In a perfect agriculture world, farms would pass seamlessly from one generation to the next. The reality is that business transitions can be difficult. They take planning and cooperation, and even then, some may not succeed.

University of Minnesota Extension’s Amber Roberts talked about assessing a farm’s transition readiness during a “Farm and Land Transition Thursdays” webinar. She emphasized that the main element of a fruitful transition is planning.

“Even if you pass down the assets of your farm, without planning, it doesn’t guarantee success,” she said. “Planning is key.”

She pointed to data that showed just 30% of small businesses successfully transfer from the first to second generation. That number falls to 12% from the second to third generation, and it’s just 4% for the third generation and beyond. “Planning can make your farm part of the 30% that are successful,” she said.

Why is the success rate so low? Roberts noted three main reasons why business transfers fail:

  1. Inadequate estate and retirement planning
  2. Insufficient capital and cash flow to support a second generation
  3. Failure to prepare the next generation with knowledge and decision-making skills

To help avoid these three mistakes, Roberts shared five factors to consider when preparing for a farm transition:

  1. Financial support: Is the transition financially viable? Can it support the retiring and incoming generations?
  2. Planning and decision making: Is everyone willing to develop a written plan of transition and a business agreement prior to starting the process?
  3. Relationships and communication: Is there a way to do this transfer and keep everyone happy? Can family members maintain positive, respectful attitudes, communicate openly and freely, and not control others’ businesses or personal lives?
  4. Housing: Are there housing facilities available that will be acceptable and independent for each family?
  5. Desire to farm and learn: Is the retiring generation ready to let go and pass on their institutional knowledge? Is the younger generation grateful for the opportunity and excited to learn?

Roberts reminded listeners that succession planning takes time. “The average farm transition plan takes two to three years to create, so the best time to start planning is now,” she said. “You can always change and update it in the future to better meet your needs.”

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(c) Hoard's Dairyman Intel 2021
January 7, 2021
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