Legal matters, business strategy, and life perspectives from the mind of a non-attorney.
Farming runs deep in my bloodline.
My ancestors were homesteaders. Farmers by trade. According to the Portage County records, Henry H. Dopp settled in the BOOMING (there were 3 families total) township of Belmont, WI around the year 1852.
Fast forward 166 years and natural selection hasn’t taken its course on the Dopp family.
But it has taken its course on the Dopp Family Farm – at least our portion of it.
My Grandfather still farms a small portion of the original Dopp homestead today. But it’s just a fraction of what ‘Dopp Farms’ was in its hay day.
I grew up less than a mile from that homestead. We drove past those fields every day on our way to and from school. I still drive past it every time I go home to visit.
I sometimes wonder how life would have been different if somebody else had been given the keys to the operation after my great-grandfather stepped out. If some better – more proactive – planning had been done, maybe the operation wouldn’t have failed while my dad was graduating high school.
Would my dad have followed in the family footsteps and become a farmer himself? The answer is likely yes. After all, his lifelong idol – my great-grandfather Russ Dopp – was the very man who had built the operation to one of the largest in the area.
WHAT WOULD I BE DOING?
It took only one generation of mismanagement – no, no. One PERSON making a series of terrible, erratic decisions – to unravel the whole deal.
Boom. That was it. Dopp Farms – for all intents and purposes – was gone.
The rest is history.
Dad went into Ag sales instead of Ag production, and my brothers and I haven’t spent but a handful of days working in the fields.
Amazing how life goes sometimes, isn’t it?
Whether you’re considering an internal transition or a sale to a 3rd party, here are a few tips so your farm doesn’t implode like my family’s did.
Things to consider as you transition your family farm.
Fair does not mean equal.
This is a big one for farms. Inevitably, most farm operations have some children who are an active part of the farm and some who have moved on to “bigger and better” things. How do you split it up ‘fairly’ among all the kids?
I can’t answer that question confidently without having a conversation with you, but I can tell you what not to do:
- Don’t avoid the conversation. The absolute worst thing you can do is ignore the conversation and keep the future of your estate a mystery to your children. In the face of mystery, most people begin to act very irrationally. Starving for clarity on the situation, they will formulate their own (false) set of facts to try and control the narrative. Depending on their outlook on life, those facts will be heavily slanted for or against them, and fracture within the family will ensue. This can all be avoided if you – the leader of the family – are willing to step up and provide a clear and well-reasoned agenda for how the farm will be distributed. You should do it the moment you sense it becoming a concern among your children.
- Don’t discount sweat equity. The children who have an active role on the farm have likely contributed to the growth of the business as a whole. In addition to helping you grow the business, they have worked longer hours, taken on a greater amount of risk, and potentially earned less compensation than they would have if they had never come back to the farm. While it is difficult to quantify what this is worth, it is a great mistake to ignore sweat equity entirely. Doing so will likely fracture the business and personal relationship you have with your children who are active in the business.
Finding – and keeping – a Successor.
It is no secret that the farming industry as a whole is having a very difficult time finding and retaining hard-working, trustworthy, talented employees.
Suppose you don’t have any children who are interested in taking over, or perhaps you do, but you know they – alone – won’t be able to manage the whole operation. What do you do?
Once again, I can’t answer that question confidently without having a conversation with you, but here are a few good ideas:
- Update your employee benefits. You are not allowed to complain about “no good employees” if you aren’t offering the most basic employee benefits. This isn’t 1980 anymore. You need to offer a 401k, a basic healthcare package with dental and vision, and a smattering of PTO days.
- Offer a clear path to ownership. Handshakes and verbal “promises” of future ownership aren’t going to cut it anymore. It’s your responsibility, as the employer, to offer a written plan that leads to ownership for your successor. Tell them what they need to get better at. Tell them how much money they need to save. Offer them a creative incentive program that helps them accumulate wealth.
- Contact a reputable “Ag” University. If all of your ducks are in a row and you still can’t find a successor, it might be time to start working with a reputable University to start getting talented young people in the door. Contrary to what you may have heard, there are still several thousand students pursuing ag-related degrees this year. UW-River Falls and UW-Madison produce the most. You can coordinate with their department coordinators to offer internships, schedule interviews, and promote post-graduate positions.
Growing the value of your business.
Understand something: As a farm owner, you can choose to think about the value of your business in one of two contexts.
- The value of the assets your business has accumulated.
- The value of the ongoing income your business generates.
By thinking along the lines of #1, you are not transferring a business upon your exit. Rather, you are selling assets. There is certainly nothing wrong with that, as your assets likely have a substantial amount of value…
However, by thinking along the lines of #2, you have much greater upside. If you are selling a business – a business that will continue producing income even in your absence – you have the opportunity to demand a premium on top of the Fair Market Value of your assets.
Whether you are seeking an internal transition or external sale, you likely want to drive the value of your farm business upwards in the years leading up to your exit.
Here are some things that can help you drive the value of your farm business upwards:
- Strong brand reputation.
- Valuable land base – difficult to replicate.
- Cross-training among management. Owner has delegated the majority of day-to-day tasks.
- Strong culture.
- Dependable management team.
- Customer base and/or special contracts that bring the business higher margins.
- Intellectual property (patents / unique processes).
- Highly efficient day-to-day operations.
Give us a call or shoot me an email if you have more specific questions!
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