; Enhancing The Probability of Successful Farm Business Transition | Conferences | AgRisk Library


Conference Name Enhancing The Probability of Successful Farm Business Transition

Rodney Jones


Research suggests that family-owned businesses like farms and ranches historically have only about a 30% success rate in transferring the business intact without significant disruption to the successive generation. These low success rates suggest that the common desire to keep together what a farm owner has built for the next generation to start from is difficult to satisfy. Our objective is to identify farm transition strategies and tools that will increase the chance of success given the well-known cash flow constraints and year-to-year variability, and to subsequently extend those strategies and tools to assist a broad array of farm families in implementing successful transition strategies. Using a representative farm simulated over a multi-year transition period we examined several common strategies, looking at the likelihood that the farming operation could remain financially viable through the transition timeline (also considering the retirement needs of the senior generation). Strategies include requiring the successor generation to “borrow” funds (either commercially or from family) to accommodate the transition, sinking fund or life insurance purchase strategies, and formation of various types of asset holding entities and associated restrictions on the assets in those holding entities. In order to get the “probability of success” up to an acceptably high level, we find that one or more family stakeholders must make some concession. That concession can take many different forms including attractive lending rates, reduced asset values passed on to certain heirs, or restrictions on what certain heirs can do with the assets after inheritance.