When Family Business Transition Makes No Sense
Farm Business Management Update, August 2001
By David M. Kohl
Recently, while addressing a group on modernization and expansion of the farm business, I was asked, "How successful have you been at steering students away from unprogressive operations?" My initial response was that I had not been very successful, but further thought shed a different light.
Planning the future of the family business is not simply a one-time event. The world is too complex and the family's goals and philosophies change over the business and personal life cycle. If your response to many of the following key considerations for entering a business is no, the probability for problems is high.
Specific Responsibility and Accountability
One of the first signs of transition challenges is when the older generation fails to define roles and responsibilities in the business. Often a young person is lured into the business and becomes a "Jack of all trades." However, he/she stays in that job forever. A general rule is that the new partner should be making some management decisions within a six-year period.
Lack of Outside Experience
A young person just out of high school loves agriculture and the area. He/she goes away to college, becomes disenchanted, and quickly returns to the farm and family nest. Usually within two or three years, he/she gets married. The business generally does not have sufficient cash flow to support the second family. The second family becomes upset. The results are predictable. The younger generation usually leaves the farm or gets divorced, and family blow-up ensues. The solution is to get experience away from the business for 3 to 5 years.
Size and Efficiency Counts
Before a new member enters a business, the additional or incremental earnings required for him/her have to be known. If the earnings are insufficient to support an additional family at their expected standard of living, the spouse must consider working in a non-farm job to make up the difference.
The following scenarios need to be considered. If a young person desires a family withdrawal of $40,000 annually, including benefits, the following productive units may be required. For a dairy with average net income per cow of $500, the increase would be 80 cows. Deviations in net incomes per cow increased the range to 200 cows for inefficient operations to as low as 50 additional cow units for highly efficient dairymen. If the net income per acre for the typical crop farm is $100, the additional productive acres would be 400. Less efficient farms netting only $50 per acre, then an additional 800 acres would be required.
In Virginia, cow-calf operations are very popular. If the cow unit nets $125 per herd, to support a full-time partner without additional off-farm earnings would require another 300 to 350 cows. These scenarios illustrate how the dollars and cents relate back to production numbers. The math needs to be done for each operation.
Grandma's and Grandpa's Estate Plans
Often in the agricultural community with tightly knit extended families, grandparents of the Great Depression generation are very tight-lipped about provisions in their estate plans. To compound this problem, Mary and Joe, who work on the farm, perceive that Uncle Jim and Aunt Betty, who have nothing to do with the farm, will share in the estate. Failure to have open and clear discussions of family business estates is a sign of potential problems. The old saying is, "Either pay now or pay later!" To carry on the family legacy, open communication is the key.
Decisions Made on the Run
Stepping back and observing the business is necessary. Are the partners so busy with the daily $100 decisions that they overlook the $10,000-a-day aspects such as transition planning? Is the spouse, who is not immediate family, not invited to family discussions? If this sounds like your family, you're not alone. The above scenario gets caught in "episodic" transition planning, i.e. a major event such as death of a key partner, leads to an emotional and traumatic fix to a neglected business practice. The usual result is the loss of money, family harmony, and time.
"Life cycle" or disciplined planning is critical in any family business. Periodic time-outs or short sabbaticals from the daily grind are essential to maintain continuity and energy in the business.
Junior is away at college. Mom and Dad call to tell him the farm is going down fast. They can't get away for vacation or time off. The best cow is sick. This scenario has played itself out numerous times in my teaching career. My best advice is to stay in school. If Mom and Dad are good managers, they will work out the problems.
21st Century Business
Does the business and location you are returning to offer an opportunity to establish productive roots for an extended period of time? Does it have the soil, water, and markets that make it viable? Are you near a locale that has the infrastructure, schools, hospitals, and shopping areas that make it appealing to the early 21st Century family? As a rule, young people like to be located within a 45-minute drive of the mall.
Classes at Virginia Tech, conferences, and seminars have been designed to incorporate some of the philosophies and thinking presented in this article. The more that I think about it, young people and their families are asking the tough questions addressed in this article, which leads to discussion and a smoother transition.
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