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Business Transition 101: Phasing Out the Older Generation

Farm Business Management Update, February/March 2003

By Dave Kohl and Alicia Morris

Family get-togethers on the farm and ranch can be very joyful, whether they are winter holidays or summer weddings. The festive activities, sharing of stories and family traditions, and the sounds of grandchildren playing tag are experiences that memories are made of. However, frequently disguised in these family affairs are side conversations between the siblings.

A lip reader could zero-in on the questions. When are the parents and grandparents going to retire from the business? Who gets which assets and equities? Where are they going to live? Who is going to care for them if they become sick or if one of the parents should die?

Transitioning the older generation from the business is one of the top five challenges facing North American agriculture. It's more than having a lawyer draw up a will or an estate plan. It is a long-term, methodical process that requires planning, execution, and open communications among all parties involved.

Getting Started

The biggest hurdle family members face is getting the older generation motivated to think about their future. This initiative often has to be motivated by a trusted third party, such as a friend, accountant, lender, or lawyer. Sometimes an event such as a death of a friend or neighbor can trigger the discussion. In some cases, a seminar or article such as this one can be a subtle hint that a transition plan needs to be developed.


Orderly exit from the business is an emotional event. Frequently, an owner's ego and a lifetime of work and memories are being challenged. This can be emotional and trying for all family members.

Soliciting the assistance of an outside facilitator to organize and execute the planning process and reasoning among the family members is suggested.

Goal Setting

The facilitator will begin by determining existing and future goals of both the business and family so that everyone has input and can establish a clear direction for the future.

Family Living Arrangements

An overlooked part of the process is where the retiring generation is going to live. Frequently, communication problems can occur when the senior generation stays near the base of operation with an oversight of everyday decisions. If the older generation is moving to another location, the cost of the move and living arrangements must be considered.

When Are You Going to Retire?

The senior generation should never be asked when they are going to retire from the business. The common response is, "I want to die working in the business." A deeper, more thoughtful question is, "When are you going to be financially independent of the business?"

For an older generation retiring at the age of 65 with elevating life expectancy, the need for 15 to 20 years of earnings from the wealth built up in the business can be expected. With the average farm family living cost frequently exceeding $40,000 annually, a large equity base is needed. Thus, a well-established personal living budget is a requirement, not an option.

Where Will the Earnings Come From?

In the planning process, a candid discussion of where retirement earnings will be generated needs to be presented. Pensions, Social Security, retirement investments, and the sale and lease of business assets must be placed in the equation. Ideally, 50 percent of the retirement income should be generated from investments outside the business equity. This provides financial diversity to the senior generation and flexibility to the younger generation getting established and building wealth.

Non-Business Siblings

It's difficult to treat all siblings equally. However, discussion must occur in treating them fairly and equitably. Using insurance provisions or other investments compensate the non-business family members frees sweat equity built by the managing partners to be used for necessary growth of the business.

Written Plan

All the discussed recommendations must be developed in a written plan that is periodically updated. Within that plan, adequate protection in the event of disability, long-term care needs, and final death directives must be spelled out and communicated.

To carry on the family legacy and continue having get-togethers that are joyous events, the senior generation must face the realities of the life cycle, and plan, execute, and communicate. If they do not, they are mixing a recipe for business and family disaster.

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