How ya gonna keep ’em down on the farm? (And should you?) (December 2009)

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How ya gonna keep ’em down on the farm? (And should you?) (December 2009)

Banks wrestle with succession and other thorny family farm issues

By Steve Cocheo, executive editor

... and should you even try to?

When the customer is a family farm, bankers wrestle with tougher issues than loans

The veteran farmer thought it was time to call it quits, and pass the family farm to his sons. His wife had died, and, after decades of battling all the factors that farmers face, he told an advisor, “I’m sick to death of farming.”

He was looking for advice and help. He and his children, two sons and two daughters, didn’t communicate all that well. He asked consultant Neil Koenig to assist him by speaking to his grown children, to sound them out about his desire to retire, and to have one of them take over the farm.

Koenig met with the younger generation, and found surprises.

One daughter thought the father absolutely loved farming, while the other believed he would never, ever let go of the farm.

One son told Koenig, “I hate farming! I’m doing it only because of Dad. He can’t lose his wife and his farm.” The other son confessed to much the same feeling—stuck in a hated spot out of concern for the parent.

Koenig then invited the four siblings and their father for an off-site meeting at a hotel, and revealed all how everyone felt.

The farmer stood up, as did the elder son. “By God, then, we’ve got a deal!” he said, and for the first time in years, they hugged. Within an hour the family had engaged an appraiser.

Bankers stuck in the middle
Koenig is head of Leadership R&D, Clovis, Calif., and is frequently engaged by family-owned firms and farms to help them sort out questions, disputes, and even violent confrontations over succession and related issues. He told bankers at ABA’s recent National Agricultural Bankers Conference that bankers often wind up refereeing such issues by default, and much more of this will be the lot of the ag banker, Koenig predicted.

“Most of the businesses that I work with have a dream of an enduring family business that will last from generation to generation,” said Koenig. But while many family farms trace their history back to pioneer days, the current and incoming generations may feel little love for farming. And that leads to a truth the bankers and families must confront, according to Koenig: by 2012, the largest transfer of wealth in American agricultural history will be hitting its stride, as family farms and agri-businesses change hands.

It’s not an easy transition to make, said Koenig. “Soon, we’ll talk about the passing of the computer to the next generation,” instead of the tractor, as ag becomes more and more automated.

“You’re going to get stuck in between the generations,” Koenig warned bankers.

Regrettably, not all stories involving family farms and agri-business go nearly as smoothly as did the one just told.

A common problem is the onset of dementia in the older farmer. Bankers spoke of second spouses that don’t necessarily have the patriarch’s well-being at heart—in one banker’s words, “gold diggers”—who capitalize on mental deterioration. Koenig spoke of one customer who, at 83, decided to buy 30 acres of land near an Interstate junction. Among other mistakes, due to mental deterioration, was his waiver for an environment inspection prior to finalizing the purchase. The family later found itself stuck with $3.5 million in environmental cleanup costs. When the bank learns of a questionable transaction, it can face a quandary. Koenig suggested that in such cases, the banker needs to pursue a meeting with the family.

“As a banker, you can be the bad guy,” he explained, “and that will help out the family.”

Dementia isn’t always an unexpected issue. Sometimes, the farmer knows he is slipping, and begins to express concerns about it. “When they start speaking like that, they need to be listened to,” said Koenig. “But it’s a mistake for a banker to go solo. You need to get other professionals involved.” Tap doctors, clergymen, attorneys, estate planners, and other financial advisors.

The pain of not mattering anymore
A major issue is pending lack of relevance. No one who has run a family farm—or any business—wants to confront the fact that they are coming to the end of their effective time with it, that “you are an impediment,” and that in time your actions and views will be “irrelevant,” said Koenig.

This can lead to outbursts, when the dam busts, like this: “You’re not kicking me off the farm. You can’t fire me. I’m your old man!”

So frequently does this come up that it served as title of Koenig’s book, You Can’t Fire Me, I’m Your Father: What Every Family Business Needs to Know for Success (Kiplinger Books, 2000)

But the hard truth is, the “kids don’t want to be irrelevant, either,” said Koenig.

And there is intergenerational jealousy and misunderstanding. Parents who have sunk everything into the family farm, and turned its management over to the next generation while they continue to live off it, can come to resent lifestyles they see being maintained at the expense of the family operation. This is especially so when the security of their continued livelihood appears to be at risk because of grown children’s spending.

“They expect to start right off right where we are,” after years of work and struggle, is a complaint Koenig hears frequently.

Misguided “fairness” can also muddy the waters, according to Koenig. “My farm clients are proud Republicans,” he observed, “but they are ‘Socialists’ with their kids.” Meaning, they tend to try to treat siblings equally, although often not all the siblings equally shoulder the load . This can lead to much difficulty.

Indeed, Koenig warned that one need look no further than the Bible to see how family can become a difficult issue. Cain and Abel, Jacob and Esau, Joseph and his brothers—“the classic story of mankind is sibling rivalry,” he said.

Management succession on the farm
While the generations involved in the farm family whose predicament opened this article determined that getting out entirely made the most sense, that’s not the road many take when parents decide it’s time to move on. They often discover that it takes more than one pair of hands to replace the work level and knowledge the typical older American farmer has built.

Then the issue becomes, what skill sets does the operation need the next manager to have? Frequently, the family determines that what’s needed is a team of people, each with their special sets of skills, but with a good coordinator at the top.

Koenig praised one client’s approach to skills building, which he felt bankers could encourage their farm borrowers to emulate.

This family chose to treat the farm as a business, rather than as a family legacy, and took it so much to heart that the issue of coming to work on the family farm in adult life was positioned more as an opportunity, not as an expectation or a requirement.

The family rules were as follows: First, you could work on the farm during high school and college vacations, but the expectation was that each child would obtain an advanced degree of some type, and then work somewhere else for at least five years.

The father’s explanation for this last requirement, was: “I want you to learn the mistakes that they are making,” he said, “and then come back to so we don’t make those mistakes here.”

Favors you can do your customers
Koenig gave the bankers numerous words of advice on dealing with the generational gap and keeping constructive peace in family farms and businesses. Among them:

1. Don’t let them go cheap on the bookkeeping. All too often, family farm financial accounting is handled by one member of the family. This can breed mistrust and worse. Koenig suggested that bankers insist that all farm bookkeeping be done professionally in accord with certified public accounting standards by a mutually trusted non-family member.

2. Talk to the family, and avoid all jargon when doing so.
Many family farm family members are not farmers, and don’t know the lingo. Don’t use it around them, aiming for clarity and plain English instead. Further, even the ones who know farming don’t generally know banking—so keep banking jargon out of the conversation, too.

3. Educate the family in the basics that they need to watch.
Koenig suggested giving family members a selection of key measures that will serve as a “scorecard” by which they can monitor their family operation and thereby get a sense of how things stand.

This makes a good beginning, he said, “and then they can learn to drill down.”

4. Where and when appropriate, encourage the family to explore a governance structure.
In all of the examples cited in this article, a single individual made all the key decisions, oversaw operations, and knew the whole situation and finances. Koenig said there are cases where a banker will be doing the family farm or agri-business a favor by suggesting adoption of a structure that broadens oversight and certain decisionmaking.

One is a formal board of directors, which can begin as a less-formal board of advisors. Ideally, such a body consists of outsiders with experience in agriculture who can oversee an operation and advise the stockholders-family members. Typ- ically, these directors aren’t in it for the money—fees tend to be relatively low and “perks” few—but to be of service. In fact, Koenig advised bankers to urge families to avoid tapping professional board members, and to stick to parties qualified by some essential skill or background.

Boards are not without risks, Koenig acknowledged. Some can become dominated by a strong-willed member. Ideally, a board should consist of even-handed individuals who aren’t worried about being a friend to the farmer, but instead a trusted overseer.

A related structure that brings the family to the oversight role more directly is called the “family council,” sometimes, “ownership council.”

Bankers’ key tool: Questions
Koenig noted that most ag bankers, because of their business experience, walk into farm family situations with many answers. However, he said they shouldn’t give answers unless asked.

Further, Koenig believes that giving answers directly isn’t always the way to go. Far better, he said, is to ask questions that will help elicit information, and, building on that, help the customer find their answer.

“The more they get their stories told, the better,” he explained.

This takes patience. You have to listen to the whole story, and it will come out haltingly. Sometimes the best place to ask the questions, is outside the office.

“I’ve had some wonderful interviews at the back of pickup trucks,” said Koenig. Besides putting customers at ease, it means something to them when their banker comes to their place. BJ

How has your bank addressed family succession issues for farms—indeed, for any small business you serve? Share your ideas on our “Pass the Aspirin” blog at www.ababj.com/blog/277.html

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