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Who controls the purse strings on your farm?

By the time the parents hit their mid-60s, financial decision-making should be in the hands of the next generation. Really!

Two decades ago, U.K. professor Andrew Errington identified three stages of farm transfer: succession, retirement and inheritance. He defined succession as the gradual handing over of managerial control. Retirement was the owner withdrawing from active participation in the business of the farm, and inheritance was how the assets were finally signed over to the successor.

Errington compared this process to a series of ladder rungs rising up from the lowest amount of authority, with increasing participation in technical, tactical and strategic planning, supervision and management, financial analysis, and most importantly, what he called “control of the purse strings.”

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Overall, he found, French and Canadian farm successors move fairly rapidly up this ladder, while British successors only gradually achieve any control.

But every farm is different and many farmers never let go of the purse strings.

Compared to when Errington first published his research, today’s farms have changed dramatically, especially in scale and asset value, and also in what they produce and who’s involved.

More people are living longer, and new technology and products have revolutionized our farms. And socially things have changed too. Today’s Baby Boomers are retiring differently. Gender equity has become more normal too, and more opportunities are available to children off the farm.

It all means that more is at stake in transferring control between generations, and it’s more complex.

Families continue to get stuck. And often the sticking point is letting go of control of financial decisions and of the “purse strings” that Errington refers to.

Of course, the appropriate time depends on the situation, say researchers and advisers.

But, they also agree, the transition does have to happen and it’s better if it’s planned and incremental, and not reactionary.

“Parents at some point need to transition from shareholder to creditor,” says Alberta-based farm financial consultant Merle Good.

Admittedly, it’s a big step, because creditors are not the business’s equity owners or shareholders, and they do not make business decisions. If Good had to make a generalization he’d say at least by age 65 to 70, farmers should become creditors. By then, 100 per cent of the management should be transferred. But it takes work, and he says it won’t work if the younger generation doesn’t get the education, opportunities and experience on some level to acquire a financial background.

Also, although the decision-making has shifted, it’s often important for most parents to still have some equity ownership until they die. To not own land leaves some farmers feeling very vulnerable, says Good. “Many older farmers want to keep land as retirement security,” he says. “But then only keep as much land as that would require.”

The chicken will

Instead of transferring farm assets when they are alive, many older-generation farmers are using their wills, which can leave a lot of questions and potential problems.

For a business to not know when the transfer of assets will happen can limit growth opportunities and motivation. Not only does the uncertainty constrain the farm business, if done without consideration for the future situation (and who can guess that?), it can lead to saddling the next generation or their children with huge debt to pay off siblings.

In fact, with today’s high value of farm assets, Good has seen it can become impossible for these “chicken willed” farms to sustain themselves while meeting family commitments at the time of death.

If that happens, it will kill the business and those farming children will never talk to their siblings again, Good says. “It’s why I call it a chicken will. It’s just kicking the can down to the next generation. That plan is doomed to fail someday.”

Instead farmers need to enable their chosen successors to become financially responsible when they’re younger in order to take advantage of their appetite for improvement and learning. If the younger generation is fully engaged, the farm gets infused with energy as well as new ways to look for profits, plus new ideas about how to engage new technology and knowledge.

Generally, Good sees a 10 to 15 per cent increase in gross revenues within three to four years of a young person coming home… and that’s without investing in expansion.

However, it’s important to understand the culture of younger people and sometimes it takes longer. “Each generation is little behind the previous one,” says Good. “It’s just because they’re growing up when they do. It’s just a different culture today.”

Also, he says the younger generation today often has a different perspective on debt. “We were the generation brought up with the idea that money doesn’t grow on trees,” says Good. “This generation thinks money does grow on plastic.”

Transferring the financial control should be an incremental process done with thought and a strategy to build know-how without putting the farm at risk. It’s a shared responsibility with parents having a say on debt. “A child can never send a farm into bankruptcy without the parents agreeing to it,” says Good.

In the last decade, Good has been finding farmers are less worried and more positive about succession and the ability to source credit for expansion, and this has fuelled their enthusiasm. However, he adds, younger farmers need to operate within the reality of a future that is likely to include higher interest rates, less availability of credit, and shorter terms.

Young people should start by creating budgets with their parents. Then they can proactively get excited about the future together. Many farms today are already using accrual accounting and this starting place makes it easier to apply financial management processes to a farm. “The majority of farms are incorporated and have accrual statements so young people today actually have financial information they can use,” says Good.

To be able to use financial management to make decisions, says Good, the next generation needs three levels of experience — age, education and opportunity. So you can’t set an arbitrary deadline date for when the next generation is ready to take over financial control, says Good. They’re ready when they have the financial know-how to make decisions with confidence and capability.

Education

Good says the younger generation should get off the farm for a few years and go to college or work off the farm. This allows them to mature and to have experiences beyond their family farm, exposing them to new people and ideas to bring back to the operation.

Good also believes financial literacy should be a required course in high school. “Kids come out of high school knowing how to do algebra but not how to balance their cheque books. That’s crazy.”

Being able to run a business is another leap and for most farms it’s a multimillion dollar leap. Good likes how some agricultural colleges now require students to do a business plan for their farm or new agricultural business. Students can even be required to take it a step further and meet with a lender to review their plan.

Parents should have expectations their child will come out of college and off-farm employment and become a key employee for the farm, not someone you have to tell what to do all the time, says Good. And then they should always be on the lookout for training opportunities.

Opportunities

Young farmers also need opportunities to apply their knowledge and try new things. Good suggests farms develop more than one profit centre so the next generation can test themselves in smaller ways, such as renting a half-section or owning some livestock.

The trick for some parents is to make it as real as possible financially and let them have full control. “They need to know all the costs and there should be clearly communicated expectations on what they are going to do with the profits,” says Good. “They should say, ‘No, don’t use it all as a down payment to buy a new truck with the proceeds, and save 20 per cent of final profits.’”

Transferring management requires a time of shared responsibility, says Good. “Father and mother should create a proposal and the son or daughter should review and create a plan. That’s the younger generation’s obligation and gives it some deadlines.

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