* Editor’s Note: This is the first in a three-part series on machinery’s role in a farm succession plan.
On most farms, farm machinery is second only to land on the list of the biggest expenses. That makes it important to account for your iron lineup when building a succession plan for your operation, according to an AgDirect expert.
That plan starts with knowing where you stand and where you want to go. Since machinery is such a large financial component of most farm operations, the succession discussion should include what you own, the price tag of that ownership and how that machinery can meet the successors’ needs, both from an operational and cost management standpoint.
“It’s essentially a business plan that outlines what it is you’re trying to do and making sure you’re managing fixed costs so you’re not jeopardizing your ability to transition into an operation or grow because you’ve loaded yourself up with too much machinery debt,” says Carl Horne, Young, Beginning & Small Producer Program & Outreach Manager with Farm Credit Services of America. “For young and beginning farmers, the time to start thinking about your succession plan is right now. Many are focused on the generation ahead of them and what they’re going to do, but you shouldn’t focus on that too much and miss out on the opportunity to position yourself today.”
Strategies Versus Tactics
Establishing that position starts with a strategy and leads to a tactic. Horne says the strategy – the means through which producers reach the ultimate goal of an effective succession plan – should be ever-present when considering tactics to make that strategy work.
“The thing I notice most is the consistent confusion of tactics and strategies. For example, some may think of putting their land into an LLC, then transferring shares to a successor later as a strategy. But, that’s the tactic, the end result of a strategic thought process,” Horne says. “First, answer the question ‘What is it we really want to happen?’ then look at tactics to get you there.”
Ensure ‘The Right Fit’ With Machinery
Specific to farm machinery, positioning an operation for continued success through a succession plan may not be as simple as passing a machinery line on to the next generation; it has to be the right financial and operational fit for the successor, and ensuring that fit should be a priority when starting a succession plan. Sometimes, what’s affordable and necessary for the predecessor may not be for the successor.
“Sometimes, dad or grandpa will be retiring and he’ll say ‘go ahead and take over our machinery line.’ That machinery line may be best suited for grandpa’s operation, but not for the grandson’s operation of that farm,” Horne says. “It’s important for young producers to balance capability with affordability. A young producer really needs to be able to protect his or her ability to make money and build the financial strength of the operation. Some things may need to be deferred to build a little stronger financial position.”
Building a farm succession plan that includes a large machinery investment and positions the next generation for success can require a lot of discipline. Old habits, including those regarding machinery management, can be hard to break, even if doing so is the difference between a fruitful and unsuccessful transfer of farm assets to the next generation. This puts a premium on specific financial management of major elements of a farm succession plan, like a machinery lineup.
“Sometimes, we fail to get disciplined enough on ramping up our management on the business and financial aspects. But, the fact remains if they want to keep doing what they’re doing, they have to get their financial house in order,” Horne says. “Some producers say they were doing things a certain way for decades, but losing money doing it. When they break it down and figure out the right changes to make, they turn it around just because they actually know what’s going on.”