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Key Components of a Succession Plan

Successful farm transition can take years, and requires a hefty emotional and management investment.

Published on: Jul 15, 2011

Passing on the farming operation can be an emotional and difficult process. Yet avoiding the topic is apt to be more costly than uncomfortable.

Simply put, succession planning is the process of transitioning the operations of the business when the current principal will no longer be running it. It's a topic that many business owners -  especially farmers - tend to shy away from, likely because it requires an acceptance of the reality that death, incapacitation or perhaps simply retirement, will result in them no longer running the business.

It is a conscious, problem solving approach to the inevitable - that no business is going to continue forever under the guidance of a present operator - and involves wise planning for this transition rather than simply trusting to happenstance, or worse, pretending it will never happen.

"It's ironic that those who spend a lifetime building an operation they hope will be profitable and eventually serve them well during retirement often don't consider how to best transition it," says Blaine Moats, a CPA with Latta, Harris, Hanon & Penningroth, LLP, Grundy Center, Iowa. "They spend decades being diligent in creating a legacy, only to let it slip away at the end. Avoiding the inevitable and not planning for an orderly business succession just isn't prudent.

"CPA's understand there are some things people just aren't comfortable discussing," notes Moats. "But what is more important is for them to feel they can trust someone to keep what they tell them in confidence. It has been my experience that farmers really appreciate having someone to discuss business matters with and someone who will help them that they can trust outside of the family."

Get the process started

A common misconception about succession planning - and likely the most important factor that makes it uncomfortable for farmers - is that the process focuses primarily on structuring the business to pass onto children. While this may certainly be a component, succession planning is often more about securing the golden years for the principal(s). The important thing is to get the planning process started.

Often individuals are reluctant to get going, even having that first family meeting, simply because they are convinced that management succession and ownership transition are identical when it comes to farm succession planning. They are simply afraid of either losing control or are not yet comfortable having someone else along their side to oversee day-to-day operations. In fact, it is quite the opposite.

Depending on size of the operation and the extent of holdings, it can take several years and many growing seasons to prepare successors before the senior generation owner feels comfortable handing over control of the farm. As time passes however, after they begin to get more confident in their successor's skills, the fears and insecurities of letting go of the control will likely be reduced.

Once it is determined who will be the next generation running the farming operation, a CPA can help develop strategies that provide fairly for all interested parties, especially family members. Once those decisions are made, it's up to the CPA to work with all concerned to develop a plan and build consensus among all for accomplishing it.

Further, CPAs have the experience and knowledge of tax and inheritance laws to explore strategies for accomplishing succession of farming operations in the most effective way, along with the ability to address potential circumstances that rural folks may be less likely to encounter as often as their suburban peers - divorce.

Respect generational differences

"Few people, especially those residing in rural communities, actually enter into a marriage thinking it will end in divorce," Moats says. "Even if the thought does cross their mind, they are not likely to bring it up, or address it in a succession plan. Sometimes it's up to a CPA or trusted advisor to bring such uncomfortable things into the discussion."

In many respects, given the varied interests of so many different individuals that will likely need to be addressed in developing a farm succession plan, a CPA also plays an important role in helping keep the peace. Outside of the expected - advising on the financial, tax, and inheritance implications of passing on the family farm - a CPA's primary role may be that of counselor and negotiator.

While none of us like to think about getting into squabbles with brothers, sisters, cousins or in-laws, this may happen. Don't underestimate the important role that a CPA can offer in mediating the sometimes tumultuous landscape with the courage to address what family members all-to-often are uncomfortable doing so.

Source: Iowa Society of Certified Public Accountants