Family Ties – How succession and transition in agriculture continue to spin circles.
Frankly, I am tired of hearing the line “agriculture is different”. I think this is the cause of many of our industry’s downfalls as we continue to push the narrative that we are special in comparison to other industries. We choose to be different almost to the point of inefficiency and detriment. The unpopular opinion is, we are not different, we are just behind.
Take the succession and transition topic.
We as an industry have differing opinions, experts, theories, and other speculations on how “family” is only apparent in primary producer operations. In truth, I believe that the reason we are no further ahead today than in the past decade is that the experts continue to push a narrative to create a need. Fear sells, so the longer we continue to make emotions and family business the reason for failure, the longer we employ numerous individuals that preach to this content.
As a professional accountant and consultant, I have seen it done right and on a much larger scale than most others. Whether it be through my time at Strategic Coach, discussing self-managing operations, or our implementation of EOS (Entrepreneurial Operating System) and its focus on communication and roles, and accountability, I have seen true succession and transition done with minimal emotion, and highly equitable roles and compensation.
In the end, all that matters is that the business is not bankrupt, and the family can still spend Christmas together.
Many families ask “where do we start?”. This is actually one of the most common things I hear in all aspects of business. Most farms try to over complicate simple business tasks. So, let’s break it down to the main aspects of succession and transition:
Communication
Since I am an accountant, you thought I was going to go straight to the numbers, didn’t you? The truth is that the majority of succession plans fail at the communication stage. Most businesses with the amount of equity that farms have today, would have a full-time human resource manager.
I am pretty sure (not definitive), that the College of Agriculture probably did not have a human resource management course when many farmers got their degrees. This is one of the hardest skills in business, but it is also the most important when it comes to multi-generational farms, and farms with large related, and non-related team members.
You need to leave emotion at the door.
Family farms like to be run based on lifestyle and emotion, but I have seen the downfall of a large percentage of plans put in place around “handing off the reins”. Walmart is owned by the Walton family; do you think that their boardroom meetings are based on family members yelling at each other about something they did to one another as kids? Communication on primary producer operations, whether family or not, needs to be without emotion.
Now, remember this is in the boardroom – when making business decisions you need to make reasonable, equitable, and fair conclusions. That is not to say that you cannot bring up uncomfortable conversations (hell, I have been part of numerous family farm conversations where I felt uncomfortable), but the answer to this is non-emotional discussions.
The EOS system calls it IDS, identify, discuss, solve. In layman’s terms, identify the issue, discuss it with no emotion, and provide a solution (does not even have to be the correct solution, but you must leave with a solution). We use this in our organization, and I would say it is one of the top procedures we have to move decisions forward effectively.
Compensation
Although not the most important, it is still a main factor in effective succession and transition. A decade ago, I would say that the problem was in the older generation not compensating the younger generation for the actual “sweat equity” or work provided. Lately, I have generally found it to be reversed.
Today, the older generation is often giving up their retirement to subsidize the farm legacy or transition. Whether it be due to land appreciation, the cost of living, or the next generation having a small sense of entitlement, I won’t answer. But in either case, nothing will derail a succession and transition plan as much as unfair compensation to any of the members.
So, how do we make it fair at today’s costs? Quite simply, time, brains, and money.
Now that you are confused, let’s go a little deeper.
In any business, farming or otherwise, you are compensated for these three things. Time compensation is based on hours worked and labour provided. Brains are based on decision-making, management, and all other areas of leadership. And finally, money. Money is based on what capital you provide to the business, whether in the form of land, equity, or cash. This is a simple formula as every farm today is made up of these three items, and they should be compensated fairly in all three.
When breaking it down, money is the first thing to be paid. As a retiring farmer, you have two things to provide to the business, equity, and a land base (PS – never transition land before death unless there is a good strong tax reason – this creates a lack of motivation in the next generation as they become millionaires through a “gift”).
When retiring the farm, much like any other investor in any other business, you expect a fair rent and a fair return on your money. And much like the bank and your landlords, you are paid first. Whether this is done through actual rent and interest payments, or for tax purposes as a percentage of net income, choose the best way for your taxes. But make sure this is guaranteed before splitting out any further income or loss. This ensures an equitable retirement based on your true net worth and also shows any non-farming siblings that there is no inequitable split between the farming child and themselves (easy to discuss in the will when everything is done at fair market value).
The second thing is time (or labour). I find there are two effective ways to split this income. The first is that in a new generation just entering the farm, you can fix a certain labour amount that allows this child to sustain a living. This will then reduce the amount of “brains” compensation, as with less risk comes less reward. However, for the early years, I find having a fixed labour allows the child to avoid some loss scenarios that can always occur in a volatile primary producer industry. The second option is to leave labour based on a set percentage of income and therefore create some additional risk and reward compensation. Either way works, as long as the amount paid for the labour can be backed up with fair compensation.
And lastly, brains. This is the leadership and management component of compensation. In most joint venture or partnership scenarios, this is the final split of what remains after paying labour and rent, and equity. These are the entrepreneurs that run the business and as such they take the most risk and reward. In big profit years, this can be multi-generational wealth. In loss years, they also will go backward while rent, equity, and labour may be a fixed amount of earnings.
Time, brains and money, as the second pillar in succession and transition, is an easy formula to fairly compensate all members. Spending Christmas together is important, and this type of split reduces any arguments in terms of money as it is done fairly. The older generation is not “gifting” in order to keep the legacy, and the younger generation is motivated to work more hours (labour), make more decisions (brains), and finally, reinvest in farming operations (land or equity return). It is a win-win scenario for all generations.
Roles, Responsibilities, and Accountability
Do not have your children invest in education in the same specialty as your own.
The reason I highlight this is that it’s a historical process for many farms that have led to a large amount of angst in succession and transition. Having two experts in the same field of study is never a good idea. It would be like a business hiring two accountants to do the same job. Other industries would never do this, so why on a farm do we have a parent who took agronomy convince their kids to do the same? Who is now the agronomist on the farm? Is this going to lead to disgruntled partners or disagreements?
When it comes to roles and responsibilities, I have always found it easiest to lay out all the tasks on the farm first. You will notice that there are probably 10 to 20 tasks on a farm that should have their own employee. It will also identify those roles that can be discussed as to who is the most appropriate to fill.
Technology, in most instances, is falling on the new generation. People management or leadership may be more to the older generation with expertise. None of this is written in stone, but having the breakdown, discussion, and then assigning tasks removes a lot of emotion and removes the confusion when it comes to who is in charge of what.
Lastly, accountability. How many sons would be comfortable performing a performance review on their fathers? Daughters to mothers? Brothers? Now, this is where I get the most pushback from agriculture producers who always claim that farms are different. No, they are not, just like any business, upward and downward feedback, positive and negative feedback, and any other discussions on accountability are crucial in business.
If one family member is continually doing something incorrectly, why should we remain quiet and let it happen? This goes back to communication. Get comfortable being uncomfortable.
Will this work in all operations? No. Sometimes the family dynamic is so strong that these pillars cannot save the succession. But those businesses should not be transitioned. Some people just cannot work with others. We have seen it with employees, and I have seen it with family members numerous times.
What I really want to get across is that agriculture is not any different than other industries. It might hurt, but we are “not special” and agriculture is not reliant on “family ties”.
