Business Link

Planning a Financial Transition

Image by Jim Patrico

Successful succession plans don’t happen overnight. They take years of planning and strategic thinking to execute.

“I call it a nurturing process,” says Cal McCastlain, an attorney with Dover Dixon Horne, in Arkansas. “The actual execution may come in parts or bits and pieces.”

In the best-laid plans, successors start working at the entry level and gain managerial responsibilities as their understanding of the business grows. McCastlain says this works really well on operations that include service business components such as custom application or dirt work, where the successor can ultimately take over management of those components.

FISCAL RESPONSIBILITY

Conditioning the next generation to make smart managerial and marketing decisions is only one aspect of succession planning. Another crucial aspect is easing them into the farm’s financial obligations.

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“It’s unrealistic for all parties just to drop in on the lender one day and say, ‘Dad’s retiring. Put all these financial obligations in the name of the successor,’ ” McCastlain says. For the bank, the transition is essentially a new relationship with different levels of perceived risk and trust. It may not be able to accommodate an abrupt change.

That’s why McCastlain says it’s important to get the next generation started on its own commercial credit experience as soon as possible, even if it’s as simple as buying a single piece of equipment. Another good strategy is to have them farm separately or take over the financial obligations of the portion of the business they’re managing.

“The key is to get started as soon as you can in setting up the successor. You want that successor to have that credit in their own right, not guaranteed by the older generation or someone else,” he says. “Then, ultimately, they’ll be able to take on that larger debt, that larger operation and all of the obligations that go with it.”

VENDOR RELATIONSHIPS

It’s also important to transition the relationships with landowners and other third-party vendors. Landowners enter into lease agreements with tenants based on their ability to farm, stewardship and a number of other factors that go into being a good tenant. The successor has to live up to those expectations. It’s the same with vendors.

As the primary operator’s retirement draws closer, McCastlain says it’s important to work with a team of advisers, especially a good accountant, to prepare for the tax implications of having a year of income without offsetting expenses.

“I think that part of it, the retirement year should take two or three years of planning. If it’s left unplanned, you can have a lot of unexpected expenses and costs, and worse, bunched up income from crop sales and equipment sales without offsetting expenses.”

A solid business plan, talented group of external advisers and good third-party relationships will go a long way to a successful business transition, but McCastlain says the key is a loving family unit.

“You’ve got to be prepared for some life changes that might occur along the way that disrupt the plan. Divorces, death and things like that wreak havoc on the best-laid plans.You’ve got to have a very solid and honest family relationship. That’s first and foremost.”

Read Katie’s business blog at about.dtnpf.com/business.

You may email Katie at katie.dehlinger@dtn.com, or visit @KatieD_DTN on Twitter.

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