What’s It Worth If You Stay On The Farm?

What’s It Worth If You Stay On The Farm?

John R. BakerAttorney at Law1-800-447-1985jrbaker@iastate.edu

Photos by USDA NRCS

Our greatest responsibility is to be good ancestors.

Dr. Jonas Salk

Acknowledgments• Professor Andrew Errington (deceased)Research Chair in Rural DevelopmentUniversity of Plymouth, England

• Dr. Walter WarrickProfessor of Business ManagementDrake University

If the ship-building art were in the wood, it would produce the same results by nature.

Aristotle (384 BC – 322 BC)

If the farm succession art were in the assets, it would produce the same results by nature.

John Baker (1947 - ????)

How is “family farm” defined?

• Maintaining family ownership of farm land is not the same as maintaining the family farm.

• The former is an investment in an illiquid, long term, appreciable fixed asset and the latter is a business.

• If inheriting farm land creates a farmer then inheriting law books creates a lawyer.

THE FARM

BUSINESSSUCCESSOR

Owner’s priorityContinuation of family ownership of farmland

Owner’s priorityContinuation of farm family business

Assets Money Management

ESTATE PLAN

HEIRS

RETIREMENT

SUCCESSION PLAN

We don't see things as they are, we see them as we are.

Anais Nin (1903 – 1977)

Two Different SystemsFamily is inward looking

Family avoids risk

Family focuses on emotions

Family seeks stability

Family does not count cost

• Business is outward looking

• Business embraces risk

• Business focuses on work

• Business seeks change

• Business tracks cost

The FAMILY system– Attributes of a successful family

• Loving• Loyal• Affectionate• Supportive• Empathetic• Understanding• Enduring• Communicative

The BUSINESS system– Attributes of a successful business

• Efficient• Profitable• Goal Directed• Effective• Aggressive• Evaluative• Innovative• Proficient

Structure• The Structure Of A Family Does Not Change

– What Is The Genogram (Family Tree)?

• The Structure Of A Business Must Change– What Is The Organization Chart?

Succession Planning Is The Planned Change Of The Organization Chart

What’s It Worth If You Stay On The

Farm?

“I’ve spent my entire life paying off my uncles.

Now I’ll spend the rest of my life paying off my brothers.”

English farmer, Devon, UK 2002

The Question• How many times should one family

buy the same farm?

The Results• Buying the business every

generation limits the ability of the business to react to change.

• Buying the business every generation puts it on a trajectory for oblivion.

EQUITY

Debt

TIME

Net Worth

Dad and Mom have asked Sarah to come back and eventually take over the farm family business. They have offered Sarah an annual salary of $52,000 per year.Sarah has one sister and two brothers. None are interested in taking over the farm family business. Dad and Mom have always said that they will treat all their children equally.

Mom and Dad have told Sarah that she will receive $250 per week and that each of her sibling will receive $250.Sarah, her sister and her brothers have been treated equally.Does this sound fair?If it is not fair during the life of the owner then what makes an equal division fair after the death of the owner?

KEY CONCEPT

Compensation = Contribution

Contribution = Compensation• 1990 the owner has a net worth of $300,000• 3 children: If divided then each receives $100,000• By 2010 the net worth has grown to $3,300,000• If no successor: each child inherits $1,100,000• One child is the successor• Contribution = Compensation• The Owner determines that one half of the

increase is attributed to the efforts of the successor

• Therefore, the owner’s share is $1,500,000• Therefore, the successor’s share is $1,500,000

• The successor’s share of the Owner’s estate is:– 1990 From the Owner’s share $100,000 – 2010 Successor’s efforts $1,500,000– 2010 From the Owner’s share $500,000 – TOTAL inheritance $2,100,000 • Each Siblings’ Share of the Owner’s estate is:– 1990 From the Owner’s share $100,000 – 2010 From the Owner’s share $500,000 – TOTAL inheritance $600,000

Conversation Confusion(In the family and by their

attorney)

• TIMING• LOCATION• ROLE • VOCABULARY• CONFLICT

Conversation Confusion

• Timing – When will the conversation be held?

Usually it is during a holiday meal when every one is present. The family is operating in the family system and attempting to discuss issues that are in the business system.

Conversation Confusion

• Location– Where does the conversation take

place? Usually at the largest table in the parents house. Dad sits were he always sits and each child sits where they always sit. Mom is in the kitchen arranging coffee and cookies. The family system overlays the business conversation.

Conversation Confusion

• Role– What is the role of the individuals

involved in the conversation? A conversation about the farm family business requires the individuals to assume the role of business principles and not the role of Dad or Mom or Son or Daughter or In-law or Brother or Sister or Niece or Nephew or Cousin or Grandchild or Grandparent.

Conversation Confusion

• VOCABULARY– What is the appropriate vocabulary for

the conversation? A conversation about business requires the use of a business vocabulary. A conversation about family allows the use of a family vocabulary. “The limits of my language are the limits of my mind. All I know is what I have words for.” Ludwig Wittgenstein (Austrian philosopher 1889 -1951)

Conversation Confusion

• CONFLICT– What happens when a conflict arises?

In a conflict communication is fractured, the participants are at impasse, they avoid one another and emotions are heightened. The participants lapse into their respective family system roles and the family system vocabulary is employed.

Some Final Thoughts

• Failure to develop a coherent succession plan.

• Failure to treat the farm as a business.• Failure of the owner to transfer managerial

authority, responsibility and accountability.• Failure of the owner to retire.• Failure to develop an equitable estate plan.

Presented by:

John R. BakerAttorney at Law

jrbaker@iastate.edu1-800-447-1985