When people talk about succession planning, they’re really talking about transitioning the ownership and management of the farm to the next generation. The transition of ownership will be to the next generation who will be actively farming and often, to siblings (or cousins) who aren’t … who own assets or shares but who won’t be actively farming.
The transition of management is typically to the actively farming children of the next generation. I’ve written before that both aspects of transition have their inherent challenges.
Not to over simplify the ownership transition aspect, but it’s largely about effecting the transition with the most optimal tax outcomes and determining who will eventually inherit what part and how much of the parents’ overall estate. These are challenges that farm families have dealt with in past transitions – sometimes with not the best of outcomes which in turn then, can be catalysts for the current retiring generation in taking a different approach.
Generally, due to the size, complexity and evolution of today’s farms, it’s the transition of management that increasingly requires the most attention to planning. This aspect of the transition can be much more challenging. For those of you who fall into the “retiring generation” category, take a minute or two and think back to the farm that you started with. Now, compare that in your mind, to the farm that exists today. Likely a pointless question, but which “farm” requires the more advanced management practices? My point is that the incoming generation, through the transition, will ultimately take on the responsibility of managing a much more complex operation that what the retiring generation started with.
I hear these questions all the time. How do we best deal with that? How do we make sure that our children will be able to successfully manage the business, as we transition into retirement?
Transition within the Transition
There’s another aspect of transition that doesn’t get as much attention – the transition of labour. Long before any formal introduction to management occurs, the incoming generation provides labour to the farm. This transition allows the parents to focus on other aspects of growing and managing the business. The labour contribution provided by children can be organized into three groups.
Children who work on the farm through high school:
- and upon graduation, begin to work full-time on the farm.
- and upon graduation, take full-time employment off the farm before returning to the farm in the future.
- and upon graduation pursue post-secondary education (degrees, diplomas in agriculture or a trade), and who then return to the farm.
There is a generally accepted best practice within transition planning that says children, who are going to take over the farm, should take some formal education after high school and then work away from the farm for three years.
This is partly achieved in the second grouping above. The prevailing wisdom is that the children themselves, the parents – and the farm business – will all benefit from the experience gained in children having worked for a different ‘boss’.
It can be really difficult to do though; especially in the first grouping. The reality for most farm families is that the labour provided by children who are actively going to be farming is difficult (if not virtually impossible) to replace, cost effective (children may work for less that what an arm’s length employee would cost) and hugely valuable. Who will do a better job than your son or daughter? There is an intrinsic pride of ownership in children who will be farming at some point in the future, and direct correlation to the quality of the work they do and the effort they put forth.
But, not only will children get to work for a different boss, they’ll also get to observe how another business is being managed. This leads to the transition within the transition. How does the retiring generation deal with the ideas that their children bring back to the parental farm? Especially when the work away from the family farm experience is working on another farm?
The retiring generation must be prepared to actively listen to and seriously consider applying some of the ‘learning’ that has occurred by their children. Simply paying “lip service” to the concepts and suggestions being provided runs the risk of negating most of, it not all of what their children have learned, and the experience gained.
It’s called transition for a reason. By far, the most common approach of farm families is to gradually have the parents become less involved in management, as their farming children become more involved. Unless the plan is to retire “cold turkey”, where the next generation can make any and all of the changes in management they wish, some pre-thinking can be very helpful.
So, if you’re going to require that your children work away from the family farm, you must proactively plan on how you’re going to deal with the enthusiasm and suggestions being brought back to your farm. Failing to do this runs the risk of fostering frustration and apathy within the next generation, and creating conflict between the generations within the farm family.
Terry Betker is a farm management consultant based in Winnipeg. He can be reached at 204-782-8200 or firstname.lastname@example.org.