Working their way in
Darrell Dunteman has an ironically simple recipe for bringing the next generation into the family farming operation.
Simple, because it only has five steps. Ironically so, because such transitions are rarely simple.
• Young people should work off the farm before returning.
• Write plans for transition and succession; set aside emotion.
• Avoid a side business that benefits only one partner.
“There’s no one hard-and-fast way to approach this,” acknowledges Dunteman, a Bushnell farm accountant who has spent decades advising farm families about their finances. “But if you go to these five points, you’ll come out better.”
1. Leave the farm. That’s right; get away. “The first step is to make sure there’s a break,” Dunteman says. College counts as a break, as does working for a couple of years after college or working for another farmer instead of going to college.
“We’re seeing more guys working in industry, then coming back. They get used to working with people, and they have a better experience level when they come home.
“The biggest thing is to break that father-son bond where Dad’s in charge, and where he’ll always be in charge and son will tuck right in.”
2. Get to work. “Whether they’re related or unrelated, I like to see young people have a two-year ‘internship’ where they do not accumulate any assets,” Dunteman says. The parties agree to a two-year employment where the young person is given charge of, say, 80 acres to make all the decisions on and do all the work on.
“The internship gives everybody a good chance to look at one another and see what’s going on. At the end of two years, you can look at each other and say, ‘This worked’ or ‘This didn’t work.’ There’s no obligation by either party to go on.”
3. Put it in writing. During the “internship,” create a document that sets aside emotions and says what both parties will do. The document can be as formal as a contract or as informal as a letter, but it should outline:
• what you hope to accomplish
• how you will handle it
• that at the end of two years, the young person has the right to join, and the parents agree
4. Join the operation. At this point, the business structure will determine how the young person formally joins the operation. Those working with incorporated operations can buy shares (see stories on next page), and those in partnerships can buy assets.
“I really like to see the son or daughter become an equal partner on the equipment side of the operation,” Dunteman adds. “The ideal goal is that at the end of two years, the son or daughter inherits, buys, whatever — and is an equal partner on the equipment side of the operation. They might even have to rent Dad’s ground. But if that son or daughter only has 25%, they already have less votes.
“The big thing is to make it a win-win situation, with the end result being equal ownership, and then actually do the buyout when Dad gets ready to retire.”
Again, get it on paper; the plan is what protects the child. “If I come back,” Dunteman hypothesizes, “I want to know I will be able to work there my working lifetime. I don’t want to end up with two or three partners who have no assets.”
5. Father plans exit. In the preagreement, Dad should roughly outline when he plans to retire, Dunteman says. It gives the son or daughter an idea of what to expect: when they’ll be a junior partner, an equal partner and eventually, the senior partner. “Dad needs to be thinking about that because at some point, he’ll need to make an exit.”
Additionally, this succession plan should be coordinated with the estate plan, as they will need to work together to protect the operation and the child.
“Son or daughter is making a commitment, and they have a right to know they will be able to operate the farm and not have the operation sold out from beneath them when Mom and Dad are gone,” Dunteman adds.
Beyond the five steps? Dunteman adds one more thing: Don’t allow side businesses that profit just one partner. Small stuff is OK. But one person shouldn’t be able to draw more income because the part of the business he or she manages is more profitable in a given year. Nor do you want to be in a situation where one child accuses another of stealing time from the farm to work on a pet side business.
“Inequality breeds dissent,” Dunteman adds. “If you’re truly going to be a partner, everybody needs to be pulling the harness in the same direction.”
This article published in the December, 2011 edition of PRAIRIE FARMER.