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What's a family farm without a leader?

Problem submitted by S.Z.,
Iowa

I’ve built a large and
successful grain operation, growing specialized crops under contract to large
food companies.

I have a son and daughter in
the business and three other off-farm children.

The problem I have is the
fact that my wife and I own none of the land we farm. Instead, we depend on
long and special relationships with many landowners in our area. I’ve been able
to develop and maintain long-term lease arrangements based on honesty, quality
farming, and win-win results.

My problem is that neither
of my on-farm children seems to have the ability to step into my shoes. I want
very much to keep our profitable business intact to provide opportunities for
future generations, but I wonder if that’s realistic.

My wife insists on treating
all of our children equally in the estate, which makes things even more
complicated. What do you suggest?

Dr. Jonovic’s solution

This is not a common problem
in agriculture, but it will become more so as farm land increasingly transfers
to off-farm owners. S.Z.’s problem has two basic levels. The first and most
fundamental is whether equality with the heirs is a sound idea.

Does S.Z.’s family truly
value keeping the current operation as a family business? If they don’t, his
wife’s understandable desire to treat the children equally notwithstanding, he
could be making a mistake involving them in long-term ownership.

He shouldn’t throw them
together as owners unless (1) they want to be together that way and (2)
significant cash can be distributed year after year.

If either is unlikely, he’d
be better off keeping the operating equity for the working heirs and cashing
out off-farm heirs with notes instead of equity.

As to the operating
business, S.Z. should ask what value can be transferred to his heirs. Capital
assets are minimal, so existing value is embedded in present and future cash
flows.

Assuming that outright sale
of the business now is not a realistic option, S.Z. needs to focus on the following
two strategic issues.

  • Clearly, S.Z. sees himself
    as the major asset who makes this business work. In future, the quality of his
    management team will be key. He judges his working heirs as unable to take
    over, but can the overall team handle it? Are there potential mentors for his
    children? Preserving value requires effort now to put strong management in
    place to ensure the business’s survival beyond him.
  • The nature of potential
    competition in the area is a critical factor, too. If S.Z.’s operation is the
    best choice for local landowners, the existing relationships are more likely to
    survive transition to his successor managers even if they lack his personal
    style – the current value added that S.Z. provides.

If his operation is
producing quality yields and growing returns (things his successors can
maintain), there’s less risk that current landowners will move to other
operators when S.Z. is gone.

Whatever he decides about
equity for his children, S.Z. must develop successor management, probably via
an experienced and capable manager from outside the family and the business.

Bringing in a nonfamily
successor is a huge and risky step in any family farming business. It deserves
a column all its own, so I’ll deal with it next month.

By Dr. Donald J. Jonovic

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