February 19, 2021
In the days of no travel and confinement to “cyberville,” the opportunity to present to an in-person group is especially enjoyable. One such experience was as a guest lecturer for a senior-level agriculture management class at Virginia Tech. Over the three-hour lab, it was enjoyable to engage with the students, many who planned to return to family-owned farms and agribusinesses after graduation. One section of the lab was devoted to family business transition with a combination of lecture and a case application. The following is a checklist for young people to consider before returning to the family business. While this checklist is not all-inclusive, it provides a start to the critical questions for crucial conversations.
The first step is to analyze whether the business has been profitable using a three- to five-year trend analysis. Be careful of using Schedule F or Schedule C tax records designed to lower the income tax burden with revenue, expense and depreciation adjustments. These adjustments and aggressive depreciation methods allowed by tax laws can distort net income. This is why accrual adjusted statements can be a useful tool for the transition analysis.
In family businesses, one common flaw is too many people in the business as it relates to size or the ability to generate net income. If full-time, will the new generation produce at least $40,000 to $70,000 of additional net income? This is important to ensure the business is large enough to accommodate multiple family members from the business.
Next, conduct a resource assessment to evaluate the equipment, land, structures, livestock and overall infrastructure. What is the remaining productive life of the assets? Are they rusted out, worn-out, and faded out? If something needs to be replaced, these unexpected capital expenditures can be a financial burden on the new generation.
In a family transition plan, the people equation is especially important. What will be the role and responsibilities of siblings? Where will the parents live? What are the skills of the major players and stakeholders? These subtle, often overlooked components of transition often raise their ugly head when tension and pressure occur.
Does the senior generation meet the 50% rule of retirement income needs? At least 50% of retirement income should be generated either through Social Security or investments outside the sale or lease of the farm business.
Finally, is there more than just an asset or equity estate plan? What is the management transition plan to transfer the necessary operational skills to the next generation? Often, this transfer of management skillsets happens too late with less than desirable results.
These questions were applied to the in-class case study that resulted in some interesting discussion and, in some cases, debate. It would be interesting to be a fly on the wall during some of these family discussions when the students return home.