By Ted LeBow, Co-CEO, and Evan Driscoll, Business Consultant, Kitchen Table Consultants
Ted LeBow, Co-CEO and co-founder of Kitchen Table Consultants
Many of the dairy farms we work with are family businesses. There are two core components to a family business: Family and Business. For many of our clients, the mixing of these two ingredients brings a great richness to their lives, spending many hours in the day together as a family, running and operating their dairy businesses. Sometimes, grandparents, parents, children, and grandchildren will all be actively involved in the daily operations. This dynamic often leads to a key decision point: Are you a family-first business or a business-first family? These phrases explore the priority setting between focusing on the needs and interests of the family versus the demands and goals of the business, which is a crucial balance to maintain for familial harmony and business success.
The main benefit of running a family business tends to be the family part. That said, it is critical for the business part to be built and managed in a way that allows for longevity and sustainability. It is half of the recipe, after all.
Family-operated dairy businesses experience change, and this change must be actively managed. Family members grow older and want to retire. Some children in the family stay on the farm, while others leave to pursue other interests. Family members move in and out of ownership in the business. Family strife, divorce, and death can create great waves of upheaval.
Being ready for these changes to your dairy business is essential for the family and the business. This is what we call ‘succession planning.’ It includes preparing financially and operationally, as well as thinking about the emotional and relationship aspects. Good succession planning involves all these areas, and, in some cases, it can take years to get everything aligned properly.
Dairy farm owners need a thorough plan to ensure the succession goes smoothly. This plan should cover fair wealth distribution, fairness, financial matters, family relationships, and whether the next generation is ready to take over. Here, we provide detailed considerations to create a solid succession plan to align with your goals and help your farm thrive and prosper.
For dairy farms, the path to a successful succession begins with a clear understanding of the farm's current financial and operational health. This comprehensive view is crucial because it lays the foundation for all subsequent planning steps, ensuring that the transition from one generation to the next is smooth and sustainable.
At the heart of financial assessments is the balance sheet. This document provides a snapshot of the farm's financial health at any moment. It's important to keep the balance sheet well-maintained because it directly shows the business's value, which is necessary for planning its future or selling it.
The Profit & Loss Statement must also tell a compelling and clear financial story about the farm’s profitability. Profits from the business often fuel succession planning, providing the internal financing needed to fund ownership transfers. If there are profitability issues, we will start here and work on fixing this.
"Clean financial records" mean books that are accurately reconciled, making sure the P&L statements and balance sheet reflect the farm’s real financial performance. This requires setting up a chart of accounts that tells a clear fnancial story. The books need to be closed consistently every month. These practices make sure the financial information is trustworthy and useful for decision-making.
Consider a dairy farm worth $1 million, including land, buildings, livestock, and equipment, but losing $10,000 annually for the last ten years. The financial difficulties are clear. If the next generation wants to take over, they might need external financing to cover the difference between the farm's value and its profits. This could mean getting extra cash or a loan. And, they would be buying a business that—if operated similarly— would continue to lose money every year. If the farm were making money, it could potentially finance itself over time through internal financing.
These financial documents—the balance sheet and clean P&L statements—are essential. They are key to fully understanding the farm's value and its ability to keep running, which are vital for planning a successful transition.
Succession planning should ideally begin at least three years before the planned handover date. This gives enough time to address any financial or interpersonal issues that might complicate the transition.
Sometimes, a financial turnaround is necessary. If the farm isn’t making money, it's crucial to understand why and take steps to become profitable. Look at the specific reasons the farm is not profitable. For dairy farms, key areas often include the size and composition of the herd, herd productivity, and the cost efficacy of feed programs.
To download our FREE Herd Model Template, click on the document at the bottom of this article. The worksheet enables you to track key herd metrics and project revenue.
It’s also vital to get ahead of any toxic dynamics within the family. Ensuring that everyone can have productive conversations without hurt feelings is essential for a smooth succession. This may require family counseling to help resolve deep-seated issues and promote a unified approach.
Succession planning involves many different people: the current owner (seller), the future owner (buyer), family members, a CPA, attorneys, appraisers, and sometimes a facilitator. Each person has a specific role, like managing taxes or the legal details of the transfer. It's critical to work with professionals who specialize in succession planning.
They can guide the process and help avoid any conflicts or misunderstandings.
It's vital to evaluate whether potential successors are ready to take over. This involves setting specific criteria and providing training to ensure they're prepared for farm ownership. Criteria might focus on their understanding of farm operations, management skills, and financial knowledge. Sometimes, the next generation has worked on the farm their whole lives and has a deep understanding of the operations and day-to-day.
However, they might have never touched the financials, applied for a loan, or managed key-buyer relationships. The current owners need to ensure the next generation has adequate training and ongoing support, even after the succession has occurred.
Planning for the current owner's future is also crucial. They might consider roles like consulting, taking up hobbies, or community involvement. If they want to continue to be involved with the farm, clearly outline how they will be involved. Will they retain a small percentage of ownership in the long term? Will they serve as long-term staff? What will they be responsible for, and are all parties okay with that? These activities can help them transition smoothly after handing over the farm.
Establishing a firm deadline for the succession ensures everyone is clear about the timeline. This deadline should be based on the readiness of the current owner and the successors. A defined timeline helps motivate preparation and aligns expectations for a smooth transition.
Beyond having clear financial records, consider the following to kick off a smooth transition:
Fairness is crucial in succession planning. Sometimes, creative solutions are needed to balance financial equity with the emotional expectations of all involved. This might include structured payment plans or specific roles within the farm to acknowledge each family member's contributions.
Think of sorting the components of a succession plan like "cleaning the closet." This involves organizing and deciding what to keep, what needs attention, and what to let go of, ensuring everything is ready for the next generation.
Using a checklist can help keep the succession planning process systematic and thorough. This tool ensures all essential steps are completed, nothing is overlooked, and progress is steady toward the set goals.
For dairy farms, succession planning isn't just about maintaining the farm; it's also about respecting a family’s legacy and improving the farm's success in the future. Dairy farm owners should begin the planning process with a clear understanding of their goals, the financial and emotional aspects involved, and the steps needed for a smooth changeover. This thorough approach helps protect the farm's future and helps ensure its continued success for generations to come.
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Posted: to Field Days on Sat, Jul 13, 2024
Updated: Mon, Jul 15, 2024
