CABO SAN LUCAS, Mexico (DTN) -- Lloyd and Daphne Holterman have been partners in business as well as life for more than 30 years. The husband-wife team built a successful 900-cow dairy near Watertown, Wis., from scratch, paying market rates for the start-up equipment and genetics they acquired from Lloyd's parents in the 1980s. In between, they've buzzed country roads on their Harley-Davidson motorbike for fun and traveled as far afield as the former USSR and the Baja Peninsula in Mexico on business. They've also raised two outstanding college-aged daughters, Lauren and Taylor, who might one day want to farm but are too young to decide yet.
So in the next phase of their life adventure, the Holtermans will be bucking conventions, this time by transitioning farm ownership to two long-time key employees -- crop manager Tim Strobel, 38, and dairy operations manager Jordan Matthews, 25. Both men were local boys who have worked on the farm since they were teenagers; Strobel has been a part-owner since 1999 and Matthews chose a dairy science and business degree in college to refine his skills.
Both said they are willing to "live dirt cheap" and reinvest virtually everything "except their retirement funds and life insurance" for the chance to own a stake in one of the state's top dairies.
"There's risk in being a minority shareholder, but there are risks in farming, too," Strobel said. "This was a way for us to get our foot in the door and build some equity."
BEST OPTION FOR OWNERS WITHOUT HEIRS
While employee successors remain rare in U.S. agriculture, they do offer a solid option for owners who are without heir apparents but who want to see their farms transition intact. The key to success is good chemistry with partners and starting early in the planning process.
"I don't really want all the grief and stress from making every decision on the farm, but I'm not falling into the dust heap of humanity just yet," joked Lloyd, a youthful 55-year-old.
Progressive farms need the vitality and passion of younger partners if they are to continue to innovate and reinvest in technologies, he added, but his role will be more of a mentor and investor going forward. He's also planning to stay engaged in his registered cattle business.
For the time being, Daphne will continue to handle environmental regulations, payroll, accounting and human resources for their 20 full-time employees.
The Holtermans' slow retirement plan involves a gradual sale of the operating business, Rosy-Lane Holsteins LLC. Lloyd and Daphne will retain title to their farm real estate and facilities in a separate business entity, using future rental income as their "pension."
In essence, Strobel and Matthews will buy the operating company -- cows, feed, machinery, tools, etc. -- just about all items you can sell at a "farm auction." Still, affordability of what can be a $5 million to $10 million investment is a major obstacle for young partners on a salary. Both have small side investments: Matthews owns a few cows and Strobel owns a farm shop he built on his own land and leases at a profit back to the farm. But even so, they only have managed to buy about 1% of the farm's stock each year of employment.
"At that rate, we'd need about 100 years on our current salaries to own it all," Matthews said.
One option may be to increase compensation for their management roles as Lloyd and Daphne scale back. If the successors can own 50% of the farm in another 10 years, up from today's 14%, they will be more likely to qualify for bank financing on the balance.
"Sellers have to be realistic. We can afford to discount, because we'd have auction and realtor costs if we had a public sale. We'll also pay less in deferred taxes if we have a chance to sell over time," Lloyd added. (From a tax standpoint, however, employers need to be cautious. IRS may treat bargain elements like compensation income, so employees would owe extra income taxes.)
Transitions to non-relatives aren't always as open and businesslike as the Holtermans' case. Like a marriage, partners need time to assess compatibility before they commit.
"We recommend that potential partners go slow and work together several years, because these deals are difficult to unravel tax-wise if things go wrong," said Andy Biebl, a CPA and tax partner with CliftonLarsonAllen LLP in Minneapolis who has counseled upper Midwest farm families for more than 30 years. Making sure a successor has the ability to think like an owner instead of an employee is one hurdle, so mentoring and coaching are important. Operators must also share the same values.
"In grain operations, the easiest thing is for a junior partner to build a parallel operation and farm side by side, with each partner filing their own Schedule F. That way they don't need to spend a lot of money on lawyers and accountants," Biebl said. Gradually, most farm operators end up leasing their land to their successors.
Joe Kluender, president of Farm Family Dynamics in Mankato, Minn., also has counseled several crop and livestock operations through nonfamily sales. Some progress well, but some ended prematurely when partners realized they weren't a good match.
"There are really a lot of positives to the approach," Kluender said. "The farm stays more vital and forward looking if there's a successor on board. And it's a great tax management tool to keep assets and earnings on the farm.
"But to be successful, the arrangement needs to be formalized in writing, so both parties share the same goals," he added. "Lots of times, what the older partner says and what the younger partner hears are two different things, and vice versa. Sometimes, it's not as attractive an arrangement on paper as it is in theory. What's more, the seller needs to include provisions for a partner in an estate plan, so the goal is communicated to all heirs and stakeholders. If not, kids or other beneficiaries may assume they can cash in and sell the farm."
Trust is also key because retirees or their surviving spouses often finance the remaining sale over a 10-, 20- or 30-year amortization, Kluender and Biebl said.
"The benefit for the retiree is that payments are like an annuity and offer a long-term and more orderly process than a public-auction retirement," Kluender said. "The seller also has the satisfaction of seeing a life's work continue, even though his health or energy level ebbs."
Lloyd isn't worried about his successors. "Tim and Jordan earned the chance to be partners -- they're honest, motivated and treated the farm like they owned it before they did," said Lloyd. "I wouldn't handle the situation any differently if they were my sons."
For more help on farm transitions:
DTN's on-going Senior Partners series examines the financial, legal and emotional hurdles families face as they transition farm ownership from the senior to junior partners. To read other features in the package go to DTN/The Progressive Farmer In-depth at http://www.dtn.com/…
DTN University's "Pass It On!", CPA Andy Biebl's 2-hour, pre-recorded webinar, offers in-depth tax solutions to ease senior partners' retirement. Case studies apply to those transitioning with on-farm heirs and those without. Registration of $85 includes course materials and repeat access to the online course. http://www.dtn.com/…
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