Transitioning a ranch or farm operation from one generation to the next is more than just figuring out a way to plan for estate taxes. It’s also about focusing on “business succession” and identifying the best way to not only transfer assets but a lifetime of experience and management. The goal should be to create a smooth change in leadership when there is mutual interest in both the current and incoming generations to continue to operate the business.
“If we want people to carry on the tradition of agriculture, we have to do it in a businesslike way,” says Dick Wittman of Wittman Consulting Services. “Approximately two-thirds of family businesses never make it past the third generation. People have to choose to make succession happen.”
Most ranchers say passing down their operation to the next generation is one of the primary reasons they continue to persist in a sometimes inhospitable business environment, but how many really do anything to plan for that eventuality?
“According to a recent survey conducted by Allianz Life, the generations involved on both sides of estate transfers report that they understand what needs to be done for ‘good’ estate planning. However, they also report that they are unwilling in most cases to initiate that process,” says John Hewlett, a farm- and ranch-management specialist with the University of Wyoming.
“Some of the top reasons I hear to justify procrastinating about estate or succession planning are it’s ‘too complicated, too emotional, too costly, and there are too many inevitable wrecks,’” Wittman says. Do any of those sound familiar?
“Transitioning a ranch or farm is a difficult task even when everyone involved recognizes its importance,” says Dave Goeller, who has been specializing in farm and ranch transition since 1999 and currently serves as the assistant director of the North Central Risk Management Education Center. “It’s easy to put this process off because it’s not urgent. Unfortunately, when it does become urgent, it’s because a principal participant has become ill or there was an unexpected death. When that happens and no plans were made for how to run the business, people aren’t able to make good decisions.”
While for many families the task of succession planning can seem daunting, Wittman recommends that people need to approach it from a simpler philosophy. “Ask yourself, ‘What do I want to do?’ and ‘How are we going to get there?’ ” He also emphasizes the importance of writing down key understandings. “You never make a transition until you put it on paper,” he adds.
“Once we establish that the principal operator does want to have a successor, we go through a series of questions to identify the necessary steps to accomplish that goal,” Goeller says. He believes that succession is aided by facilitation from a third party and has been leading farmers and ranchers through that process for years as part of the University of Nebraska’s Returning to the Farm program. “It’s difficult to do this on your own.”
In Sustaining the Legacy, a workbook developed by the King Ranch Institute for Ranch Management and South Dakota State University Extension Service, the authors highlighted that one of the most important first steps in succession planning is to inventory the ranch and its resources — both people and wealth.
As part of that process, some important questions to ask are:
Who will inherit the ranch business?
Who will manage the ranch in the future?
If no future manager is identified, what is likely to happen to the ranch?
It’s more than an estate plan
Many agricultural operations focus simply on creating an estate plan that reduces tax burdens and creates vehicles for transferring wealth but spend little time on the here and now. Succession planning is about transferring the decision-making process in the business successfully, as well as transferring the ownership of its assets.
Taking the steps toward a succession plan can actually make the estate planning process much more palatable, as it helps lay a foundation for successful business planning and communication among all parties. “Professional management philosophies shouldn’t be looked at as a necessary evil to keep the ranch running; rather, they should be a critical asset,” Wittman says.
Circumstances that are unique to any individual family operation means taking a “cookie cutter” approach doesn’t guarantee success. However, there are steps that apply to every operation that should be considered.
In his guidebook Building Effective FarmManagement Systems, Wittman recommends that one of the best places to start is to create the following guidance documents:
Mission Statement defines in broad terms the purpose or mission of the ranch or business. It should describe the key product or service that will be offered, the target market or primary customer, and primary business objective.
Vision Statement defines how your business should be described or the ultimate state that will exist if and when your mission has been accomplished.
Core Values Statement sets forth key practices, guidelines or values you intend to follow or keep sacred in managing the business.
Another important step to getting started is to evaluate the ranch’s current status and where it should head in the future. It is important to involve everyone that will be affected by changes in the ranch’s management.
Wittman recommends the following questions to get started in a strategic planning process:
Where are we? (current financial position, operating structure and decision-making roles)
How did we get here? (operating and financial trends and managerial processes followed; strengths you want to maintain, weaknesses you want to address)
Where do we want to go? (objectives — short- and long-term, business and personal)
What is the gap between where we are and where we want to be? (problems or performance concerns)
What strategies will we pursue to fill the gap or reach our targets? (strategies and action plans; who will do it; target dates and how success will be monitored)
A helpful resource that might also get you started is an online course developed by University of Wyoming Cooperative Extension as part of its Enterprising Rural Families program. The program focuses on strategic planning and goal setting for family businesses and can be accessed at Drovers.com/succession.
According to Sustaining the Legacy, the ranch transition process is about much more than having the proper legal and financial documents in place. “While those components are critical, a successful transition also requires training the next generation to make decisions, and then having the ability to transfer that control.”
“Transitioning the management of a ranching or farming operation to the next generation can be a lengthy process,” Goeller says. “It may take five, 10 or even 15 years before a complete transfer has taken place, and even then an actual change in ownership may not occur until someone has passed away. There are several factors that influence the best way to handle both the transfer in management and the transfer of assets.”
As Goeller points out there is no “trigger” in ranching and farming that signals the need to initiate business succession planning, unless it is planning for estate taxes.
At the end of the day, remember why you want to work this hard at passing the ranch down. Think of the legacy that will be yours if you successfully transition your business to the next generation.
“As the principal operator, you have a decision to make,” Goeller says. “Do you want to do everything you can to help your successor succeed, or do you want them to fail? Of course, most people say they want the next generation to succeed, but they have to realize that once they make that decision, their principal job becomes mentoring that successor.”
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