Succession Planning in the Agriculture Industry
by Kyle Hanko, CPA
“Business IS personal.” Is there an industry that this applies to more than agriculture? Your dairy, raspberry or blueberry growing/processing operation, tree fruit, potato farm or other business has likely been the biggest time and energy commitment of your adult life. And now, it’s time to map out what the future looks like, both for you personally and for your business.
It’s likely that your future financial security depends on your largest assets — your farming business and its accompanying land. However, we understand that these aren’t just financial assets to you. If you’re like most farm owners, your desire is to leave a legacy, ensure your hard work continues after you step away and provide the same benefits (both financial and personal) to the next generation.
According to the Conway Center for Family Business, less than 12% of family businesses survive to the third generation. It’s not guaranteed that a thriving and successful business today will continue to be successful in the next generation of ownership especially given the challenging dynamics in the agriculture industry. A proper succession plan is important and should address the following questions (and much more):
- What is your vision for the transfer of ownership or management of the farming business?
- Have you identified one or more potential successors and defined a path developing them for leadership?
- Do you have plans in place in the event of your untimely death or the death of another leader?
- Do you have a cross-purchase agreement in place?
- Have you communicated succession plans with your family and worked through any potential issues with them?
- Do you have strategies in place to minimize taxes on your distributions, the transfer of ownership or the transfer of your estate?
- How are the cash flows of the business impacted over the next 5-10 years with a succession plan in place?
- How and when do you transition not only the operations of the farming business, but also the land?
- How do you manage the difficulty of the regulatory atmosphere and ensure the next generation is ready to take on these challenges?
These questions can be explored by having a proper plan that begins with addressing what your personal desires and objectives are. These are the things you’ll use as a theme and guide for the rest of the planning that needs to be done.
But what if you’re looking elsewhere – beyond your family or beyond key employees? Maybe you’re looking toward crafting an exit plan with the goal of a sale to a financial buyer or a strategic buyer. While you should start with your personal objectives, additional questions must be considered:
- How do you maximize value and keep a healthy set of financials well in advance of any sale or acquisition event?
- How do you address any potential red flags now so that, when the time comes for a buyer to vet your company, no “skeletons come out of the closet”?
- Is the internal infrastructure (human resources, accounting, legal and IT) strong in the case of a financial buyer? Or are you looking to get purchased by a strategic buyer which would likely eliminate these functions post-transaction and not offer value for them?
- How and where do you market and when do you go to market?
Another model of exit planning that has gained popularity in recent years is an Employee Stock Ownership Plan (ESOP). There are certain characteristics of an ESOP that make it a great method to exit a business. There are also characteristics, such as cost and other ongoing constraints, that make it an improper fit for some businesses.
With all these questions and potential options, planning is key. Not only is a plan important, but the following execution of the plan is critical. Keep an open mind and stay committed to being flexible or modifying the plan as time goes on and life simply happens.
One of the most important parts of the exit or succession planning process is consulting with an objective professional. If you’d like more information on how to start exit or succession planning, contact us today. Our experienced consultants can help with your exit or succession planning needs while staying true to your objectives – both personally and professionally.
Call us at (360) 734-4280 or fill out the form below and we'll contact you to discuss your specific situation.
Kyle Hanko, CPA
Kyle Hanko joined Larson Gross in 2014. He specializes in serving businesses that operate in the agriculture industry and has deep expertise in ownership succession planning.