They wear big cowboy hats and tiny workboots. They play with toy tractors in their sandboxes, go with Grandpa on a parts run, push brooms in barns and listen to conversations with salespeople.
Before they can even count, farm kids learn some valuable lessons about farming, or as Elaine Froese, farm family coach and partner in a family farm near Boissevain, Man., sums it up, “Parents sow the seeds of farming.”
Transferring a family farm from one generation to the next is a critical point in the survival of a family farm, and everyone involved in a family farm knows that the process actually starts years earlier, based on a foundation that is typically laid when the children are still small.
Just think about it: In no other industry would a kid miss school to attend a trade show. Only farm children spend a Saturday on a barn tour or their summer evenings training 4-H calves.
When families put high value on these types of agricultural activities, they’re sending a message that farming is an important career, says Froese.
On top of that, involving children in the ranch or farm makes them feel a part of business. Consider that farm chores might be training opportunities. Age-appropriate experiences can really set them on a course for a career in agriculture, says Froese.
On the other hand, of course, farm families live where they work, so children also overhear and see things that may not give them such a positive attitude about the prospects of farming.
Sometimes it’s not so much what you say to kids as what they hear when you’re not expecting them to be listening. Froese recalls a local kindergarten class writing in to the local newspaper about what they wanted for Christmas, and one boy saying that he wanted Santa to bring better barley prices. “I wonder what that kid heard over the dinner table?” says Froese.
It’s important for parents to get a handle on their own attitudes toward farming and money, Froese says. What does money mean to you? When is enough? How do you value it for yourself? Is it hoarding that makes you happy, or sharing? Is it what you can buy, what you can give or how much you can save? What are your ingrained values around debt, bill payment and marketing?
Teaching your young children how to talk and share feelings goes a long ways toward building an open relationship, as does simply spending time together. “Family secrets don’t work,” says Froese. “Silence is a form of violence.”
Froese believes it’s also important to address favouritism at an early age. Sibling strife can cause huge problems later on, especially during succession. That means parents need to state and address the issue early. Navigate it as caring parents, instead of building sibling rivalry by comparing and pitting children against each other, says Froese.
Transfer financial smarts early
“If there are communication problems and there’s the issue of succession, it’s that the children are almost always illiterate when it comes to what is going on regarding the finances of the business,” says Richard Cressman, communication adviser, seed dealership owner and former farmer from New Hamburg, Ont.
Cressman distinctly remembers his father asking him when he was 16 years old if he wanted to buy three cows and quota. At the time it would have cost about a 10th of what it would today, and he still regrets not taking his dad’s offer to co-sign for the loan. “I was too afraid even though I was hell-bent and determined to be a dairy farmer at that age,” he says.
Fast-forward to the new millennium and a new generation of Cressmans. At 18 years old, Cressman’s oldest child bought an ongoing vegetable retail business. She and her younger sister had worked for a market gardener for a couple of summers, and when he wanted to get out of the business, he put it up for sale to any of his employees, mostly university students.
Even though young, quiet and shy, she bought it, and ran the business for two summers. Then she sold it to her next youngest sister who ran the business for four more years. Their younger sister worked for them but never was an owner. This little farm retail business paid their way through post-secondary education and gave them financial knowledge that they are still using in non-farm applications.
The girls weren’t afraid to take responsibility for their dreams — and for the financial implications of achieving those dreams — because from the time when they had been very young, they had been taught financial know-how. Their parents had shown them how to track expenses for their personal lives and any ventures, and at age 16, Cressman’s oldest daughter had already taken a tax certification course.
“From a very young age — the first time you give a child a quarter — they’re involved in the commerce of the world,” Cressman says.
The message is that if a child feels compelled to be involved with something such as a 4-H calf or rabbits, the feeding and caring for the animal is only part of the package. The costs also have to be managed.
Indeed, a calf project can become an excellent opportunity for learning the financial realities.
Transfer family business values
According to Paul MacDonald, executive director of the Canadian Association of Family Enterprises (CAFE), the family businesses that groom successful successors are the ones that introduce the family’s business values at fairly early ages.
If that sounds touchy-feely, think of it in terms of the attributes that make a family business different from other businesses, such as pride of ownership, the fact that the business is the family legacy, and that everyone is a steward of the business.
These families teach the “familiness” of family business, says MacDonald.
Not only do they teach basic financial knowledge, they indoctrinate the children with what it means to feel a part of the family business, including a sense of pride.
This includes understanding what MacDonald terms “patient” capital investment, meaning that the business invests in long-term assets rather than always looking at short-term return.
MacDonald also says some of the most successful transitions have been in businesses that employ family councils and independent boards, and that have written, formal best practices to help maintain the original strengths and values of the businesses.
The challenge of family business is balancing the rich, historical tradition with meeting the current and future businesses, economic realities. For many family businesses, there is also a requirement that the children have outside experiences or education, and they must prove themselves outside the family business before they take on a role within the business.
Future generations shouldn’t work in the family business until they have the necessary skills and independent experiences, MacDonald says, and until they have gained a broad experience and skills.
CAFE estimates that more than two-thirds of the operating companies in Canada that are controlled by business families will go through an ownership and/or management transition in the next decade.
MacDonald estimates that only about a quarter of their members have formal written succession or transition plans.
Transfer skills and confidence
Working in the business is not the same as running a business.
In a family-business survey by CAFE and KPMG Enterprise, a common suggestion involved exposing future generations to the business at an early age in order to instill passion for the business, and empower the next generation to become leaders.
The current owners said the next generation needs to have both the vision and the leadership capability to innovate new ideas and overcome entitlement issues.
Meanwhile, many of the younger generation were concerned with how they were going to fill the older generations’ shoes.
They should be more concerned, their parents said, with what’s ahead for their own shoes.
Young children move through a hierarchy of development and skilled tasks, mostly based on dexterity, size, experience and safety. On a farm, a child might go first from using a push mower to a riding lawn mower, then to a tractor and wagon, and finally to a combine. Slowly they build skills and confidence.
There are rites of passage through various chores children are allowed to do, adds Froese.
Those steps of development continue into adulthood. In their 20s, the developmental task is to become independent. At this phase, children need to set up their own households and learn to take care of themselves, says Froese. Their 30s is a time to be mastering skills and by the time they’re in their 40s, they need some ownership.
“Most importantly, the succeeding generation gets to choose, and doesn’t feel trapped by the farm,” says Froese. “There’s a power in choice.”
Plan and prepare
Larry Morin, investment and farm business adviser from Fort Saskatchewan, Alta., says that if parents do some planning for succession, retirement and inheritance when their children are small, it’s often easier when the time comes to make succession decisions.
It doesn’t have to be written in stone, but you should talk about what you want after farming. “It’s never too early to think about what your vision of your retirement is,” says Morin.
Interestingly, a 2006 Iowa succession survey showed that only about a third of farmers plan to retire, ever. Furthermore, over 45 per cent of those who had indicated they would either retire or semi-retire said they had not talked to anyone about retirement. Of those who have discussed retirement, almost half had done so with their families, and the rest talked to professional advisers such as accountants, lawyers, bankers and farm consultants.
Talking about retirement may not seem important when you have young children, but retirement and succession visions should influence the farm growth plan. Often the annual financial challenges of farming and current lifestyle desires influence off-farm income decisions more than longer-term planning for the farm, says Morin.
The main influence for growth and expansion is the need for income need. This comes to a head when more families expect to rely on the farm to support their families. If there has been no growth planning to support more families, someone will not be part of the future farm.
Planning is not all about talking. There are some structures that farmers with small children can learn about and prepare early to help with succession, retirement and inheritance. Which business structure would be best for succession and tax management for farms your size? Learning about options now may make the decisions and timing easier later.
One common strategy recommended by many succession planners is to buy life insurance. The spread in insurance premiums costs for different ages is significant. For example, a $1 million whole-life policy for a 30-year-old is about $400 a month, compared to $1,900 a month for a 55-year-old.
Before buying an insurance policy, Morin says narrowing down the purpose for it will help you choose the right type. For example, if it’s to provide non-farming children a cash payment from the estate, then whole-life might be an alternative, depending on your age. Term insurance is much cheaper but only covers for a specific timeline and might best be used for specific needs, such as to cover debt.
Alternatively, it might make financial sense to buy a term policy combined with periodic investments or universal insurance. Then if the kids decide not to farm, the parents would have the option of using the investment for retirement funding.
“Each situation will be somewhat unique, and age and goals will definitely influence what is best for their situation,” says Morin.
For both his non-farm and farming clients, Morin suggests parents start saving money in a Registered Education Savings Plans (RESPs) as soon as children are born.
RESPs are great ways to save and get government funding for the escalating costs of post-secondary education. Along the way, they also help parents send the message that learning is important enough to invest in. According to Canada’s 2006 census, over half of all operators on farms with at least one young farmer had some post-secondary education, compared to 44 per cent of other farms.
It’s also important for young parents to be prepared for emergencies and have legal documents such as wills up to date. Ensure your wishes are explained properly in the documents and discuss the contents with everybody who will be affected to make sure they’re aware of and agree with it. Says Morin: “Just having a will that says if something happens to me, everything goes to the wife, and if we both die, split all our assets between our kids, may create more issues than it solves.”
— Maggie Van Camp is an associate editor with Country Guide at Blackstock, Ont.
The Errington Report
In his often-cited paper on succession, U.K. economist Andrew Errington identifies three stages of farm transfer: succession, retirement and inheritance.
Errington defines succession as the transfer of managerial control. In most cases, it is gradually handed over, and his research found that on most farms there is a progressive transfer of different types of responsibility, starting with a number of technical and short-term tactical decisions and ending with the transfer of financial decisions and ultimately financial control of the farm business.
Errington also compared methods of farm transfer between generations in England, France and Canada. He found consistent patterns for helping the next generation climb the rungs of responsibility. The final rungs were financial — paying bills, identifying sources of financing, and negotiating financing. How quickly the successor ascends this ladder and achieves decision-making power varied fiscally and culturally.
French and Canadian successors both move fairly rapidly up this ladder, while British successors only gradually achieve increasing amounts of control and often never got to the final financial rungs until the older generation dies.
In all geographies, however, Errington found that some farmers are simply reluctant to give up the authority.