Mom and Dad just had coffee with their neighbour, talking about how it’s time to start preparing for retirement. Not just thinking about it, but actually doing it. They’re only a fenceline apart, but they’re in very different situations, though, which for farmers in the area who want to expand could make all the difference.
Mom and Dad’s son and daughter-in-law already farm alongside them and are busting to take over the farm. The neighbour’s kids, by contrast, have busy careers elsewhere with no interest in coming back, so he’s looking to somehow put the farm up for sale.
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In both cases, someone is going to want to carry on farming that land, whether a family member or outsider. If you want that to be you, your chances may be better if you know exactly what’s going on in their heads.
What do they really want? What are their expectations and fears? How would they view your offer or your plans for their land? Do they have the confidence that you’d farm it well?
Sooner or later, everyone has to have a conversation about it, and that’s probably better done sooner than later, says Javier Vargas, a farm management consultant with MNP. There’s no point just guessing what those aspiring retirees are looking at as key decision points.
A little telepathy would help, though.
Vargas and his colleague Jennifer Christensen have seen farmers in just about every situation come through their door. As farm business advisors with MNP, it’s their job to help such clients through family transitions or farm sales. Without exception, they say, every farm and every farmer has their own unique considerations, but that doesn’t mean your overall approach can’t be based on an overarching strategy.
In essence, your job is to use sound communication skills to get everyone on the same page, and to tease out the answers to some crucially important questions that so many people are reluctant to discuss, even though the answer will make all the difference in easing these huge life changes for both retiring and incoming farmers.
The two scenarios — selling or transitioning — are obviously different and will have different considerations. In either scenario the retirees definitely want to ensure they get the right price for their land or assets so that they can retire comfortably, but in a family situation there are more non-financial considerations, like how much equity the next generation has already built through their involvement, something an outside buyer won’t have.
“When a child is working on the farm, they create some equity somehow,” says Vargas. “As an example, some kids are buying land slowly, or purchasing some cows or a tractor, things like that. When you’re buying a farm from zero, you have to pay market value for everything. It’s a totally different game.”
“When a farm is being sold in its entirety, the seller is not as worried that the buyer is going to run the farm as they did if they were selling or transitioning to a family member,” says Christensen. “I’m not saying they don’t take that into consideration, but it is more about the dollars and cents versus their farming practices.”
Non-financial considerations
Whether it’s a family transition or third-party sale, there are often both financial and non-financial considerations.
“On the non-financial end, the retirees may be thinking, is the next generation, or whoever is taking over, going to work as hard as we did?” says Christensen. “Are they going to get everything done? Do they have the capacity to make the right management decisions? Do they have a vision for the farm?”
In some cases, maybe Mom and Dad have a hard time walking away from what’s been their life for decades. Many are concerned about what are they going to do. Will they still be able to work on the farm? Can they still live on the farm or do they have to leave?
“Sometimes, the existing generation has to change up their roles on the farm as transition occurs; roles do evolve over time such as running the combine, driving truck, the parts run to town, marketing decisions, banking decisions or even the consulting side. This can cause tension, however, so it all comes down to communication,” says Christensen.
Even in scenarios where the farmer is selling out, it doesn’t always come down to price, especially if there is a pre-existing relationship with the potential buyer.
“The farmer next door wants that young farmer to succeed and it really comes down to their farming practices,” says Christensen. “If he or she has solid practices, is expanding, making sound management decisions and is growing good crops, those things are noticed. They want someone to take over their land and be successful because there’s a feeling that it’s their legacy.”
Of course, that’s also an opportunity for the young neighbour: if you really want that farm, be careful of your reputation. Be honest, work hard, and keep the front fields clean!
Being prepared
Especially when there are other siblings involved in a family transition, whether farming or non-farming, you’ll never know what’s in Mom and Dad’s head until you ask them, says Christensen. “You can think that you’re getting everything, but it doesn’t mean you are,” she says. “It could become much more complicated if you haven’t been proactive and had the discussion, and done your homework ahead of time.”
So again, there’s an opportunity for young farmers, and some are taking steps to get prepared in advance, so they know how to position the subject of taking over the farm from their parents or approaching an outsider about purchasing their land.
“Some incoming young farmers, before they even approach Mom and Dad about taking over the farm, work with our farm management consulting team to look at their cash flow, their break-even, how much debt they can service, and determine if they can even afford the land,” says Christensen.
It’s a proactive approach that demonstrates to Mom and Dad, when they finally go to them and say they want to take over the farm, that they have a well-thought out, foundational plan that can be built on to suit everyone’s needs.
“I think that parents are more open to talk, knowing that the incoming generation has started to look at all those critical items,” says Christensen. “It’s important for Mom and Dad to know that they have a plan in place because they’re looking after themselves as well. Often today the transition happens slowly over time, so the kids don’t have to buy them out all at one time. If it works for both the ones coming in, and the ones that are getting out, there’s a sense of control on both sides.”
Just as a son or daughter might talk to their parents about their plans for the farm, an unrelated potential buyer should do the same thing, says Christensen.
“As hard as it may be to talk to a stranger or the neighbour you don’t normally deal with, talking about your future plans and how you want to grow is important,” she says. “They want to help young people stay in farming.”
Be respectful of the past
At the same time, keep an eye on how the retiring farmer does things and their practices and focus, because there’s nothing worse than being at odds with their management style. In some cases, Vargas also suggests being a little cautious about discussing your grand future plans.
“The difficult part is usually when a young farmer wants to buy a farm, a piece of land, sometimes he or she wants to make some changes,” agrees Javier. “You cannot go to a potential seller and tell them you want to buy their quarter section because you want to take out the bushes and do this or that, because that can create a lot of ownership pain (if that’s not the way the farmer likes to do things). Try to be cautious in how you present your plan to the farmer. Just approach them and tell them you want to buy the land and keep farming.”
“There are many blanket strategies that can be applied to farm sales and transitions,” says Christensen. “But for the most part, every situation, every transition, every sale is different and all the factors involved in it need to be considered.”
Four tips for getting inside a retiring farmers’ head
1. Start the conversation
“The first thing is to make sure Mom and Dad or the neighbour selling his or her land is okay with the whole project, so have the conversation with them and make sure they are willing to do a transaction,” says MNP’s Javier Vargas.
Those are difficult conversations, whether it’s for Mom and Dad to tell the kids their plans, or for the kids to tell Mom and Dad that they want them out, or for a young farmer to ask the neighbour he has been renting from for years if he or she is ready to sell. But it’s where everything begins.
“Try to put all the cards on the table, so everybody knows what the plan is,” says Vargas.
2. Understand the finances
The second big thing is to make sure everyone understands the financial situation of the farm, and equally important, the personal financial situation and expectations of any family members involved.
“One of the challenges is to get Mom and Dad and the kids to open up the personal books and put everything on the table,” says Vargas. “If Mom and Dad say they need $100,000 a year, some of the kids might say, why? It’s usually the insecurity of some farmers that I won’t have enough money to live on, so putting some numbers together for them helps them to understand how much money they need going forward. That’s not difficult to do.”
At the same time, Mom and Dad need to show the kids whether the farm has been successful or not. “We call it a transition of experience. All farmers have had difficult years, and young farmers may never have had that situation,” says Vargas. “Mom and Dad need to open their eyes that this could happen and it could be bad. Communication is the key, knowing the plan, the financial situation, and knowing the challenges that the kid is going to face.”
In one case, when a young farmer came to Vargas about wanting to buy out his parents, he helped them draw up a plan and followed the farm financials for a year and half to make sure the young farmer could pay Mom and Dad the money that they needed.
“That gives two different perspectives,” Vargas says. “One is for Mom and Dad to be secure that their kid is doing well and they have some sort of financial stability. The second is making sure the kid knows what can he improve, or what can he get more revenue out of.”
The same is true with an arm’s-length buyer. It’s virtually impossible to make any kind of transition or purchase plan if the incoming farmer doesn’t know the full financial picture because how else do they know if they can afford to make the offer or live with the plan?
3. Don’t approach it like a commodity
If money isn’t the overriding issue for a retiring farmer, they generally want a successful farmer to buy their land, so what the young person chafing to buy that land has to do is prove they’re a good farmer.
“Show maturity, that he or she is a business person and wants to keep farming,” says Vargas. “Understand that the land for this person is not a commodity. It is a piece of his heart and soul, he’s owned the land for many years and been growing with the land. One of the biggest points is how can you get this farmer to understand that you will continue with his vision.”
It’s the same thing with a family transition, says Vargas. “Mom and Dad are going to give you more and more power as soon as you show that you’re able to handle it and make good decisions, or if you make bad decisions, because everybody does at some point, how you overcome them.”
4. Don’t listen to the coffee shop gossip
When approaching a farmer about purchasing their land, rather than relying on coffee shop gossip, it’s important to try and find out exactly what the farmer’s situation really is, says Vargas. That gives you the opportunity to get creative, maybe coming up with different options to pay for the land.
“It’s not always just about cash; it’s about how can you make his life easier if you know the situation that he is in,” says Vargas. “For instance, if you have a house in town, and you know the farmer wants a house in town to give to one of the kids, you can offer to pay part of the land cost with the house. If you don’t know the person it does become challenging.”
In reality, it’s pretty hard for a person from a different place to just knock at the door of a farm and ask if they want to sell it, and more often than not it doesn’t happen that way. A majority of the non-family land transactions that Vargas sees in his area involve family farmers that have been renting land for many years, and their kids are buying land to try and grow the farm. “Usually Mom and Dad have known the neighbour for many years and they have the right of first refusal.”
Even in family transitions there are creative ways to keep everyone happy, says Vargas. In one instance, a family had one boy who wanted to take over the farm and two girls who had married farmers and lived away. When Mom and Dad decided to sell the farm to the boy, instead of giving the girls cash, they bought land close to the farms where the girls were living that would pass to them when the parents died. In the meantime, the parents rented the land to the daughters and their husbands to provide income.
Keep pushing the conversation, even though it’s all too natural to want to avoid it, Vargas says. “Create the need for things to happen and keep happening.”
