In a three part series we are highlight farm transition planning. John Black joins us for the first episode. He shares tips to guide families through a farm transition.
Guiding Families Through Transition with John Black
This week’s episode is a podcast takeover that is part of The Farm Transition Planning Podcast series. We will explore farm succession planning, business planning, and more. We know that this is one of the biggest challenges facing multi-generational farm families, and therefore have joined forces with Darlene Livingston, Executive Director with Pennsylvania Farm Link and operator of a family livestock and crop farm in Indiana County, who will serve as our guest host for this series.
This episode’s guest is John Black, an ag business consultant with Farm Credit. In his role, John helps farm families tackle the transition process and the financial and business planning necessary to help both generations achieve their goals. For the full podcast, click here: https://www.buzzsprout.com/960592/10017744
Can you tell our listeners more about yourself and your passion in helping families through the transition process?
Insofar as my background, I grew up on a dairy farm in Blair County. After graduating from Penn State with a degree in AgBusiness Management, I returned to the farm where I was a partner for 25 years. After that, I spent nearly 20 years doing taxes, and 16 of them doing farm taxes. During that time, I also did some analysis work and budgeting, and I had the beginnings of helping farmers with their succession planning. I’ve been a business consultant with Farm Credit for four years. I help customers with feasibility studies, budgeting, transition planning, and succession planning.
I think transition planning is such important topic for farmers, because a family business can have such an emotional impact on the family structure. It's hard to separate business and family in any kind of family business. It is especially hard on a family dairy farm because of the long hours you put in. Essentially, the farm is the family's way of life. It's also a lot harder because of the huge capital investment. Things can get pretty emotional, and I think that's where I come in. I've seen a variety of different scenarios, and a lot of different things that can happen. However, I can come in as somebody that's not emotional and strictly look at the numbers and strictly look at the situation in a non-emotional manner.
What do you find are the biggest stumbling blocks for farm families in putting a farm transition plan in place?
I always have to look at the financial position. It doesn't seem to matter what project I do, whether it's a feasibility study or a succession plan or a transition plan, they all revolve around finances and what the farm can afford to do. The financial position of the business will largely determine what the transition plan looks like. As you know, there's three ways to transition assets: selling, gifting, and inheriting. Usually, it takes a combination of the three. If a business still has debt, how does that impact the ability to transfer? Can the business generate the cashflow to afford a buyout and still provide for all the members? Along with that, it's important to have good financial records so we can help determine what the needs are and what the position is.
Secondly, I think communication or lack thereof is a key stumbling block. Sometimes it's easier for families to not talk about a transition, and then the transition never gets done. As you know, farmers are farmers because they like working with animals, or they like working on a tractor, but they aren't in it for the people skills. A lot of times they're not very good communicators with one another.
Along with that, I would say the third thing is the ability to negotiate between partners. A lot of times in a family business you cannot look solely at your own interests. There has to be some kind of negotiation involved. I think these are some of the major stumbling blocks I see.
For most transitions, there's a senior generation and a junior generation. Do you typically hear first from the senior generation or junior generation, and why do you think that is?
I thought about this question for a long time, and I honestly think it depends on the situation. In my experience, I've had a pretty good balance between the older and younger generation with regards to who's pushing the transition plan. I see a lot of progressive families, and it all goes back to communication. For the ones that communicate well, I hear from the older generation first. Usually, they're ready to start transferring assets.
Keep in mind that the elements of farm transfer include three items: transfer of management, transfer of ownership, and the division of income. Typically, all three of these things don't happen at the same time. Within these elements, you might see the transfer of ownership starting with maybe cows, machinery, or animals and machinery. Then at the end they’ll transfer the real estate. Usually, it doesn't happen all at once.
In a progressive family where they're communicating, they've generally already started to take this step with the transfer management and they're ready to go onto the next step. I'll hear from the older generation first in this case. On the opposite side of that, sometimes in a family that doesn’t communicate as well, none of this has happened. Then you'll hear from the younger generation. When I mention the younger generation, I am referring to people in their forties or even fifties. Still, the transition of the farm hasn't taken place yet. Now the younger generation is the one that is contacting me because they want to get mom and dad moving. I really think it depends on the situation in terms of who I hear from first.
Let's hone in on the senior generation. What are some key considerations to ensure the senior generations' needs are met?
First, it is most important to start early. I think that finances are a key to this, so we have to do an evaluation of the farm business assets. What can the business afford to do while still providing an income for the remaining people in the operation? Has the senior generation looked at their social security and checked their statement lately? We all hear the bad things about social security and that we can't rely on it to provide for our retirements. In reality, the social security benefits are the basis and cornerstone of our retirements. If you haven't looked at it in a long time, then a good place to start is to look at that. Do we have time to build social security if we don't have enough income for the future? Are we still young enough to be able to bump up our income a little bit through the next few years as we get closer to retirement?
Another big decision is deciding when the best time to take social security is. If you take it before your full retirement age, you’re going to have reduced benefits. You can start taking social security at age 62, but that benefit is going to be 30% less than what it is in full retirement. There are also income limitations involved with that. On the other side of it, if you wait until you're 70, from the time you reach retirement age until 70, your benefits will go up about 8% a year. If somebody has a full retirement at age 67, but they waited until they were 70 to start taking that, they could be seeing a 25% boost in their social security income.
Besides social security, we start looking at other non-farm assets. Do they have any IRAs? Do they have pensions from an outside job? My main goal is to make sure the senior generation is comfortable and that they have what they need to provide for their needs in retirement. I also look at life insurance. Does your life insurance have possible payouts for some of the family members? I think a key consideration that we always want to look at is the treatment of farm and non-farm heirs. I adhere to the rule that equal isn't fair and fair is not equal. As a parent of grown children, I certainly want to leave non-farm heirs with something too, because it's important that we provide for all of them. Those are some of the key considerations I have for the senior generation.
Now that we've talked about the senior generation, let's focus on the junior generation. What recommendations do you have for the younger folks to not only ensure a smooth transition, but to have a viable business?
Again, one of the keys is to start early. A young person has the enthusiasm and the work ethic to get things done. Don't wait until you're over the hill and aren't able to put forth the effort it takes. Don't be afraid to take the mantel as a young person. You need to take on responsibility to show that you're ready to take on ownership of the farm. The ability to take on responsibility and take on management decisions is a key part of the transition process. The younger generation needs to exhibit strong personal financial health. They need to keep their personal debt low and save to invest as a buy-in to the business.
They also need to demonstrate financial responsibility. Do they have a lot of high price toys that they’re buying? Are they taking lavish vacations? Do they spend frivolously? Be careful of all these components because the senior generation is watching. They want to see that you're responsible. Additionally, financial responsibility improves your borrowing capacity in case you need to borrow money to facilitate a buyout. Another key here with the younger generation is willingness to communicate. Communication is key no matter what we're doing in this transition. Not only is it key with the family members, but also with their spouse who is not involved in the business itself. Those are some of the key considerations for the younger generation.
Farm transitions aren't only about succession planning. Sometimes we see farms transition to different enterprises. How do you suggest farm families approach such changes?
Above and beyond everything, do your homework. A lot of times, we're talking about a value-added enterprise to complement existing enterprises. For instance, a dairy farm could take on some processing equipment and make a cheese enterprise or a bottling enterprise. Other times, it's trying something new that you don't have a lot of experience with. In either case, you need to get a business plan. Get a team of experts to help you with this business, to educate you in all aspects you're not sure of, and to make sure that you're aware of roadblocks you haven't thought of.
You may be familiar with what you’re doing, but this is uncharted territory. You’re going to come across things that you have not thought of. You want to make sure that you have budgets done for financing. You want to make sure you have a business plan that covers all aspects of this. Make sure you have gone through things and worked with a team of experts. They'll bring a lot of things to the table that you have not thought of.
What is the one piece of advice farm families should remember while embarking on a family farm transition?
The big thing is to start early. A successful plan doesn't happen overnight. It takes careful thought and consideration that evolves over time. Involve everyone within the business. Have annual family meetings, discuss financial performance, and get the younger generation involved in finances early. I encourage everybody to work with a team of consultants, with a consultant, or with a team of advisors to help them through the process. Set your SMART goals and complete a written plan. Finally, take that plan and review, review, review. Review not only to make sure that you're on track with your goals, but also to make adjustments with your plan. The plan isn't rigid. Life changes, your plan has to also.
Thanks for listening along with us, as Darlene and John discussed helping farms through the transition process. John's perspectives on key aspects for the senior and junior generation to consider, and his suggestion to start early, are so important for farm families to keep in mind. To learn more about the mission of Pennsylvania Farm Link, visit pafarmlink.org. Remember to check out our next podcast in the series, where we'll interview Marlin Hartzler, a crop and hog farmer from Belleville, Pennsylvania. Marlin will reflect on his farm transition and share his perspective. Join us next week.