Farm businesses typically go through a four-stage life cycle that is closely related to the ages of the owners. In the entry stage, they plan the type and size of business and how to get enough capital resources for a viable economic unit. The next phase is the growth stage, which emphasizes increasing the size of the business. Capital requirements increase, and the owners get resources by borrowing and leasing.
In the consolidation stage, the family tries to maintain and stabilize the resource base and income stream. Repaying loans is more important than getting more resources. In the exit stage, the owners withdraw their labor, management and capital from the business. The exit can be voluntary through planned retirement or forced by advancing age, ill health, accident, or death.
This bulletin focuses primarily on business transfer issues that occur during the consolidation stage. Typically the parents want to provide an opportunity for children to come into the business, but they aren't quite ready to "exit" and withdraw their labor, management and capital. This stage is difficult because the experience gained from a lifetime of active farming helps little in dealing with the complex personal, financial, tax and legal issues.
Here are some typical goals of parents who want to transfer an on-going business to the next generation:
Families frequently are trying to simultaneously juggle another set of estate planning goals related to their exit from the business. Typical goals, as described in Bulletin No. 595, Estate Planning Considerations for Ohio Families, are to: 1) provide for the financial needs of a widow/widower, children, and other dependents, 2) provide adequately for the parents during retirement, 3) treat all children fairly, not necessarily equally, 4) maintain the business as an efficient and functioning unit, 5) provide liquidity to settle the estate, 6) maximize the amount remaining after settlement costs, and 7) maximize total family satisfaction.
Some of these goals are the same as the previous list. Others are different. Clearly, though, the business transfer and estate planning goals cannot be addressed independently. For example, business transfer decisions affect retirement and liquidity to settle the parents' estate.
Fulfilling these goals also requires a realistic assessment of resources, abilities and circumstances. Some families have large businesses that can easily bring in one or more members of the "next generation." In other cases, the business is barely large enough to provide adequately for the parents. Some parents want their business to grow and prosper, while others want to slow down and enjoy the fruits of their labor. The abilities and aspirations of prospective new entrants also affect the intergeneration transfer decision.
Timing and the number of other children are also important. An intergeneration transfer may be simple if the parents are five years from retirement and there is one capable child who is willing and old enough to start farming. At the other extreme are 45-year-old parents with a modest one-family business, substantial debt, two married children who want to farm with them and three other children. Transferring the business to the next generation is certainly easier if the entry stage for the children coincides with the exit stage for the parents.
Families frequently face trade-offs among goals. It is important that all family members, including in-laws, understand why parents made certain trade-offs. Clear recognition of the important goals in the consolidation stage is important.