Talk by Peter Callan at the 2011 Small Farm Family Conference

1. Saving the Small Family Farm
and Saving the Small Farm
Family
Original Slide Presentation Developed by Dr. Alex White,
Agricultural & Applied Economics ,
Revised & Presented by
Peter Callan, Farm Business Management Extension Agent
"Managing the Farm Transition" Workshop
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2. Transitioning the Farm
To The Next Generation
Is a Stop & Go Process
that is Convoluted
&
often Walks the same ground many times
before a Successful End Point is Achieved!
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3. Farm Transition Planning
 Crucial to survival of the farm!
 Involves many topics
 Goals
 Living arrangements & income needs
 Analysis of the resources & environment
 Estate planning
 Tax management
 Contingency plans (“What ifs”)
 Most important factor is Communication!!
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4. Getting Started
 Must assess:
 Family members’ goals
 Older/younger generation, spouses, heirs, etc.
 Personal goals and business goals
 Family members’ abilities
 Operating environment
 Economic viability of the farm
 Sounds like a business plan to me!
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5. $1 Million Question for You
 You have $1 million in cash
 Would you make plans to use it?
 Would you discuss your plans with family?
 Would you investigate your investment options?
 Would you get outside help?
 Would you include it in your will?
 When would you do these things?
 Ave. VA farm has more than $1 million in assets
 Would you answer these questions the same way
for your farm assets? 5

6. Possible Transition Options
 Continue to farm as a full-time operation
 Older generation is active partner
 Ben Cartwright School of Farm Management
 Older generation phases out of management
 Older generation gets out completely
 Operate farm as a part-time operation
 Both generations involved vs. one generation
 Lease the farm
 Sell the farm
 Sell the farm and purchase a farm in another 6
area

7. Goals
 Business goals
 Keep the farm in the family, (ownership)
 Keep the family on the farm, (operating that farm)
 Keep the family in farming, or (operating a farm)
 Keep the family from farming - Huh!
 Older generation’s business goals
 Younger generation’s business goals
 Personal & family goals
 Of all involved!
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8. Possible Business Goals - Topics
 More/less risk
 More/less debt
 Expansion/contraction of operation
 Increased/decreased labor effort
 Increased/decreased management
responsibilities
 No/dramatic change in operation
 New enterprises, markets, etc.
 Time away from the operation
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9. More on Goals
 Family living needs
 US ave. of 2008 US average pretax/household
income ~$63,500 (BLS)
 Averages family living expenses ~$50,500
(BLS)
 Do you expect any retirement income??
 “Non-farm” children
 Must clearly establish goals
 Involve all relevant parties
 Compromise
 Communication is critical!! 9

10. Goals
 Keep your main goals VISIBLE
 Mind reading not allowed!
 Communicate your goals!
 Revise your goals as necessary
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11. Communication
 It takes TWO to communicate
 Listening is critical
 Honesty and trust are critical
 Too often taken for granted by both parties
 Not always easy
 You CAN NOT communicate
 Body language, expressions, actions
 Environment is important
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12. Barriers to Communication
 Privacy issues
 “family secrets”
 Lack of mutual respect for each family
member’s goals, age and experience
 Personality profiles
 Chip off the “old block”
 Using guilt to “control” family members
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13. Is your family ready for the big
conversation?
 Taking stock of family unity and shared
values
 What are your family's shared values and
traditions?
 How have previous generation used family
resources to perpetuate the shared values?
 How will existing family resources be used to
perpetuate the shared values for future
generations?
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14. Steps a family can take to prepare
for open discussion about finances
 Each family member writes down answers to
the following questions before the meeting:
 Family members’ goals
 Older/younger generation, spouses, heirs, etc.
 Personal goals and business goals
 Family members’ abilities
 Can the younger generation manage money?
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15. Steps a family can take to prepare for
open discussion about finances cont.
 Net Worth Statement for older Generation
 Income requirements for older generation
 What are the older generation’s goals in the
distribution of assets?
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16. Steps a family can take to prepare for
open discussion about finances cont.
 Who inherits real estate and financial assets?
 Who inherits personal property?
 Furniture, dishes, silverware etc.
 Family heirlooms
 Who speaks to whom in your family?
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17. Holding a Family Meeting
 Who leads the discussion?
 Ben Cartwright rules of order
 “Golden” rules of family communication
 How to get people to speak?
 Rules of civility
 Respect for each family member’s comments
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18. Holding a Family Meeting cont.
 Avoid family secrets
 Discussion of fair vs. equal
 Third parties can help or harm the discussion
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19. Fostering Good Communication
 Have regular family meetings
 Discuss major issues candidly
 Leave your egos outside
 Meet AWAY from the farm/house
 Keep minutes of the meeting
 Respect for each family member’s ideas
 Consciously work on listening
 Be open-minded
 Don’t gloss over or ignore problems – be open
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20. Agreement on shared values for
future generations
 Makes estate planning and tax management
issues easier to address
 Promotes family unity
 Perpetuates family values and traditions
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21. Living Arrangements & Needs
 Where will you live?
 Before, during, after transition
 On farm, off farm
 How much money will you need to live?
 US average = 2008 US average
pretax/household ~$63,500(BLS)
 That equates to ~$400,000 of gross farm
income (84% Expense/Receipt Ratio)
 Need to develop a budget for family living
expenses
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22. Sources of Income – Older Generation
 Net farm income
 Continued draw from farm
 Lease of farm assets
 Sale of farm assets (after-tax)
 Off-farm salary/wages
 Retirement income
 Pension, Social Security benefits
 Personal savings & investments
 IRAs, 401(k), taxable inv., real estate, etc.
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23. Can You Afford to Retire?
 Retirement living needs
 60-80% of pre-retirement needs – this is not
realistic
 100-125%
 Some expenses hidden under the farm
 Increased medical expenses
 Travel, leisure, spoiling grandkids, etc.!!
 Retirement planning worksheet
 How long will your retirement funds last?
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24. How Long Will $600,000 Last?
Annual Living Expense Needed from Savings
$30,000 $40,000 $50,000 $60,000 $70,000 $80,000
1% 22.2 16.2 12.7 10.5 8.9 7.8
Real Rate 3% 29.6 19.4 14.5 11.6 9.7 8.3
of Return 5% 62.4 25.7 17.4 13.3 10.8 9.1
7% Forever Forever 22.7 15.7 12.2 10.0
9% Forever Forever Forever 20.3 14.3 11.2
Cell values indicate the number of years your portfolio will last.
Consider impact of inflation!
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25. How Much Must I Have in the
“Bank” If I Spend $50,000 per Year?
Retirement Portfolio
$200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000
1% 4.1 8.3 12.7 17.3 22.2 27.3
Real Rate 3% 4.2 9.0 14.5 21.2 29.6 40.6
of Return 5% 4.3 9.8 17.4 29.4 62.4 Forever
7% 4.5 11.0 22.7 Forever Forever Forever
9% 4.7 12.5 Forever Forever Forever Forever
Cell values indicate the number of years your
portfolio will last.
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Ignores any other sources of income

26. Resources: Abilities
 Carefully analyze each operator’s abilities
 Production, finance, marketing, labor mgt.
 “Business” management
 Organization, scheduling, creativity, innovation
 Listening, thinking, decision making
 Work ethic, trustworthy, honesty
 Personality profile
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27. Operating Environment
 Water, soils, land, & labor availability
 Adequate supply, adequate quality
 On-farm facilities
 Condition, capacity
 Infrastructure
 Supplies, financing, transportation, processing
, stable markets
 Regulations, zoning, urban pressure
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28. Economic Viability
 Depends on:
 Production capabilities
 Financial condition
 Marketing plan
 Operating environment
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29. Cash flow, profitability, debt mgt.
are keys successful farm transition
 Can the business generate sufficient
revenues to pay:
 Farm expenses
 Family living expenses
 Make debt payments
 Replace worn out capital items
 Equipment
 Buildings
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30. Is the Farm Worth Transferring?
 If “No”, plan accordingly
 Older Generation
 Sell or not? (Financial planner)
 Estate planning (Attorney)
 Source of income for living needs?
 Younger Generation
 Career plans?
 Source of income?
 Discuss with all relevant parties
 Spouse, children, partners, non-farm kids
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31. Is the Farm Worth Transferring?
 If “Yes”, plan accordingly
 Communicate early and often
 Clearly lay out managerial responsibilities
 Develop a transition “timeframe”
 Ownership and management responsibilities
 Communicate regularly!!
 Estate planning (Attorney)
 How to treat non-farm kids!!
 Put the plans in writing – business plan
 Communicate, communicate, communicate!
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32. Contingency Planning
 Always have an escape route
 Think about how to get out BEFORE getting in!
 Be creative, flexible, open-minded
 Look at opportunities vs problems
 Write down your contingency plans
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33. Consequences of NOT developing
and implementing a transition plan
 IRS has a plan for you!
 Legislation mandates how property is transferred
between generations
 Estate transfer laws may not implement the
older generation’s wishes for the transfer of land
and family assets
 Strained relationships between family members
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34. Questions?
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