomplished.
In today’s labour market, agriculture is at the bottom. We are not seen as a career, we are lagging behind other industries in terms of human resource policies and strategies, and we have cost-driven behaviours. But if the narrative is flipped, and we can show potential employees a projection to ownership or growth of the farm, does this reduce all the issues I identified? It did for me. As an equity owner in a farm that does not have my last name, this motivated me to leave a professional career where I would have been a partner. If it worked on myself, there have to be others it will work on as well.
So, how do we do it? Step one is to stop thinking like we have traditionally.
Be open to seeing high-quality employees, start investing in labour, and not focus on cost as the driving factor in hiring. Lastly, train, educate, and promote when you find those people. All of these aspects are important in creating a self-managing company.
And lastly, get out of the way! As a leader, I have been told this more times than I care to admit, but the more I am involved in entrepreneurial courses, the more I believe this to be true. Find good people, delegate to them, and get out of the way. You will find that most people, when committed and motivated correctly, will outperform many of the current business owners today.
With the current age of farm owners eclipsing 65 years, this seems to be one of the ways they see retirement without sale. Find a neighbour they trust or respect, create a joint venture or partnership with that individual, and become a minority member of a larger enterprise. Unlike the internal version, I have seen this work in numerous ways, and it does allow the retiring farmer not only to hold onto the “golden investment” of the land but also to continue feeling like a farmer.
Without going into the tax benefits of this structure, the other main benefits are quite clear. You continue to have a percentage in active business income while also participating in the appreciation of land. The positive for the other members is that they get to grow their operation and take a percentage of a larger acre base. It also, in many instances, provides some risk and reward which is enticing to both sides depending on the risk tolerance. Sometimes, there are parameters that will protect the landlord, but this depends on the agreement.
As we move into the next decade, we are going to see mass land movement due to the aging farm owners. I don’t believe that buy and sell will be the most popular option given the current interest environment and land values. There are only so many farms that can continue to meet the large financing requirements on purchase.
More of the options identified above will continue to be utilized as retirement and or legacy options. I personally like the internal option as you continue to be the legacy farm and your name is on the door. The old adage that family was the only way a farm could have a legacy is no longer true. I know who Steve Jobs, Elon Musk, and Jeff Bezos are by the companies they created. Why can’t agriculture be the same? Why can we not go to a place we have never been?