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Dr. David M. KohlBy: Dr. David M. Kohl

In my North American and global travels, management and ownership transition is one of the top three challenges facing businesses. This is particularly an issue in agriculture because of the mix of business, family and the legacy of multigenerational farm businesses. Articles often center on the mistakes of the junior generation. Now let’s make a 180° turn and examine mistakes that are made by the more experienced producers at the other end of the spectrum in the agricultural arena.

First out of the box is called “read my mind” by famous transition management speaker, Dr. Don Jonovic. The older generation has been conditioned over the years to keep their thoughts and perspectives close to the vest. Lack of transparency usually causes suspicion and a wide range of assumptions with those involved in the process. The key is to develop a written transition plan, most often with the assistance of an outside facilitator to keep the process on track and ask the tough questions. With multiple generations in larger, more complex businesses, the hiring of a facilitator is not an option but a requirement to ensure progress is made.

[rich-callout title="30-Day vs. 15-Year Farm Credit Bond" image_id="4532"] This chart illustrates that 30 day issues continue to stay at historically low levels through March 31, 2012. These same rates remain flat as approach mid-year. However, movement in the gap between long-term and short-term rates widens. You may want to consider locking in historically low, fixed rates on real estate loans or other term loans in order to avoid escalating interest costs should interest rates continue to move upward.[/rich-callout] The next mistake is failing to take time to develop a family budget in semi-retirement and retirement. Questions pertaining to where one will live, activities in the business and job responsibilities and descriptions versus enjoying the fruits of life are crucial decisions seniors need to make. Where one would like to live, whether it is in the middle of the farmstead, at a lake house nearby, or a condo in Arizona or Florida are questions to be answered.

While the news media has a focus on college and university debt for the younger generation’s budget, the costs of medical care and insurance are equally challenging for the senior generation. I recommend that this generation develop a family living budget, and then realize that your budget is likely to increase by 4 percent per year due to inflation.

Next, identify sources of income in retirement years, whether it is sale or lease of the farm, Social Security, or other investments off the farm. A general rule of thumb is that if the junior generation is entering your business, you need 50 percent of your retirement income from investments outside of the farm business, i.e. stocks, bonds, cash, etc. This is to allow for diversification so the younger generation is not responsible for your sole source of retirement income. Another rule of thumb is for every $1,000 of retirement income needed per month, you will need approximately $200,000 of retirement equity. In other words, $5,000 per month equates to $1 million in equity.

Finally, you should not treat all your children equally in the retirement schematic. On the contrary, divide up the estate fairly and equitably. The son or daughter who stays on the farm should retain the management or sweat equity because of the risk endured in carrying on the business. Children away from the business should receive outside investments from the farm or cash, which is liquid with no risk. It is suggested that any inheritance be systematically distributed. One transition planner suggests inheritance distribution be equal to W-2 wages or net business income annually so as not to spoil the younger generation. Remember, a person inheriting $100,000 will spend it in 17 months on average with little or nothing to show for it. A great book to read regarding inheritance is The Ultimate Gift by Jim Stovall. This book teaches many life values and principles through agricultural examples.

Yes, transition management is full of potholes and can get one diverted and into the ditch very quickly. However, proactively planning ones transition from the senior side with experience and wisdom can provide needed leadership for the next generation of management. A well-planned transition road map by the senior generation helps the younger generation prepare to get the business to their destination.
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