Farmers across our nation have had farming operations rooted and established in their family for generations; in fact, 97% of all U.S. farming operations are family-owned. These farms take pride in their evolution and look forward to what the future holds for the next generation; but, often times, what eludes most farmers and other family-owned businesses is how to successfully transition the operation from one generation to the next.
Business succession planning is often most difficult for first and second generations. These generational family members are reluctant to change, what for them, has always worked. While this hesitancy may be warranted in some instances, consideration of the following factors will help to alleviate issues that may arise with business succession planning:
Evaluate the Present and Future – The key to succession planning is a common understanding of the current operations and forecasting what the future holds for the business. Among other things, it is important to discuss the direction of the business, its structure, and its eventual successor(s) interest.
Consider Reorganization – Many farmers are still operating as sole proprietorships out of fear of changing what for them has always worked. However, if done properly, separating the land from the operations of the farm business can help ensure an easier transition for future generations.
Prepare for Foreseeable Events – Many business owners enter into buy-sell agreements, which restrict the transferability of the owners’ interest and establish procedures for the sale of an owner’s interest upon the occurrence of certain foreseeable events, including death, disability, retirement, and, in some instances, divorce. If not already established (and, more importantly, updated regularly) such an agreement should be the first order of business for any family-owned entity.
Operate Like a Business – All too often, closely held businesses, including family farms, disregard the formalities associated with business entities. For instance, family members should not be on the payroll if they are not working for the company and not contributing to the business. Farmers should be careful not to confuse family decisions with business decisions and instead should establish healthy and well-pronounced boundaries between the two. Establishing such boundaries may require farmers to make difficult choices that protect the family business from outside influences.
The foregoing is a non-exhaustive list of some important considerations during small-business succession planning, which family-owned business should take into account to avoid being a part of the vast majority of family-owned operations that fail after three generations, and often in the process suffer a loss of family harmony. Instead, plan ahead and speak with an attorney to obtain more complete legal advice based on your specific circumstances.
