When sitting down to build a farm’s succession plan, there are a number of variables for the team to consider. Succession planning should start with getting the farm organized – including what parties should be involved in the discussion. (Read: Success in succession planning – getting organized.) Two other key components are performing a thorough financial analysis and working through legal aspects.
Earlier this year, Dairy Stream – a podcast coproduced by Edge Dairy Farmer Cooperative and the Dairy Business Association – released a three-part series titled “Success in Succession Planning” tackling these topics. The second episode focused on the financials.
Dairy farmer Kari Gribble of Tri-Fecta Farms in Wisconsin and Eric Gullicksrud, vice president of tax and accounting at Compeer Financial, provided their expertise and firsthand experience with setting up financial success in a farm’s transition plan.
“My brother Nick and I started buying into the farm back in 2002,” Gribble said. “At that point, our parents loaned us 10 cows, and we paid it back as we sold the milk. It was always important for us to have ‘skin in the game.’”
The loan did not come without expectations set forth by their parents.
“They always had rules where we had to get an education, work for somebody else and then return to the farm with something of value,” Gribble said.
Gribble’s family has set up the business in a unique way, as well. “We’ve worked under a parallel business model,” she said. “Our financials have always been separated. We run two different C corporations, and we have some LLCs. It has allowed us to shrink one side as we grow the other, providing some control as to the speed in which we were transferring those assets.”
As Gribble and her brother began purchasing land from their parents, they realized the significant financial implications that came with the transition. Wanting to build a long-term strategy, they began attending succession planning workshops and researching lawyers until they found the right one for their situation.
Asset management
It has been about four years since the family put an asset plan in place, where they created a living trust. Gribble said it has completely changed their business model. No longer were they trying to accumulate cash for large down payments but were able to be more strategic about their goals.
Gullicksrud said Gribble’s situation, like every farm family’s situation, is certainly unique.
“I’ve been working with farmers for over 30 years,” Gullicksrud said. “Quite honestly, that is what I find so interesting working with farmers on their transition team.”
Gullicksrud has worked with many different types of situations – from parents selling the farm to their kids to two parties not related at all. He also has firsthand experience with his family’s dairy farm, where they are bringing his four nephews into the business.
Cash flow
The first step in any financial analysis starts with establishing the needs of the retiring party without sacrificing the needs of the business, according to Gullicksrud.
“We need to structure the deal to ensure the business meets all of its cash-flow needs,” he said. “The last thing we want to do is get the transition started when the next generation hits a cash-flow problem. You want to be confident in the plan you’ve developed.”
Using historical numbers can help provide clarity on the cash needs of the operation. Gullicksrud likes to see at least three years of cash flow records. This can help provide a clear picture of the business’s needs.
If cash needs are not met, the new business owners may have trouble obtaining credit with such low equity. Having a creditor involved in the process can help alleviate some of these issues, he said.
Know your business
Gribble reiterated the benefits of putting together a thorough analysis of the current business. “Having a comprehensive list of assets, liabilities and due dates is a really good first step,” she said. “As you’re going about creating a succession plan, spending money up front to do things correctly is a worthy investment that can save you money in the long run.”
Gribble also mentioned using software programs to help manage and analyze cash flow needs and history. Her farm’s diversified business structure – with dairy, crops and other operations – allows substantial flexibility for cash flow. “Having a clear understanding of the debts that you have – whether they are long-term or short-term, fixed or variable – can help you know what your strategy should be,” she said.
Knowing the monthly payment will help owners budget and build a plan for when some assets reach the end of their life for the farm. “As Mom and Dad look to decrease their assets, their old equipment will reach the end of its useful life,” Gribble said. “We can then purchase the new equipment, growing our side of the business and decreasing theirs.”
Of course, this entire process usually involves the younger generation taking out a loan to purchase assets. Gribble was no exception. “We utilized some long-term loan programs, as well as an operating line of credit,” she said. “Having that line of credit provides us with a safety net or cushion to get us through some times when our cash needs are greater.”
Building a strong succession plan takes time and investment, but Gribble says above all else, normalizing these discussions and establishing clear expectations will help. “For Mom and Dad, these are ultimately their assets, and we are not entitled to them,” she said. “Having a concrete plan can make them more comfortable that the business will continue to be successful.”
