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Transition Planning - Using the Team Approach

Thank you to Dr. Alex White, Virginia Tech Dairy Science for this post.  This is one of a series of Transition Planning articles that we will share over the next few months from Dr. White.  Dr. White can be reached via email at axwhite@vt.edu.

Do you have a “go-to person” for advice?  Children often rely on their parents or grandparents for advice.  Adults often rely on certain friends.  My students, well, they rely on Wikipedia, Google, or YouTube.  Farmers often rely on their accountant for advice – about everything related to the business. 
 
I can’t tell you the number of times that I’ve talked with a farmer or small business owner about a major decision and they’ve given me the explanation, “because that’s what my accountant told me to do.”  Examples:
 
  • Which form of ownership should I choose for my farm?
  • Why did you buy that new piece of equipment at the end of the year?
  • Why did you set up 4 LLCs for your operation instead of just one?
  • Why did you invest in that life insurance policy instead of a retirement account?
 
Now, I’m not picking on accountants.  Heck, I have a great respect for accountants.  For the record, I think accountants are extremely important professionals; they provide valuable information about profitability and taxes; they should be consulted for major decisions. But too many people view accountants as experts about all topics related to business.  And that can lead to mistakes.  To be fair, there are other professionals besides accountants who are also perceived the same way – lawyers, veterinarians, lenders, etc.  Each of these professionals is an expert in their field, but very few have expertise in all areas of business management.
 
Relying on only one source of information may not be the best idea when it comes to transition planning.  There are a lot of issues related to transition planning that need to be discussed and analyzed:  Taxes, Liability, Ease of Transfer, Management Control, Communication, Cash Flow & Profitability, etc.   You need to develop a transition planning team so that nothing major slips through the cracks. 
 
So, who should you consider for your transition planning team?  Here’s a list of folks that you might ask to be on your team:
 
Accountant:
They are great sources of information on income taxes for different forms of legal organization (LLC, S-corp, etc.) and retirement plans, as well as the estate tax implications of gifts and trusts.  Work with an accountant who understands your goals, your business, and your industry.  You definitely need the assistance of a qualified accountant!
 
Attorney:
Attorneys can guide you on the legal and liability exposure of different forms of organization.  They can discuss the “mechanics” of various estate planning tools such as wills, powers of attorney (POA), advance medical directives (AMD), gifting strategies, and trusts.  They can advise you on buy/sell agreements and operating statements for your business.  Not all attorneys specialize in estate planning or business planning – choose an attorney who can provide guidance in these areas in a manner that you understand.
 
Lender/Financial Agent:
Dollar signs tend to either confuse or intimidate a lot of people.  Having a team member who understands, and can explain, the financial implications of your options can make your life a lot easier.  Understanding your current and projected financial condition – liquidity, solvency, financial efficiency, profitability, and repayment ability – as well as the advantages/disadvantages of financial products will allow you to make better business decisions.  Again, work with a lender or financial planner who understands your goals, your family, and your industry.
 
Insurance Agent:
Insurance can be a powerful tool in transition planning, but too often it is used as a substitute for planning.  “Just buy this insurance policy and use it to pay your estate taxes or transfer your business…”  Ugh, I cringe when I hear this statement!  Insurance is a tool, and like any tool, it has its proper uses and its “not-so-proper” uses.  It can be used to fund buy/sell agreements to purchase the decedent’s share of the business.  It can be used to pass the farm along to the “on-farm child” – that child gets the farm assets while the “non-farm children” get the life insurance proceeds.  It can be used for end-of-life medical expenses, as well as final expenses.  And it can provide your survivors with enough living income to make it through the transition period at your death.  Work with an insurance agent who has experience in estate planning and business planning.
 
Other Business Consultants:
Some of the most influential people in the agricultural arena are veterinarians, Extension agents, and crop consultants.  Consider having at least one other business consultant on your transition team.  This person can provide an objective look at your business and make recommendations for improving it so that it can support the next generation as you slowly phase out of the operation.  If that person has also gone through or witnessed a few family-business transitions, that’s even better!
 
Business Partners:
You probably want to include your current business partners and your future business partners on your team.  After all, chances are you’ll be working with them.  In many cases, you’ll at least be related to them!  It’s best to get the communication between the partners started as early as possible.  Too often, the older generation decides to retain control and not coach/mentor the next generation after the transition becomes “official”.  Communication amongst partners is critical, as are the relations between the families of business partners.
 
Family:
Speaking of family, you may want to include members of your family on your team.  Strike that, you definitely want to include members of your family on your team.  Your spouse or significant other probably has a huge impact on your business decisions.  Don’t ignore them in this process, as they are crucial to the success of your transition plan.
 
What about other family members, such as the “non-farm kids” or the in-laws?  This gets a little tricky, but I’m going to advise you to include them in the process.  Do they have to be involved in every business decision or every meeting – No.  But I would invite them to be a part of the process as appropriate.  You are probably better off giving them the option to be involved versus keeping them out of the process all-together.  We’ll talk more about this in future articles.
 
Mediator:
“Wait, what?!  A mediator?  We don’t need a mediator, we’re a family!”  And we all know how open and honest most of our family communication is, don’t we?  Let’s face it, there are natural reasons why family communication is limited.  That’s why an outside mediator might be a valuable part of your team.  This person can get the family members to open up and communicate more clearly.  They can improve the communications between the family members and the other team members.  They can ask the tough questions that family members want to ask, but don’t really want to ask.  They can bring up topics that might be tough for the family to face.  If a family member were to try to do this, it could divide the family forever.  If an outsider (the mediator) does it, the family can hate them for the rest of their lives, but the family should still be intact.
 
At one family meeting where I was the “outsider”, a really interesting thing happened.  One of the in-laws (spouse of one of the children) came up to me afterward and told me that she felt much more comfortable speaking up at the family meeting because I was there.  She said that normally she felt that she had to keep quiet because she was the in-law – even though she had a major managerial role on the farm.  Wow, just the presence of an “outsider” had a big positive impact on the family communication!
 


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Monday, March 12, 2018
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