Chapter 2: Ensure the Financial Health of the Farm Business

The second step in the business succession planning process is to evaluate and tune up the farm’s financial situation. We will accomplish that through an analysis of the farm’s ability to support multiple generations during the transition process. We will review the farm’s income needs, value, rate of return, operating capital, and risk-management strategies.

A. Farm Business Financial Viability

The first piece of business succession planning is making sure that the farm business is currently economically viable with a reasonable rate of return and developing a plan to expand the business so that it can support both the new generation and the retiring generation. The retiring generation has worked their whole life to build the business and should expect the business to continue to support them into retirement. The new generation brings new skills, ideas, and labor that are assets to the business, but they also need to be paid out of the business returns. The goal is not to give more people a smaller slice of the pie but to make the pie bigger in the planning process. A successful business succession process starts with a strong business. The business succession planning process should include making the business stronger as well.

1. Determine the Farm’s Income Needs

A financial planner and accountant can help you prepare for retirement through budgeting household income needs and understanding retirement accounts, pensions, Social Security, Medicare, and other sources of income and support.For a viable working farm, a substantial part of the family’s household income is coming from the farm. Most farms also have off-farm income from a spouse, which may also provide medical or other insurance. When Gen 2 retires from operating the farm, their expenses will change. If a spouse with an off-farm job retires, that will reduce the family income and add new expenses, such as medical insurance or others. When Gen 2 retires, each person may draw from Social Security, retirement accounts, or pensions from off-farm jobs to supplement their income. Their tax situation will also change with a decrease in income and no business deductions for on-farm housing or business vehicle expenses. Retirement brings big financial changes, and Gen 2 will have to carefully budget the farm income to provide for their own retirement in addition to Gen 1s who are still supported by the farm. A financial planner and the family accountant can be extremely helpful in preparing for retirement, from budgeting to understanding retirement accounts, pensions, Social Security, Medicare, and other potential sources of personal income or support and expense.

The incoming Gen 3 operators may also have an off-farm source of household income but should also be able to expect the farm to provide a substantial part of their income, especially as they start a family and that family grows. If Gen 3 becomes the new farm operator and moves to the farm, housing costs may be required to support a new household, whether that be adding housing to the current land or one generation moving into other housing. Gen 3’s household budget likely looks different from Gen 2’s budget and requires a fair market wage from a viable farm business.

It is essential to recognize that the farm will be expected to support more people in the future, which will require a fair accounting of the farm’s current value, the rate of return on farm assets and cash flow, and the other assets owned by Gen 1 and Gen 2 that can provide for their retirement. The succession planning must consider how farm assets can be managed in a way that supports both Gen 1’s and Gen 2’s retirement needs—which may come from the farm income—Gen 3’s household income needs, and the farm’s ongoing capital and cash flow needs. An honest accounting will show that the farm will have to increase its income in order to support all of these objectives, which will make it a stronger business (figure 3).

Figure 3. Increasing farm income for succession planning

2. Determine the Farm’s Value

It is critical to find out what the farm is worth and the farm owner’s total assets. This inventory is useful for business valuation, estimating estate taxes for further planning, and understanding everything that is available to include in the estate plan, which provides for meaningful gifts for all family members whether or not they plan to be involved in the farm business. To create an estate plan for the business owners, we also must inventory their .

A farm is a business. A business is worth what you can sell it for. A sale of a business is based on the value of its assets: , , and the business’s value as an economically viable unit. An agricultural business with its own brand, such as a successful winery or a processed-foods company, may have additional value due to its brand name, future contracts, and reputation. A farm’s financial performance must promise the safety of capital contributions and an adequate return. Otherwise, the operation is only a speculative economic unit, not a secure financial investment for the incoming generation. Here we will look at the of the farm, and in the next section, we will address its rate of return.

For the most part, the only asset typically used to value a farm at any given point in time is the land, timber, or other land-based assets because equipment and other property depreciate quickly. Livestock operations, such as dairies and cow-calf operations, also have notable value in the herd. If the farm is already organized as a business entity (an LLC or corporation), the value of the business should be determined based on what the business owns. However, because the vast majority of Oregon’s agricultural businesses are still owned as sole proprietorships or partnerships, the land, equipment, livestock, and other assets are technically owned by the operators personally. To organize the business, we must inventory the business assets.

With respect to the land, we want to know how much there is, where it is located, and the current . We also want to know whether it is owned or rented. Quite often in today’s modern farming operation, less than half of the land being farmed is owned by the family doing the farming. For the land that is owned, we want to know how much that land is worth on a true fair market basis. In other words, if a piece of the land was put up for sale today, how much would a willing, knowledgeable buyer actually pay for it? The is often not the best measure of the current value; the best way to determine true market value is to use comparable sales in the area rather than a formal . Often a knowledgeable realtor in the area can help by providing an estimate of what the land can be sold for at its present market value. Such an estimate is generally called a .

Farmers have to buy and operate a large amount of very expensive equipment because of the increase in that the equipment brings to the operation. However, farm equipment begins to depreciate in value the moment it is driven away from the dealer. Investments in the latest equipment dwindle very quickly. In valuing livestock, we consider herd size, value, and the method used to keep track of animals as they come and go through the operation. For example, dairies often have herds of registered cows with certification of their genetic background. This makes a cow more valuable, and the reputation of the farmer becomes a part of the value of the animal. Each animal typically has a brand or ear tags to identify the background of the animal and its place of origin and to and distinguish it from the other members of the herd. For purposes of succession planning, auction houses in the area can help by providing an estimate of the sales price of equipment and livestock.

The farm owners may have other assets owned in their name, such as investment accounts (individual stocks, bonds, or mutual funds), cash or cash equivalents (checking accounts, savings accounts, money market accounts, certificates of deposit, etc.), security deposits, retirement accounts (401[k], IRA, SEP), annuities, life insurance, and other personal property such as vehicles, boats, airplanes, collectibles (value to a knowledgeable collector), and other personal property (valued at a farm sale or garage sale). In order to accomplish a successful succession plan, the professionals will need to know about and take into consideration all of these assets.

3. Calculate the Farm’s Rate of Return

You will want to calculate the farm’s rate of return to determine if the business is currently economically viable. Then you will have a baseline for developing a plan to expand the business so that it will have a reasonable rate of return to support both the new generation and the retiring generation. You will gather this information for your own business planning purposes if you are not already doing it regularly.

The most valuable asset of a farm is the land. The value of livestock is also a major asset for dairies and cow-calf operations. The rate of return for a farm’s land or livestock is the net gain or loss on the investment in the asset over a specified period, expressed as a percentage of the original investment. Gains on investments are defined as income received plus any realized on the sale of the investment. Although you are not planning to sell the assets, you will pick a date to calculate the rate of return on assets that you hold over a reasonable period. For ease of illustration, we will use a one-year period as an example. To calculate the rate of return for the land and/or the livestock over a one-year period, first determine the amount of the original investment in those assets. Next, determine the fair market value of those assets at the beginning and at the end of the most recent year. Next, calculate the net excess income (profit) or loss received from the farming operation that is using those assets to generate income. Net excess income is the amount that exceeds or falls below operating expenses excluding salaries, , or draws paid to the owners.

For simplicity, let’s say the original investment in the asset was $100,000. The difference in the fair market value of the assets at the beginning of the year and the end of the year was $4,000 (capital gain), while the operation enjoyed the net excess income of $3,000 during the year. Add together the gain in value and the net excess income for the year, which comes to $7,000. The annual rate of return on the investment for the one-year period is the increase in value plus the net excess income divided by the original investment in those assets. To calculate the rate of return from our example, the original investment is $100,000, the increase in value plus the net excess income is $7,000. Thus the annual rate of return on the investment is 7 percent ($7,000 / $100,000 = 0.07 = 7 percent; table 1).

Table 1. Rate of return on land example

Capital Gain Year 1 (Market Value)

Value End of Year
$104,000


Value Start of Year
$100,000


=


$4,000

Net Income Year 1

Revenue attributed to land


Costs associated with land


=


$3,000

Total Return Year 1

Capital Gain
$4,000


+

Net Income
$3,000


=


$7,000

Rate of Return

Total Return on Land
$7,000


/

Value Start of Year
$100,000


=


7%

This example should demonstrate that a key part of determining whether a farming operation is a viable business is the net excess income being generated by the farm. Capital gains from increased asset values are not “realized” at the end of the year because you do not sell them. The farm continues to own them to generate income. The increased value of the land and cattle is locked in until they are sold; that value cannot be used by present operators to pay expenses or for the kids’ college tuition unless you convert that asset to cash, which comes with risk and will be discussed later. Therefore, it is crucial to focus on generating adequate net excess income from the business when planning a farm succession.

For a farm that is an ongoing business, the gain in value of the hard assets (land and livestock) will hopefully be passed down to the next generation without ever being converted to cash or diminished. Whether that happens will depend in large part on if a successful business succession plan coupled with a well-designed and coordinated estate plan can be developed for the farm. It will also depend on whether market conditions and public policy are generally favorable or unfavorable to the farm over time.

For a farm to be a viable business, its rate of return must be equal to or greater than what you could expect to receive in fair market rent for that same asset under a triple-net cash , meaning rent payments minus taxes, insurance, and maintenance and adjusted by any mortgage payment if the land is not owned outright (table 2). In other words, in order for a farm to be a good prospect for succession planning, the farm should be making more money through the current or projected farming operation than it could make by renting the land and cattle out to another operator. The income generated from the land must cover all land expenses and then some to show a profit.

Table 2. Triple-net cash lease calculation

Real Estate Taxes

+ Property Insurance

+ Property Maintenance

+ Mortgage interest (if any)

= All Land Expenses

+ Expected return on land (2%-5%)

= Minimum Annual Rental Payment

4. Increase the Rate of Return

For a farm operation to support the next generation, it is likely that the farm will have to increase its rate of return on investment, generating more farm income that can be paid as retirement income to Gen 2s and household income to Gen 3s. As discussed, the key goal is to increase the net excess income from the business so that it can be paid as wages, bonuses, and benefits or reinvested in the business for future growth.

Each farm has its own unique path to increase the rate of return and thus requires a careful analysis of its current operations and future opportunities. However, there are a few general ideas to increase rate of return for current operations.

First, diversify the farm by finding new markets that pay higher prices for the products. Diversifying the farm’s activities provides for different streams of income and expenses, which can also provide some risk management if markets change. This may come in the form of different marketing channels, such as going directly to retail, restaurants, schools, hospitals, or consumers.

Markets for local and regional foods, which could be anything grown in Oregon, often offer price premiums. Products can also be differentiated by certifications, such as USDA-certified organic or other third-party certifications. Food processors in the region seek out certified organic products, and there is still higher demand than supply for products such as organic grains and nuts. There are also niche products, like specialty grains, that are in demand. Finally, some on-farm and value-added processing can allow you to sell products at higher prices. However, with all of these opportunities come costs and risks, and the prices obtained must be higher than the costs associated with the differentiated products or markets. Some have high fixed costs, such as the three-year transition time to organic and certification fees, but if the costs can be covered in the long run for a consistently higher rate of return, the investments will be sound.

It’s not a value-added product until I sell it and am paid for my efforts. Before then, it’s cost added.
—Oregon farmer, pickle and jam producer
Another way to improve the bottom line while continuing with current production requires lowering the cost of production, which accountants refer to as the . The first step is tracking your costs and returns for different farm business activities. If you have not moved beyond paper and pencil accounting, organizing your financial information using basic business accounting software or starting a relationship with an accountant is highly recommended. It will take time, effort, and money to get started, but it will save you headaches in the future and give you valuable information about managing your farm costs, revenues, and the economic viability of various crops or other business activities. You will have a clearer picture of which costs you can control; many costs of production, such as fuel, seed, fertilizer, pesticides, and other inputs, are outside of your control unless you switch practices. Labor costs are also dictated by federal and state laws as well as labor market forces, although some types of agricultural labor are also exempted. Many farms are investing in mechanization to avoid the cost and risk of employing labor. Equipment is also expensive, including new technologies. Sharing equipment through rental agreements or hiring custom-cropping operations could be a way to decrease your investment in equipment. Overall, new technology such as precision agriculture and mechanization can help farms control their input and labor costs, but there are still up-front and ongoing costs to be considered. Some of those up-front costs can be recovered by participating in USDA or other subsidy programs that share some of the cost of improvements, such as renewable energy or other conservation technologies that both reduce some costs of production and have environmental benefits (see “Resources” section).

Finally, a farm can increase productivity to improve the rate of return. Productivity simply means the rate at which you produce a unit of output (e.g., a bushel) per unit of input, such as land and labor (e.g., acre or person-hour). Increasing productivity means producing more income without increasing your current resources. Some of the ideas already discussed increase productivity, such as switching to higher-value crops on the same land or mechanizing aspects of your operation. Other ways to increase productivity are to add more land, which is a challenge in Oregon because of the high competition for agricultural land and a limited supply. Adding land increases productivity if you can use your current equipment and labor to work the extra land, increasing output overall (but be aware of the rate of return on the new land to be sure it is worth the investment). Oregon is also challenged by the availability of water and presence of wetlands in many areas, which are highly regulated—but getting the ability to irrigate your land or add drainage could also increase the productivity on the land you own. You can also add recreational opportunities such as agritourism or other limited public access for a fee. Again, be aware of regulations and legal and financial risks associated with inviting the public onto your land, but the benefits can outweigh the costs for some operations.

In addition, organizing your business to better handle risk and improving the chances of getting paid for your product—which are discussed in the following section—will benefit the business and your rate of return in the long run.

5. Value and Incorporate Gen 3 Skills

The incoming Gen 3 will bring valuable skills and experience to the business, which can foster new business viability options such as the ideas previously discussed. Many family farms require their Gen 3 children to get a college education and experience in a different job before they decide to come back to the farm and begin the process of taking over management duties. Seriousness and experience are invaluable aspects of a competent Gen 3. Nonfamilial Gen 3s are also getting farm management experience, creating a strong crop of young farmers who are eager and dedicated to taking over a successful farm operation. Many Gen 3 graduates studied crops, soils, horticulture, animal science, and other valuable programs. However, to manage a complex farm business, it is imperative that Gen 3s also take courses, or an entire degree program, in agricultural business management, microeconomics, accounting, legal issues, and other business topics as applied to agriculture.

As part of the business succession plan, we recommend that Gen 3 individuals manage a separate business line, bringing in new assets and skills. The succession plan can allow for some independent decision making as well as overlap between the retiring Gen 2 and the incoming Gen 3. The business succession plan can be designed to reach the simultaneous goals of increasing farm rate of return and income, strengthening the farm business, and fostering the management skills of the incoming Gen 3.

6. Increase the Operating Capital

A business is only viable if it generates excess cash after deducting the cash flow necessary to cover its expenses when they come due. For a farm business, there are high expenses at the beginning of the crop year. During that time, cash flows out to plant and tend the crop and keep the lights on. Payment comes after a crop is harvested and might need to be cleaned, processed, and stored before it can be delivered to the buyer and payment is due. Often, expenses for the new crop season are paid before income from the previous crop has been received. The money that flows out during the crop-year expense-income cycles is operating capital. Many Oregon farms now require millions of dollars of operating capital to bridge the gap between the time when expenses have to be paid and the time when income is received for the next crop.

Farm lenders are key partners in providing operating capital, typically in the form of a line of credit. The number of agricultural lenders is shrinking in Oregon, and operating capital can be hard to come by for some farms. Most or lines of credit are short-term variable interest loans that take the farm’s equipment, products, and accounts as collateral, putting the farm at risk if income does not come in as expected and the loan is unable to be paid (known as , with the lender filing a financing statement / UCC-1; this is different from a loan using land as collateral, which is a mortgage). While lenders that work with farms understand the farm expense-income cycle and can negotiate loan terms, it is prudent for farms to develop their own sources of operating capital, which can also cut down on interest payments and improve the rate of return, reduce risks associated with debt, and improve business viability.

To the extent possible, any from an operating year can be saved by paying down debt with high interest rates or putting the money into investment accounts that offer a reasonable rate of return. A highly liquid account that you can draw on anytime, such as a standard savings account, will earn a much lower interest rate than a money market account that requires a high minimum balance or a certificate of deposit that must stay in the account for a number of years. Excess income can be invested in stocks or bonds to grow over time and can be sold at any time if necessary but with higher risk. Creating pools of liquid assets that can appreciate over time will build an operating capital fund for the future.

7. Convert Farm Assets into Retirement Income or Operating Capital

If you calculate retirement needs of Gen 2, family income for Gen 3, and operating capital to continue as a business and determine that the farm business does not generate enough excess income to meet those needs, then the temptation is to convert some of the ownership interests in the land or other assets into cash through sale, lease, , or expanding ownership to more people who contribute capital to keep the farm running. This is a precarious position for a farm and may indicate that the farm business is not viable as operated. Any of these steps to convert farm assets into cash should be done with the utmost care, and cash received should be directed toward investments to sustainably increase the rate of return, because these steps can be irreversible and may lead to the end of the operation. There are several options to consider, with caveats:

Sell land with leaseback and option to repurchase. Land can be sold, generating cash for the business to pay down debt. Reducing the farm’s debt load avoids interest payments, and additional cash from the sale of land can be added to the farm’s reserves to reduce the need to borrow operating capital. In negotiating the sale, the terms will include the right of the farmer to lease the property back from the new owner on a written farm lease. The terms of the lease should allow the farming operation to reach financial viability—for example, a fixed term (e.g., five years), automatic renewal when the term expires, and the amount and timing of lease payments. The sale and lease agreements should also give the farmer a “” if the new owner decides to sell and an “,” allowing the farmer to buy back the land if the financial position of the farm allows. Using these kinds of provisions, the transaction can be made reversible, allowing the farmer some ability to pay down the debt or create savings.

Sell equipment with leaseback and option to repurchase. The same terms can be applied to the sale of equipment to generate cash to pay debt or build operating capital, with the same caveats. However, equipment will depreciate over time, which can impact the price and desirability of buying the equipment back if significant time passes. It could be a short-term bridge to produce a smaller amount of operating capital if necessary.

Sell an easement. An easement is a voluntary agreement between a landowner and an authorized organization like a land or a soil and water conservation district to permanently limit some of the development or use rights on a property. Conservation easements may apply to all or just a portion of the property and need not require public access. Working lands easements are conservation easements that allow farmers and foresters to continue productive farming and forestry operations and keep the land in production forever. Farmers may also enter a conservation easement, which is a promise to not farm a particular parcel that is ecologically sensitive, such as land next to a river, wetlands, or a habitat for critical species. Farmers in Oregon have also developed wetland mitigation banks that restore historical wetlands in exchange for payment from developers that seek permits to destroy wetlands in another area, which is a program managed by the state. The easement holder, which is typically a land trust or government agency, is responsible for making sure the easement’s terms are followed.

Easements may allow landowners to continue to own and use their land, sell it, and pass it on to the next generation. The farmer may get the payment when they enter into the easement or at regular intervals, depending on the terms of the agreement. For easements “,” with no end point, the appraised value of the land is reduced because future owners also will be bound by the easement’s terms, although the easement does not necessarily affect sales price where the agricultural value of the land is high. Besides generating capital for the business, an easement can have income and estate tax benefits through deductions if the easement is donated (if applicable) and through reducing the total value of the land. We will discuss taxes in more detail later.

A farmer should exercise caution in entering any easement, whether an access easement with a neighbor or a family member or a conservation easement with a land trust or a government entity. Easements are complex documents and must be drafted carefully with true expertise and an eye toward making sure that the burden and business risk on the land and farming operation are what the farmer is expecting. Entering an easement adds complexity to management, as the easement holder will annually monitor compliance with the easement document. The easement agreement can be fairly detailed, depending on its purpose. Before entering into an easement on farmland, a farmer should seek competent legal, tax, and investment advice, form a relationship with the easement holder, and talk with others who have entered into similar easements.

Sell an equity position. The riskiest option is to sell an in the farming operation, which brings in new owners who will contribute capital. It is crucial to get the help of an attorney and tax accountant with this path because it requires business reorganization and can have serious tax and implications. Including a new partner in the operation can have a big effect on business decision-making going forward. While you can negotiate the rules about how business decisions are made, no amount of documentation can serve as a replacement for two partners who get along, communicate well, and have worked out a way to operate the farm as partners. Unless you are uniquely blessed with that kind of a relationship, you should avoid bringing in new business owners for the purpose of raising capital.

B. Managing Risk for the Health of the Farm Business

Any business is risky, and farming is a business. Farms’ risk-management needs are broad. Farms face risks from natural systems, such as droughts or floods that can devastate a crop and impact contract or loan obligations. Farms manage natural resources and as a result are subject to local, state, and federal environmental laws that may apply. Agricultural businesses typically use machinery and equipment that can be dangerous to workers or other people. Farms face a range of risks by taking on employees and must follow all employment laws, find and retain skilled employees, and set up ways to handle accidents or injuries. Farms often create off-farm impacts—such as smell, noise, dust, or chemicals—that cause neighbors to complain. Many farms have interactions with the public, selling products directly to consumers or inviting the public onto their land. Some farms maintain certifications that increase the value of their product but can be lost through mismanagement or due to natural or human forces that contaminate or damage their crop or infrastructure. Business risk is increasing every day with new markets, new rules and regulations, more development in rural areas, and new interactions with other industries. No one can make business risk go away. But it can be managed using some basic legal and financial tools.

1. Obtaining Insurance to Manage Risk

In this section, we will discuss using business organizations as an umbrella that covers general business risk. But even with an LLC or a , the farm should have adequate insurance to cover liability risks from someone being hurt while on the property, by farm vehicles, by product contamination, by crop loss, or by other insurable risks. As described later, an LLC only limits legal claims to business assets; it doesn’t shield the business from all claims. You still need insurance to protect business assets. Adequate liability insurance will cover court costs and some expenses, protecting the business assets.

An is a contract. You pay insurance premiums over time, and the insurance pays out in the event that one of the covered risks occurs. The covered risks are either for general categories of items or people such as “inventory” or “employees” or for specific things such as buildings and equipment. There are also limits to the amount of money that can be paid for damages to covered items, and often there are on claims so that you pay a limited percentage and/or maximum amount of the claim. Claims must also be filed according to the procedures in the policy, such as providing particular information within a certain amount of time after the event. Know what you are getting with your insurance and comply with the terms of the policy. Farm insurance can be expensive because farm activities are risky, so know what you want to cover, shop around, and work with your agent, who may visit your property and give recommendations.

When deciding on insurance coverage, first you should assess the risks on your farm that can be covered. Then choose insurance options for addressing the farm’s risks, such as property damage; injuries to visitors, customers, or service providers on your land; worker injuries; crop and livestock damage; and retail and wholesale sales liability.

covers damage to structures, equipment, and inventory on your farm from weather events, fire, and theft and can also cover damage from other events such as loss of electricity. Make a list of the property that you want to cover and its replacement value when shopping for insurance and make sure to update your policy if you get new items or make improvements to be sure that everything is covered.

Property insurance often comes with liability or casualty insurance, so that if someone comes onto your land and is hurt, the insurance company will handle the defense of any lawsuit and pay damages, up to the limitation amount. If the cost of the injury is greater than the insurance limitations, then the farm is on the hook for the balance. Of course, higher policy limits come with higher premiums, so you have to make decisions about how much insurance you want to carry. If you are doing on-farm events such as agritourism or off-farm activities such as farmers markets or selling products directly to retailers or consumers, your farm liability insurance must have “endorsements” to specifically cover those events or an additional policy that covers .

States require businesses to carry if you have any employees and impose fines for not having the insurance. Rates are based on the riskiness of the work that employees do. And it’s just a good idea, because farm work is very physical and insurance is a great risk-management tool. Workers’ compensation insurance covers any injury to an employee that arises in the course of employment, so anything from repetitive stress injuries to broken bones that happen on the job is covered. Cover everyone who works for you, from regular employees to interns, to make sure that all potential injuries are accounted for.

Crop and livestock insurance covers losses from natural disasters and is available from local insurance agents who sell and service federally subsidized crop insurance policies for many different types of operations. The USDA Risk Management Agency has resources to review different types of policies.

Insurance is an essential part of farm risk management. While the likelihood of catastrophic events may be small in any particular year, the magnitude of the cost to your business could be devastating. Carrying the right kind and amount of insurance depends on your farm operations and your risk tolerance. Working with an agent, you can create a farm liability insurance package that includes all the necessary components to minimize the impact of catastrophic events.

2. Managing the Risk of Not Getting Paid

Farms are also at risk of buyers backing out of contracts or not paying after delivery of products, especially if they sell perishable foods like fruits and vegetables. There are legal tools that you can use to get paid if a buyer backs out or goes bankrupt. These can be difficult rules and laws to navigate. The first step is to get help creating written contracts that protect your interests. They can be used for the types of transactions that you typically engage in and new business lines that you might begin.

Know which laws can be used to your advantage based on what you produce—for example, Packers and Stockyards Act (PSA), Perishable Agricultural Commodities Act (PACA), or state laws such as agricultural and landlord’s and those providing some protection for payment under production contracts. Some of these require basic language in a contract or lease; others require action on the part of the producer if they are not paid. Determine which laws are applicable to the products you sell, create basic contract or lease language, use it consistently, and keep the information on hand; it will save time and effort if you are in a situation where you don’t get paid in a timely manner.

 

Step 2—Ensure the health of the farm business.

  • Determine the income needs of retired Gen 2s, the income needs of Gen 3s and their family, and the farm’s cash-flow and investment needs.
  • Determine the farm’s value by making an inventory and an estimate of the value of each item. Also inventory nonfarm assets for estate planning purposes.
  • Evaluate the rate of return to determine if the farm is generating enough income to cover the income needs of Gen 2s and Gen 3s, and the farm’s cash-flow and investment needs.
  • Make a business plan to “make the pie bigger,” if necessary. Your prospective Gen 3s can make a business plan and budget to evaluate a new business line or expansion, for example. Planning to grow the business is a good way to involve Gen 3s and to assess their skills, provide training and experience, and give a sense of ownership over their role.
  • Consider options for converting farm assets into cash for operating capital or new farm investment, such as conservation or working lands easements. Remember that some tools can have multiple benefits, such as reducing the market value of the land for estate tax purposes. Other tools come with risks. All must be approached with caution and careful planning.
  • Take all appropriate legal steps to manage risks involved in the farm activities that you undertake in your business, from obtaining the right insurance coverage to drafting contracts, filing liens, and invoking other statutory protections when necessary.
  • Work with your accountant and other business planning professionals as you make business decisions.

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Getting Organized by Christy Anderson Brekken & Joe Hobson is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License, except where otherwise noted.