Transferring Your Farm Business to the Next Generation

Bulletin 862

Part III People Issues in Transferring the Farm Business

Some Reasons Transfers Fail

What explains the often observed difficulty of keeping family farm businesses going beyond two generations? There are the obvious answers: lack of profits, inadequate financial and legal planning, bad luck, farm is too small or too large, and failure to stay current with technology and modern farming practices. However, there are additional reasons that center on people and the family. These reasons include:

1. Family farm businesses mix business and family. For example, family Thanksgiving dinners, often involve more farm talk than family talk. Family problems are mixed with business problems. Solutions are rarely pure business or pure family in nature.

2. It is difficult for any one farm business to provide opportunities that fit all family members' strengths. The strengths may be in skills not applicable to a farm. For example, a dairy farmer's three children may have limited mechanical, financial management and animal husbandry skills. Their outstanding artistic, musical and finish carpentry skills do not provide a strong pool of talent for a dairy farm's next generation of managers.

3. Farm businesses typically provide limited career growth opportunities for family and employees. The vast majority of family farms have fewer than 25 key, year-round people. They usually have one or two levels of management and only one or two top level managers. So, even a highly motivated and talented 35 year old may have a 20-year wait for an opening higher in the business.

4. Health, marriage, weather, and economic calamities can bring ruin to even the strongest of family farm businesses. Planning and insurance can only provide some of the needed protection.

5. Business continuity requires generation to generation transition. Correct timing is essential. However, the parents may be unwilling to give up control and authority at the time the next generation wants it and should have it. On the other hand, the next generation may not be ready for their responsibilities when they should take them.

6. No two farms and no two families are alike. Each family must discover its own strengths and weaknesses, its own opportunities and its own niche. What has worked beautifully for one farm family business may be a recipe for failure in another.

7. The farm family must continuously deal with change. The changes are diverse and pervasive: technology, public policies and regulations, growth and aging of people, and economic opportunities. Farm families must manage change, not avoid it.

8. Lack of parents' acceptance and affirmation of their children. Parents may not take their children's emotional needs into consideration. Parents' assertion that promises of a future on the farm should be enough, may leave children feeling like no more than another worker.

Taken together, these eight reasons demand the best in management creativity and planning to bring about successful transfer of a farm business to the next generation of family members.

There are no simple, or even complex, recipes on how to transfer a business that guarantee business continuity, all parties' happiness, and acceptance of the outcome. Some principles or guidelines can help, but each successful transfer is a unique challenge.

Personal and business goals of the current and future owners may be unclear or in conflict. For example, security for retirement may be in conflict with providing opportunity for all children to join the business. The families may never even discuss why the business is transferring and what would be success in the transfer. Even if there is discussion of these delicate questions, it may lead to more conflict rather than agreement.

There are almost always "winners" and "losers" in the transfer of a business. The transfer may treat people unequally even though they are treated fairly. The self-perception of being a "loser" can cloud the facts of the case and interfere with family relations for years.

Parents are dealing in their own lives with more than transfer of a business. Retirement plans may be tentative or even non-existent. Boredom with the challenges presented by the business can cause the parents to want quick relief from daily responsibilities. Little experience in delegating authority and responsibility may raise doubts about being able to unhook from the business. Chronic illness, age, and calamities such as divorce and fire can complicate the transfer.

In many cases, highly personal matters prevent the transfer from being a strictly business matter. Complicating factors include:

• disinterest of some owners in the business;
• differences in knowledge, skills, and abilities among the next generation of owners;
• treatment of special cases such as in-laws and step-children; and
• long-standing and loyal non-family employees.