What’s It Worth
If You Stay On The Farm?
John R. Baker
Attorney at Law
1-800-447-1985
jrbaker@iastate.edu
Photos by USDA NRCS
Our greatest responsibility
is to be good ancestors.
Dr. Jonas Salk
Acknowledgments
• Professor Andrew Errington (deceased)
Research Chair in Rural Development
University of Plymouth, England
• Dr. Walter Warrick
Professor of Business Management
Drake University
If the ship-building art were in the
wood, it would produce the same
results by nature.
Aristotle (384 BC – 322 BC)
If the farm succession art were
in the assets, it would produce
the same results by nature.
John Baker (1947 - ????)
How is “family farm” defined?
• Maintaining family ownership of farm land is
not the same as maintaining the family farm.
• The former is an investment in an illiquid, long
term, appreciable fixed asset and the latter is
a business.
• If inheriting farm land creates a farmer then
inheriting law books creates a lawyer.
THE FARM
Owner’s priority
Owner’s priority
Continuation of farm family business
Continuation of family ownership of farmland
SUCCESSION PLAN
ESTATE PLAN
Assets Money Management
RETIREMENT
BUSINESS
SUCCESSOR
HEIRS
We don't see things
as they are,
we see them as we
are.
Anais Nin (1903 – 1977)
Two Different Systems
 Family is inward looking
• Business is outward looking
 Family avoids risk
• Business embraces risk
 Family focuses on emotions • Business focuses on work
 Family seeks stability
• Business seeks change
 Family does not count cost • Business tracks cost
The FAMILY system
– Attributes of a successful family
• Loving
• Loyal
• Affectionate
• Supportive
• Empathetic
• Understanding
• Enduring
• Communicative
The BUSINESS system
– Attributes of a successful business
• Efficient
• Profitable
• Goal Directed
• Effective
• Aggressive
• Evaluative
• Innovative
• Proficient
Structure
• The Structure Of A Family Does Not Change
– What Is The Genogram (Family Tree)?
• The Structure Of A Business Must Change
– What Is The Organization Chart?
 Succession Planning Is The Planned Change
Of The Organization Chart
What’s It Worth If You
Stay On The Farm?
“I’ve spent my entire life
paying off my uncles.
Now I’ll spend the rest of
my life paying off my
brothers.”
English farmer, Devon, UK 2002
The Question
• How many times should one family buy
the same farm?
The Results
• Buying the business every generation
limits the ability of the business to react
to change.
• Buying the business every generation
puts it on a trajectory for oblivion.
Net Worth
EQUITY
TIME
Debt
Dad and Mom have asked Sarah to come back
and eventually take over the farm family
business. They have offered Sarah an annual
salary of $52,000 per year.
Sarah has one sister and two brothers. None
are interested in taking over the farm family
business.
Dad and Mom have always said that they will
treat all their children equally.
Mom and Dad have told Sarah that she will
receive $250 per week and that each of her
sibling will receive $250.
Sarah, her sister and her brothers have been
treated equally.
Does this sound fair?
If it is not fair during the life of the owner
then what makes an equal division fair after
the death of the owner?
KEY CONCEPT
Compensation = Contribution
Contribution = Compensation
•
•
•
•
•
•
•
1990 the owner has a net worth of $300,000
3 children: If divided then each receives $100,000
By 2010 the net worth has grown to $3,300,000
If no successor: each child inherits $1,100,000
One child is the successor
Contribution = Compensation
The Owner determines that one half of the increase is
attributed to the efforts of the successor
• Therefore, the owner’s share is $1,500,000
• Therefore, the successor’s share is $1,500,000
• The successor’s share of the Owner’s estate is:
– 1990 From the Owner’s share
$100,000
– 2010 Successor’s efforts
$1,500,000
– 2010 From the Owner’s share
$500,000
– TOTAL inheritance
$2,100,000
• Each Siblings’ Share of the Owner’s estate is:
– 1990 From the Owner’s share
$100,000
– 2010 From the Owner’s share
$500,000
– TOTAL inheritance
$600,000
Conversation Confusion
(In the family and by their attorney)
•
•
•
•
•
TIMING
LOCATION
ROLE
VOCABULARY
CONFLICT
Conversation Confusion
• Timing
– When will the conversation be held?
Usually it is during a holiday meal when
every one is present. The family is
operating in the family system and
attempting to discuss issues that are in the
business system.
Conversation Confusion
• Location
– Where does the conversation take place?
Usually at the largest table in the parents
house. Dad sits were he always sits and
each child sits where they always sit. Mom
is in the kitchen arranging coffee and
cookies. The family system overlays the
business conversation.
Conversation Confusion
• Role
– What is the role of the individuals involved
in the conversation? A conversation about
the farm family business requires the
individuals to assume the role of business
principles and not the role of Dad or Mom
or Son or Daughter or In-law or Brother or
Sister or Niece or Nephew or Cousin or
Grandchild or Grandparent.
Conversation Confusion
• VOCABULARY
– What is the appropriate vocabulary for the
conversation? A conversation about
business requires the use of a business
vocabulary. A conversation about family
allows the use of a family vocabulary.
“The limits of my language are the limits of
my mind. All I know is what I have words
for.” Ludwig Wittgenstein (Austrian philosopher 1889 -1951)
Conversation Confusion
• CONFLICT
– What happens when a conflict arises? In a
conflict communication is fractured, the
participants are at impasse, they avoid one
another and emotions are heightened.
The participants lapse into their respective
family system roles and the family system
vocabulary is employed.
Some Final Thoughts
• Failure to develop a coherent succession plan.
• Failure to treat the farm as a business.
• Failure of the owner to transfer managerial
authority, responsibility and accountability.
• Failure of the owner to retire.
• Failure to develop an equitable estate plan.
Presented by:
John R. Baker
Attorney at Law
jrbaker@iastate.edu
1-800-447-1985