Family Versus Non-Family Transfer of the Farm
Introduction
People often think the transfer of a farm is much different if it’s going to family than if it’s going to non-family. However, when you look at the process, they are vastly similar with just a few differences that make a large impact.
Methods of Transfer
The method of transfer used makes the most difference. The options include a planned, gradual succession or an outright sale of the property.
In the succession process, the owner generation focuses on their desires for the farm. The process may take more work to accomplish than an outright sale and is more complex than leaving the farm to heirs in a will. The owner generation determines their intentions, values, and vision for the farm and for themselves so they can develop a plan. The owner generation may accomplish this on their own or with the assistance of ag professionals. There may already be an identified family successor, or the process may bring to light a family successor for the farm.
If through the process the owner generation concludes that there is no family successor for the farm, then they may choose to search for a successor among their employees or others involved in the farm. Or they may look beyond the farm to neighbors or other young farmers.
The second option is to put the farm on the market so a potential successor may identify themselves by expressing interest in or bidding on the farm. Whether sold through a realtor, auction, or directly from the owner generation, the determining factor in who will get the farm is who can afford to pay for it.
Successor Constraints
Potential successors, whether family or not, face many of the same constraints.
1. Lack of Capital
The number one stumbling block for a successor is the capital required to purchase a farm. The United Kingdom’s pilot Farm Start and the County Farms Estate initiatives found this to be true. Keeping It in the Family also reported capital requirements as a barrier preventing younger people from entering production agriculture.
In the University of Wisconsin’s 2021 focus-group-based research, farmers shared that financial barriers were the second-largest financial concern they had in relation to succession planning. Beginning farmers or successors have a difficult time obtaining a loan due to high land prices. Lack of capital results in lack of land.
Family successors may be offered a discounted farm value to pay or a partial gifting option. The owner generation usually seeks full market price for the farm or assets if sold to non-family successors because family members are more likely to have sweat equity invested in the farm. And the owners may have been given a discounted option when they took over the farm and want to pay that forward to the next family generation. The owners also often depend on the sale of the farm for retirement income because they don’t have a retirement fund. All their money went to maintaining the farm business.
Often successors do not have the financial resources, nor can they acquire credit, to purchase such a farm. Therefore, younger-generation farmers should focus on getting their financial affairs in order so that they have a down payment and qualify for loans they need to purchase land.
2. Housing
On-farm or reasonably priced local housing is challenging to find in rural areas. Increased demand, in part due to remote work capabilities, has increased rural home values and limited the options.
Owner generations often want to remain in the area they know best. They usually have deep ties to the farm, especially if it has been in the family for generations. They may have negotiated an option to remain on the farm for an extended period of time, especially if maintaining a role in the farm. Successors desire to be on the farm or close by. If a second home is not available on the property, it creates an additional financial burden for the successor.
3. Experience
Potential successors are expected to have a measurable amount of farming experience to be considered.
The 2021 Wisconsin study reported generational divides, which included the owner generation’s feelings about the successor generation not being ready or able to take over the farm. The research study demonstrated that, whether family or not, the successor’s ability and management skills (or perceived lack thereof) played a role in the owner generation’s willingness to transition the farm.
It is important for younger farmers to obtain farming experience so that they are qualified for land opportunities that arise. It may be wise to ask in a job interview if the owner has a succession plan or if they are looking for a successor. It may get the owner generation to think about succession options if they haven’t already done so.
Seasoned farmers are difficult to impress, and a high level of skill is required for a potential successor to be deemed ready to take over a farm. A successor’s level of experience and work ethic will lend itself to increasing credibility in the farming community.
4. History of the Farm
The farm’s history is very important to the owner and hard for an outside successor to understand. Farm owners often have put their heart and soul into the farm and the farm is their life. They appreciate a successor who has a deep enough interest that they want to learn the stories of the farm. The owner generation wants the stories to remain a part of the farm history.
If the owner is seeking a successor, the entire process will likely require more time and a commitment on the part of both parties as they get to know each other and gain confidence in each other. The owner generation can then determine whether they feel they trust the non-farm successor with their farm. When an owner generation has put their heart and soul into a farm, finding the right person to take it over is a huge decision and one they don’t take lightly.
On the other hand, if the owner generation has already left the farm to pursue other interests, it may make it easier for them to sell the farm through a public auction or realtor. They may simply be reducing their responsibilities by selling an asset that requires time and maintenance and aren’t interested in establishing a relationship with a successor. Their goal is to eliminate responsibility so they may enjoy their new interests.
A successor may also find the opportunity comes when the farm is sold as part of an estate auction. Often in these circumstances the farm has been left equally to all children and at least one of the children wants to sell it and the others can’t afford to buy them out, so the farm is sold to settle the estate. In this case an era is ending, which provides an opportunity for a new owner. When this happens you normally bypass learning the farm history and stories; however, it also takes away opportunities to learn such things as where the water lines are located and many other seemingly small facts that play a big role in the farm operation.
References
Baker, J., Lobley, M., & Whitehead, I. (Eds.) (2012). Keeping It in the Family (1st ed.). Farnham, UK: Ashgate, pp. 111–127.
Schlesser, H., Stuttgen, S., Binversie, L., & Kirkpatrick, J. (2021). Insights into barriers and educational needs for farm succession programming. The Journal of Extension, 59(4), Article 4. https://doi.org/10.34068/joe.59.04.04
Author Bio
Darlene Livingston has served as the Executive Director of PA Farm Link for 16 years, leading the organization’s farm succession education and facilitation services, and developing next-level farm succession programming. Darlene has been instrumental in bringing the importance of farm succession to the forefront of the ag industry in Pennsylvania.
Born and raised on a diversified farm, Darlene has a lifetime of farm experience working with three generations on the farm. Her family currently owns and operates Mahoning Creek Farm, a Pennsylvania Preserved Century Farm.