Now the current generation is aging. As much as they would like to keep both hands on the balance sheet and cash flow, the next generation is going to take over the legacy of what the current generation worked so hard to achieve. Adding to the farm transfer thought process are the abilities, education, and sincere interest of the next generation.
Current generation farmers who control the assets have some serious decisions to make:
1. The total sale of the entire farm is one option.
2. If there is no next generation, is there a key employee or nonfamily member with real interest in the dairy? Many times these types of farm transfers are as successful as transferring to blood relatives.
3. Legacy transfer to the next generation of family members is the most desirable for the current generation to see the foundation of the farm continue to exist, grow, and thrive.
Once in a lifetime
Fear not because there is help out there to assist with a farm transfer of any type. Farm assets sell every day; however, your farm transfer is only going to occur once in a generation. It is best to seek the assistance of professional help.
Just because a neighbor, friend, or relative did a farm transfer does not mean the process is a cookie cutter plan. Each farm and family is different. There are three key people who should be involved in the process, which will take a year or more to complete depending on the assets and complexity.
Consultant: Once the current generation has decided they cannot milk cows forever, hold a family discussion to talk about who is interested. The current generation should start that discussion before the owners reach the age of 60.
Once this discussion is held, the ball can start to roll. Make sure a family member is taking notes from the start and continues to take notes throughout each meeting. Names of who said what should be noted along with dating each meeting.
Start by contacting a consultant who has experience with farm transfers. There are certification programs in some states that will provide names. A consultant will have done other transfers and should have a good understanding of the process and time table.
Having an experienced consultant will save time and expenses with an attorney once they are brought into the picture. Generally, two-hour meetings are plenty of time to discuss topics with 30-day intervals between meetings. After two hours of discussion, the day’s topics just seem to repeat themselves.
1. The first meeting should be a discussion with the primary owners to hear what their thoughts and desires are. Based on the outcome of the meeting, a request from the consultant would be made for the last three years of taxes and a current balance sheet. These items may have to be found or balance sheets built at the next meeting.
2. A second meeting will be to gather the financial information. A current balance sheet should now be able to be completed. Historical cash flows of the last three years will allow the consultant to see what is the ability of the farm to generate a true bottom line.
3. The next meeting will be a discussion of what a projected cash flow looks like based on the previous discussions. Will it be feasible to continue the planning? Is there enough cash flow to support the current generation and the next generation? Are there changes or does the plan need to be rethought?
4. Now is the time to bring the next generation into the meeting. Balance sheets, regardless of how weak or strong, need to be completed to give the accountant and attorney a good view of who is coming in and what their financial strength is.
5. A meeting with the accountant needs to be held either at the farm or in the accountant’s office. The purpose is to share the balance sheets, historic cash flows, and projections. Hopefully, the accountant has been the farm’s accountant so they should be familiar with the operation. A key point of this discussion is directed to the tax consequences of the plan. Better yet, discuss what can be done to preserve as much cash as possible and leave the money on the farm versus paying a large amount of taxes.
6. Another meeting may be needed based on accountant recommendations.
7. With a plan in hand, financials completed, and accountant recommendations, an attorney meeting can now be held. This meeting will give the current generation, next generation, consultant, and accountant the chance to discuss what the thoughts have been up to this time with the attorney. The attorney will have a lot of questions. Partnerships, LLCs, C-Corps, S-Corps, and other structures may be discussed and considered.
8. The next meeting will be the time for the attorney to discuss what the suggested structured plan would look like. It is also a time for everyone to ask questions and to think forward to the next 10 years to envision what the agreement will look like in real life.
9. Based on the last meeting, the attorney will have documents prepared. An exit plan will also be a part of the total plan with reasons for vesting discussed. The documents are taken home for everyone to read.
10. The next meeting is for the signing of all documents at the attorney’s office. Further questions can be asked. Unless there are some major changes needed, signing can occur. Communication should have been made to the attorney if there were major changes needed.
11. Hold annual meetings with all parties to keep everyone up-to-date with the progress of the plan.
A special note regarding attorneys . . . they need to understand agriculture, farm family dynamics, and taxes.
There are a lot of other details to be discussed and written into a good farm transfer agreement. Based on the importance of getting the plan right, you can see why it is generally a year in the making.