Last updated: Apr. 21, 2022
Moving from one model of success to another
Most farmers in Canada transition the farm down to another family member. Often, though, the transition needs to grow or diversify in order to maintain a new standard of profitability. When a child comes homes, and possibly brings a partner along with them, the same income level the farm generates is often not enough to keep the incoming and outgoing generation afloat. The incoming generation must bring in, as a general number, around $100,000 in after tax revenue, depending on desired lifestyle.
Canadian agricultural thought leader and CEO of AGvisorPRO Robert Saik offers some helpful tips on what to remember when young farmers begin to take over farms and diversify operations.
Ways to Diversify
The way this is accomplished is where the road widens and many routes are possible. Below are some common ways young Canadian farmers look to diversify into the farm for another generation.
Example, custom farming: Child and spouse take over typical mid-size commodity-based grain farm. The young couple buy a new high-clearance sprayer and begin to custom spray for surrounding farms. This helps generate income on an asset that is perennially underutilized at most farms.
Example, adding animals: Child and spouse come home to the commodity crop farm and decide animals are a viable option. Mom and dad do not have the physical drive to look after a herd of cows, but the younger generation does and it’s complementary to the landbase. The crops that are grown can act as fodder for the cows.
Example, secondary farm: If the existing farm operation has the financial wherewithal, a second farm could be purchased for the incoming generation to manage. This farm will be in a separate location for weather-related considerations as part of risk management.
Example, developing value-added/niche market: Child and spouse move back to the farm, which specializes in forage crops. To diversify, they decide to value-add and develop a straw market for horses in their local community which has a strong equine culture.
A series of strategy sessions are a great and natural starting point for any farm operation going through transition planning. It begins with how everyone involved operates. By understanding how you approach problems, process information and set about action plans, a clearer picture of how the future of the farm will look begins to materialize.
Helpful tools such as the Kolbe Index, DiSC Assessment or Myers-Briggs can offer quick and generally effective insights into understanding yourself and others in terms of roles, responsibility and accountability as the farm transitions and a new diversified model is put into action. If you do not know how you operate in stressful times, your road to managing the existing farm along with a new diversified venture, will be that much more difficult.
There are a few key questions you need to ask yourself, as well, during your initial takeover phase. These can be done solo or in conjunction with the outgoing generation. It can be done as a family or with a qualified third-party facilitator or coach.
Who am I? Although this is a philosophical question, it has direct farm implications. If you typically have a can-do attitude with a penchant for problem solving, that can be an asset. In contrast, if you have a submissive personality and a general disinterest to plan and lead, that may be more difficult to work with on a farm, especially if you’re the primary decision maker.
What’s the common vision for the farm? This is another way of asking yourself: what is it I want to accomplish? You do not need the answer for 10, 20 or 30 years down the road—that’s a long time away, but three years is a reasonable timeline to decide on, plan for and execute on a diversified operation.
Within this, you must determine what the dangers, opportunities and strengths to your business are. By understanding these three criteria, it should become clear where you need to pragmatically focus your time and effort and what you need to avoid.
This can, and should, lead you to create a mission or vision statement within your farm to help be a guidepost for today and in the future. By knowing what you are about, and just as importantly—not about—you can begin to determine how your business may thrive.
Why am I confident I can achieve this? This question comes across as a challenge more than anything, but it is designed to prompt a realistic answer. If you can clearly explain this to fellow family members or in a facilitated group session, a plan can unfold easier than if you are not sure why you could achieve your goal within the diversified farm business. If you are unsure, the people around you will be, too.
How to do it “right”
There are multiple ways the incoming generation will perceive their business to be working “right.” While there is no true solution, there are ways to ensure a general trend upwards.
Outside advisors, including a lawyer and accountant are vital to any operation both today and in the future. These people not only help with the transition, they may also be of use when you establish diversified operations. However, do not hesitate to reach out to new advisors if your current team’s potential seems to plateau. Different professionals bring niche skillsets within agriculture and agribusiness and it is essential to recognize that.
Similarly, a RACI Matrix (Responsible, Accountable, Consulted and Informed) helps any incoming or outgoing generation understand their place in the shifting farm ecosystem.
Scenario: When the incoming generation takes over, they may be Responsible for carrying out the work, but the parents are still Accountable (since it’s a majority of their assets/liquidity on the line) and must be both Consulted and Informed before a decision is made.
Eventually that begins to shift where the child has more of a stake in the business and they are both Responsible and Accountable and the parents morph into more of a C/I role and, later, simply an I.
The important thing to remember is that no matter how great your plan is, there will still be a time and a place for the outgoing generation for a few years once you are in the driver’s seat. The wisdom and experience from parents should never be downplayed, only embraced. Their real-life lessons are invaluable for any young farmers starting out or looking to diversify operations.
Let’s learn how a pair of entrepreneurial brothers turned their grain farm into something beyond their parents’ wildest dreams in a diversification case study.
Click here to read the previous week’s article about Tax, Finance, and Estate Planning.
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