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Farm Succession Part 3

Machinery and the Alignment Process

Published on 6/16/2016

*Editor’s Note: This is the third in a three-part series on machinery’s role in a farm succession plan.

Though farm succession typically starts with a single conversation, breaking it down into a specific process of alignment that places machinery in the right context can help both generations move a farm business forward successfully.

The Alignment Process

The alignment of business goals and the steps needed to accomplish them is the ultimate outcome of a distinct process that can help producers manage a farm succession. The process starts -- well before that planned succession is executed -- with communication and strategic planning.

“It’s all about alignment and the tools farmers and ranchers can use to create that alignment. First, make sure you have a foundation in communication, which I’d say is the most common challenge with any family business,” says Michael Stolp, Northwest Farm Credit Services Vice President of Customer Insights and Senior Business Advisor. “Next, make sure you think about your strategic plan. Have a vision, understand what your strategies are and roll those strategies into a budget that includes operating and capital expenditures, particularly those related to equipment. Be consistent with where you want to take your business. We are building a plan to create next-generation managers in our business, be it family or non-family.”

Machinery’s Role in Succession

Once communication is established and strategic planning is underway, the next step involves the more tactical work of addressing the specifics of the succession, especially those regarding asset ownership and management. This is where machinery and equipment should enter the conversation, says Northwest Farm Credit Services Director of Customer Insights and Senior Business Advisor Carl Sohn.

“Succession is about operating together successfully until you get to that point where you have transition in both ownership and management. That first conversation should be getting everybody on the same page,” Sohn says. “Then, it’s important to get together to set priorities for how you are going to invest machinery and equipment dollars. Get the junior and senior generations on the same page. It’s an important conversation, but not always an easy one.”

When addressing the machinery aspect of a succession plan, it’s important for both generations to stay focused on the finish line: How the strategy will position the successor in his or her ability to financially sustain the operation.

“Equipment is a great example in which aligning vision and strategies with your operating and capital budget is critical. Then, you look at your capital budget and differentiate between your needs and wants,” Stolp says. “That’s really important, because if you don’t do that, you can easily build in a fixed overhead structure that puts you at a competitive disadvantage.”

Succession Versus Liquidation

Managing machinery assets may have an entirely different goal in a farm succession versus the simple liquidation of those assets during an estate settlement. This is another component to consider when transitioning that machinery to a successor.

“If you don’t know who’s going to manage the business and what the future vision for the business is, you can’t answer the question about what to do with the equipment line,” Sohn says. “If the idea is to liquidate the business, you’re going to try to maximize value versus transfer assets to the next generation of managers of the business at the lowest price possible to set them up for success.”

Adds Stolp: “Succession is not just about estate planning. It’s also about operating together successfully until you get to that point where you have transition in both ownership and management.”

Stick To Your Plans

Once the succession strategy is established and all involved parties agree on the path forward, it’s important to stick to the plan until the group collectively decides to make changes. A focus on the agreed to long-term vision is critical and must include a way to make strategic changes in the future.

Sometimes it can be tempting to diverge from a plan if the marketplace holds the potential to offer short-term financial incentives for buying or selling a piece of machinery outside the scope of the succession plan, but Sohn says it’s important to avoid these types of circumstantial “just do it” decisions that veer from long-term succession plans, unless agreed-upon by the group through changes to the underlying strategy, goals and vision.

“We just have to stick to our plans. You may not reach your long-term goals as a result of ‘just do it’ decisions,” he says. “If you sit down, plan together, get aligned and use that framework as the foundation on which to make your specific decisions relative to equipment and everything else, that will enable you to achieve those long-term goals as a family.

“What should drive your decisions are what’s best for the business and what’s best for the people to achieve their goals,” he adds. “You need to be business-smart, family-friendly and drive accountability for everyone involved.”

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Agriculture is constantly evolving, which is why AgDirect® works to help you make the right decision for your operation when it comes to financing ag equipment.

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