A Handy Tool for Succession Planning

A financial analysis is an excellent way to help both generations transition the farm business.

Understanding how to transition the farm is not easy. You've folded your soul into your farm for forty years, you're ready to release yourself from the daily responsibility, and it's common to have reservations about what the next generation will do with your dream.

Having a series of candid, crucial conversations is a key part of the process – and I'll talk more about that in future posts. This week I want to share something simple: the financial analysis.

A farmer client of ours told us recently that taking the farm through a financial analysis, having father and son both participating in the process, was a valuable tool in handing down his dream. He said the process caused his son to think differently about the farm, the dream and the key elements of the business. He said he was confident the transition could be easier with this tool.

When I think about this, I am not surprised. As any business grows to include more people it is important for all of the players to clearly see the goals of the operation and the measurements of those goals. In our business we review a monthly P&L statement so that we understand how money comes in and where it goes. This review allows the leadership to determine if we are investing wisely in the right areas in order to keep on track with our goals.

A financial analysis is much the same. It begins with a snapshot of the current financial state of the operation. Bringing others in to the process puts everyone on the same page, leveling the playing field. Referring back to what our client told us, once the son understood the costs and returns of specific endeavors year on year, the picture became clearer.

In the framework of a succession plan, the son sees that the numbers are going to be coming into and going out of his wallet soon. The financial analysis is a roadmap to the future and is an excellent way to communicate what you should expect your decisions to yield.

Once all numbers are out in the open they can be linked to passion, creating better opportunities for success. For example, if the farm is currently diversified with crop and livestock production and the next generation doesn't have a passion for the livestock part of the operation, the numbers will help make some decisions. If livestock has been a profitable piece of the farm entity, everyone should realize this and determine a way to either replace that income or find the help needed to keep the livestock operation strong.

Numbers bring balance, helping one determine the best use of time. The financial analysis reveals where we struggle, where we excel and the path to bigger opportunity.

That path is a great place to hand off the baton from your generation to the next.   

 

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