Answering the tough questions about transitioning the operation to the next generation is an important step for farm families. It is also a step that is often missed.
“It’s family, it will all work itself out” is a common myth believed by fathers, sons, moms and daughters. This perception sets the family up for discord, unfavorable work conditions and the failure of the operation to pass to the next generation. Those three situations are rarely the goals the family has for personal relationships or the business.
The Transition Plan often is forgotten as the family creates their estate plan and is worried about the day-to-day farm activities. However, it may be one of the most important plans to put in place. Without it the estate may look quite a bit different than the family planned.
The Transition Plan consists of two main components-wealth distribution and operational policies. These components lead to increased understanding by all members of the family and operation. Moreover, this understanding reduces hard feelings, misunderstandings, and inconsistent decision-making. All which lead to business and family conflicts and problems. Wealth distribution is discussed here, and operational policies will be addressed in part 2.
Many consider Wealth Distribution a component of estate planning, related to the transfer of assets at the death of the owner. However, there are transition components related to wealth that should be addressed as well.
- How much will the next generation be paid? When will they be paid? Will they be hourly employees, receive a salary, a share in profit distribution? These questions are critical business conversations. Additionally, family businesses need to consider the “extras” the family members receive. What is the value of the farm owned house they live in? How is feed for 4-H project animals accounted for? What is the value of boarding two horses? These components should be considered as part of the compensation package, along with health insurance or retirement accounts.
- In addition to how much the compensation package is, conversations should include how the incoming generations increase in tenure will affect the compensation. An example could set up an hourly wage for the first years as they step back into full time employment. As they transition into a management positon, they will receive a salary, with bonuses for production or finance target being met in the next level of tenure. Then as they further take over majority labor and management responsibilities, profit sharing is added to their compensation. Identify how long each of these periods will last.
Another wealth consideration is the retirement income and timing of the owner’s retirement. Will the operation provide a retirement plan for employees, including the owners? This value is important to all financial planning decisions. Additionally, the timing of retirement needs to be discussed. Will the owners retire at 60, 65, or 70? This allows for long term planning for salary expenses, and retirement account expenses. Additionally, planning for retirement provides the next generation a time line for education at all levels of the operation, as well as timing for the transition of management to occur.
Are there plans in place?
Salaries & Compensation
When asked about returning to the family operation less than 25% of college students at the 2016 Beginning Farmer and Rancher Symposium responded, “Yes, there is a plan.” This indicates more, and intentional conversations related to salaries and compensation needs to occur (Figure 1).
Related to compensation, the students responded to the question, “Have you thought about where you will live?” This relates as many times the operation has purchased an older farmhouse that the returning individual will live in. More than 15% of the students indicated, “No, we don’t have a plan.” (Figure 2)
The Bottom Line
Communication regarding salary and compensation is critical to the harmony of the operation. Finances is a leading stressor for individuals across the nation and farm families understand the stress related to changing market prices, input costs and the price of inputs. Avoiding the issue of compensation will not make the addition of the next generation any easier.
To aid the discussion SDSU Extension has developed a compensation calculator to help farm families analyze the compensation each member of the business receives.
For assistance, contact Heather Gessner 605.782.3290
Source: Heather Gessner, South Dakota State University Extension
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