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Understanding your Exit Options to facilitate a Successful Farming Small Business Transfer

In my last column I asserted that as a farmer, you know how important it is to be prepared for any contingency. And you should approach your business exit with as much planning and preparation as you run your farm.  I stated that “Succession planning is simply the process of writing a plan for when a business owner decides or is forced to step down from leading their business due to a voluntary or involuntary departure.”

SCORE has partnered with Mass Mutual to develop some great resources for this topic and makes them available on its website.  I will share some of that content in this and the subsequent columns on the topic.

First, if you want to avoid a failed transition, it’s essential to understand your exit options. They include:

• Transferring or selling ownership to a vested family member. If you’re worried about your other heirs, you can leave them settlements of money, stock, or other assets.
• Liquidating farm assets, such as auctioning equipment and livestock or selling off land
• Rent or lease your land and equipment. In fact, quite a bit of U.S. farmland is rented or leased from someone else.
• Selling or contracting out the property

When considering your exit options, keep these questions in mind:

• How do you envision the future of the farm?
• Do you want to stay involved with the operation on a smaller scale?
• Do you need income from the farm for retirement or health care costs?

Exit plans sometimes fail because those involved overlook certain risks during the planning stages. It’s important to ask for help from qualified professionals who don’t have a stake in the final decisions. They can help you make sound, unbiased decisions.

Don’t confuse exit plans with estate plans which focus on tax liabilities and the various ways to lessen the tax burden. Exit planning is about the future of your farm business and the financial future of your family.

Here are some suggestions for you to consider as you plan for your retirement.

1. Have a clear picture of what your retirement life looks like.  Answer this question for yourself:  What’s on your bucket list? It’s easier to move on when you have something to look forward to.
2. Determine the income replacement value of your business .How much money will you need to live a fulfilling life in retirement?
3. Understand how your exit strategy could impact your retirement income.  There are different ways to transition out of the business, and each could impact your retirement planning differently.
4. What will your roles and responsibilities in the business be, post-retirement, if you plan to continue to receive income from the farm?  If your retirement plan is to stay on the payroll, be clear with your successor/s what your involvement will be and ensure your compensation is commensurate with that role.
5. Create a personal financial plan to achieve a comfortable retirement.  Your business retirement planning and your personal retirement planning should be done in conjunction with one another. Working with a financial professional can help you create a plan that determines how much savings you’ll need to meet your retirement goals.
6. How much savings will you need for retirement? It depends on a variety of factors:

• How much do you expect to spend when you’re retired?
• At what age do you plan to retire?
• Your expected lifespan (though that’s pretty difficult to know)
• The economy, including inflation and investment returns
• Funds available from other sources, including Social Security, pensions, inheritances, etc.
• Projected future healthcare costs

In summary, succession planning is creating a written plan for when a business owner decides or is forced to step down from leading their business due to a voluntary or involuntary departure.  I have identified the most common mistakes to avoid:

• Be sure your farm is sufficiently capitalized
• Estimate your retirement income needs and fund them
• Select and prepare the right successor
• Put the plan in writing and communicate it to all relevant parties
• Review your plan at least every three years

In my last column on this topic, I will address “estate planning”.