Audio Transcript:

Brady Brewer: Hi, and welcome to the Purdue Commercial AgCast, the Purdue University Center for Commercial Agriculture’s podcast featuring farm management news and information. I’m your host, Brady Brewer, and I’m a faculty member here in the Department of Agricultural Economics at Purdue University. And joining me is Dr. Maria Marshall, who’s a professor of Agricultural Economics and the director of the Purdue Institute for Family Business and also the director of the North Central Regional Center for Rural Development here at Purdue. Also joining me is Renee Wiatt, who’s a family business management specialist with the Department of Agricultural Economics here at Purdue,

On today’s episode, we will be discussing a survey that both Renee and Dr. Marshall did with farmers across the North Central region of the United States, thinking about how they are prepared for transitioning their farm businesses. Dr. Marshall and Renee, welcome. I know you guys have been on this podcast before, so we will skip introductions because I’m pretty sure the audience is familiar with both of you. So I want to get into today’s topic and the survey that you guys did around how prepared people are for transitioning their business.

Maria Marshall: Well, thanks for having me, Brady. I feel like this is my entire career is on this topic. I think it’s important not only because these are family businesses and it’s important to understand how this process can be done in a way that makes both kind of systems, family and business systems, successful. But also it’s important for agriculture in and of itself. If we don’t have farm families prepared for succession, then the optimal option of keeping it in the family, however that looks like, or selling it to another beginning farmer or somebody who wants to farm, might be liquidated or put into non ag practices. And so if we want to keep more land in agriculture, we need to think about how we exit out of agriculture.

Brady Brewer: Just to remind the listeners, we have both Dr. Marshall and Renee did a series on this podcast a little while ago so you can go back and listen to that series that went over the entire succession planning process and some tips and tricks for how best to do that. And I know a recurring theme when we did those podcasts previously was that a lot of people there, you know, there’s some pretty common themes and some hiccups for that keep people from moving forward, whether it be communication with family members and stuff like that. So super important. I agree there, to keep the land within the family, keep it in agriculture, and keep that family business rolling.

So you guys did a study. So Renee, I’m going to turn to you now. Can you tell me a little bit about the study that you and Dr. Marshall did? Who did you survey? Where was it? an overview of, of the survey.

Renee Wiatt: Sure. We were looking at farmers in the north central region, basically the Midwest. So we were able to do an online survey of about 200 farmers. And to qualify for this survey, they had to have either gone through the succession process previously, or were thinking about the succession process for the next generation. And we just wanted to know, a lot of their motivations, why they chose the things they did, what their thought processes were, what they valued, who they chose and why, and even some pitfalls to their process. what issues they’ve had along the process of trying to succeed or to pass it on to the next generation.

Brady Brewer: So my first question, and Renee, I’ll ask this back to you. Are people prepared for this transition? How many people did you find in your survey are actually or believe they’re prepared or think they could survive into, passing it on to the next generation?

Renee Wiatt: Yeah, so overall I would say that farm houses and farm businesses are not prepared to pass it on to the next generation. they might have some of the pieces in place, but a lot of times there’s something missing. sometimes it’s a big thing, like they don’t have a successor. Maybe they’re willing to pass the business on, but they don’t have a successor. Other times, they’re ready, but maybe the successor’s not quite ready. There’s a lot of different factors that play into that decision and that transition process.

Brady Brewer: Yeah, I’m looking over some of the notes you sent me as we were preparing for this podcast and the statistic, less than a third of first generation businesses survive into the second generation. Now, I realize that most farms are not first generation businesses because they’ve done the transition, but I think that statistic to me really pointed out that transitioning is hard. There’s a lot of factors that have to fall into place to make it a successful one.

Renee Wiatt: Yeah.

Brady Brewer: So Renee, why do you think farms aren’t doing a better job at planning for succession? You know, Maria kind of pointed out, this is super important. what are some of the pitfalls or issues that, put a hold up on this process?

Renee Wiatt: I think there’s two main things. One would be communication. It’s hard to talk about succession. It’s hard to talk about your own exit from the farm. If you’re the senior generation or incumbent, it’s hard to think of your whole legacy and lifestyle that you’ve had coming to an end. It’s also hard to see everything that that incumbent generation has worked to build up, possibly someone else taking over the decision making and the management of that. That can be very difficult as well on the other side, sometimes it’s hard for farmers to stop and actually make a hard decision and put something in writing. And actually write down a plan, work with the attorney, and get that figured out all the way.

Brady Brewer: So it’s not necessarily that the plan isn’t there, but getting it formalized, getting it in place and, communicating that out may be a huge sticking point for holding this process up.

Renee Wiatt: Farmers don’t want to upset potential heirs. They don’t want to upset their family members. They still want to have Christmas together. sometimes what maximizes the business success is not always what everyone can agree on. So those two things, the family and the business can come head to head sometimes.

Brady Brewer: You guys also looked at some goals. Or what does a successful transition look like? So how do we define what is a successful transition?

Renee Wiatt: Sure. So we want to make sure we keep the business strong enough, and healthy enough to last into the next generation. Of course, we want a functioning business that’s profitable, vibrant, growing, but we also want to continue a healthy family into the next generation. By that we mean still communicating, able to go to events together, still like to spend time together, spend holidays together, all of those things.

Brady Brewer: So, I think those are two pretty good goals, right? Keep the business moving. That’s kind of the point of the transition here, but I like the second one. Continue a healthy family. And I think that’s what you were saying, the communication aspect or the issues that arise probably I would assume, mostly fall into that second category.

Is one of these goals more important than the other, the keeping the business strong versus keeping the family healthy, or is that going to be up to the individual business?

Renee Wiatt: It depends on the farmer, and it even depends, you know, if you have a husband and wife farming together, they might even differ on which one they value more. It just depends individually, but we want both to be healthy.

Brady Brewer: But that’s going to be something that every farm business is going to have to determine is what is my ultimate priority here? is it? To keep the business running and keep it strong, or is it to keep a happy, healthy family intact? and there may be decisions made that, you know, don’t ruin the transition, but maybe you don’t profit maximize in some of the decisions in order to keep a healthy family.

Renee Wiatt: Right. Yeah, a lot of times you have to decide. in some farms that we’ve talked to, you know, they have to decide, do they want to have healthy relationships moving forward, or do they want all of their heirs to work together in the farm business. Sometimes you can’t have both. And you have to look at your family realistically and see what you can make happen.

Brady Brewer: Yeah, and there are trade offs in that decision making process that are not easy.

Renee Wiatt: Correct.

Brady Brewer: Alright, so Marie, I want to turn back to you. In this study you guys, identified, what’s called the sustainable family business model that may help in this process. So what is the sustainable family business model?

Maria Marshall: So this is a theoretical model or conceptual model put together by, family business or family economics folks, faculty. And basically what it says is that the family business is composed of two systems. The family system and the business system. And for a sustainable family business, both systems have to work. In some ways, work well independently, but also work well together because there’s this interchange and interplay of, processes. So when one gets shocked, let’s say, for example, a tornado goes through your business, the family might need to put in assets to make that work, or vice versa. So there are, interrelated and integrated. And so you need them both to be healthy and to work. But there’s also this exchange of resources between the two that is super important.

And so for succession, right, we’re talking about the family system and being having a healthy family. And we’re talking a business that has to continue into the next generation and beyond. If you’re going to have non farming heirs versus a successor for the business, those might need different assets. So then the business and the family need to figure out how those resources will be divided and exchanged. So that’s an example of how succession would be in the sustainable family business system.

Brady Brewer: So is there an ultimate goal to this business model? I mean how can we take this business model and make decisions?

Maria Marshall: so if you talk about finances and success and in succession, you might see finances as an input, not an output of the business. it’s an input into the family to make the family successful. They’re working together. profit is thought of as an input into a sustainable family business because it’s the household that ultimately benefits from having a healthy business that moves forward. when we talk about prioritizing the output of the business is for the sustainability of the family in some ways, right? But the family has to be cohesive and work well to also have a healthy business. So that’s that exchange of resources.

Brady Brewer: Yeah, it’s interesting to me. So here at Purdue, I teach the Intro to Agribusiness Management class, right? And one of the first slides I show students is the goal of every business is to maximize profits. While I largely agree with that, and we got to put a caveat on that when I say that I’m talking about long term profits, not short term, but I do think we sometimes we think about this in short term profits, right? I think what you’re saying is that we have to have a healthy family to do this and it may be worthwhile, you know, thinking about the finances as the output of the business and the input of the family. you have to remember that there’s two separate goals here, right? because this business model says there’s a family unit and a business unit, and sometimes those goals don’t align, right, to, you know, there was trade offs with what we were talking about with Renee earlier, thinking about, the family health versus the strong business unit. This is, it seems to me like this is echoing that same thing, right, that we have to determine the goals for our two business units, which is the family and the business.

Maria Marshall: Mm hmm,

Brady Brewer: So, one of the key aspects when we think about this transition and we’re talking a lot about the family aspect here. So I want to dive a little bit further into that. And one of the things you guys call out or talk about, within this study is the socio emotional wealth or S E W. Marie, I’ll ask this to you again. what is socio emotional wealth?

Maria Marshall: So basically, it’s the affect, the emotion that a family has vested in the firm. So, it’s composed of four main components. One of them is transgenerational control. And that actually means transferring it from one generation to the next, right?

That that is a priority for you, that that is an important part. Then it’s benevolent ties. That is basically the quid pro quo we might see in a family. the things we give and take in a family that you always see.

Then there’s the emotion that we have invested in our farm, right? Because it’s a legacy. We’re tied to the land. research shows that family business owners usually add about 30 percent to the value of the firm beyond the asset. So that’s that emotional tie that we have.

The last one is status and reputation. So that might be, the status you get from saying we own this farm and we’ve owned this farm for a hundred years, right? When we have that, a lot of times we give awards to farms that have been in families for a hundred years. Or, you might think a farmer might say, Well, you gotta live where you farm, because, you know, that’s our community, that’s who the community knows. and so I don’t want to sell it to somebody else, because my family’s always been here. Right, so we see that as an interplay of how you might exit as well, is that you won’t, don’t want to sell to an outsider, or you’re thinking about how somebody might affect your reputation in the community. So all of those combine to provide this social emotional wealth, when it comes to, to the family. And this is a distinguishing factor between a non family business and a family business.

Brady Brewer: Yeah, you know, if you think about a lot of the businesses on Wall Street, right? Their CEO was not the founder of their firm, not related to the family that founded that firm many moons ago. it’s purely who maximizes profit. Their socio emotional wealth does not come into play very much, when those decisions are made. But anecdotally, just talking with farmers, these are big factors and important these are legitimate reasons for wanting your farm to succeed or not succeed at these items after you pass it on to the next generation.

Maria Marshall: For sure. Well, this is also so it can have a good and a bad side, right to social emotional wealth. And on the good side, it’s the sacrifice capital that a family is willing to give to that business, right?

The I’m not going to make much more money working for somebody else, but because I get to work for my family business, I don’t need to make as much money, right? Those opportunity costs, the sweat equity, a lot of times we call it in farming, that we were able to provide and the things we’ll sacrifice for that business. So that’s kind of like, and sometimes the good things, the bad thing is if it gets you to do things that are actually bad for the family and the business, because you have so much emotion that you’re actually tying the hands of the next generation, right? So there’s always this given take that social emotional wealth can be good, but it can have negative implications as well. If as anything taken too far.

Brady Brewer: I like how you just phrased it? bad for the family and bad for the business. I think those are two key questions that people need to be asking during this process, right? If the answer is yes to both of those, it’s probably not worth the socio emotional wealth that you’re willing to fight for, right?

If it’s bad for the family and the business, if the answer is yes to one of those, then I think it comes to what we were talking about earlier and the trade offs you’re willing to give up. And you really need to analyze the pros and cons to that.Well, so we’ve talked about the business models, the family and the business units that has to be taken into account when we’re doing, this transition of a farm or small business. But another thing that you guys looked at was the exit quadrant, which deals with the readiness of the outgoing generation, you know, at the end of the day, in order to get a transition, we actually have to transition. and the exit quadrant deals with is the current owner of the business, where are they? So Renee, would you like to tell the listeners what is the exit quadrant?

Renee Wiatt: Sure, so when we look at that incumbent generation and their readiness to let go of that business to the next generation, basically we have to grapple with both their financial readiness, so their financial resources, their retirement, things like that, but also their mental readiness to let it go. So basically, ideally, if a farmer is at the age where he or she is ready to pass it on to the next business, ideally, they would be rich and ready to go. So that is mentally and financially ready to go. at this point, a lot of times they’re able to give the business to the next generation versus having the next generation, buy that business out. Sometimes they can, transfer it to employees, but, you know, they’re mentally ready. and financially ready to go. So that’s ideally where we want farmers to be at retirement age, or what they deem retirement age, right?

If they’re financially ready to go, but not mentally ready to go, we call them well off, but chooses to work. We know a lot of these farmers. maybe our listeners are a lot of these farmers. they’re able financially to retire, but they’re not mentally ready to go, right? They have so much invested in that business, it’s just so hard for them to think about letting it go to the next generation.

Brady Brewer: And I think that’s a key, you know, farming is a lifestyle. And I think tying back to the conversation we just had on the socio emotional wealth, there’s a lot of sweat equity invested in some of these farm businesses. So I suspect that’s a big reason why someone may be financially right. They’re able to retire financially according to the bank and the financials, but they just want to farm and that may hold up the succession.

Maria Marshall: We actually saw in one of the, our recent master student graduates was looking at this quadrant that if you have very high social emotional wealth, you are not rich and ready to go. You’re well off, but you just cannot let go. That’s the downside of that social emotional wealth, because you’re so highly invested that you just won’t retire.

Brady Brewer: And I think that comes back to the two questions that you posed, Maria. Does this hurt the family or does it help the family? Does it help the business? Right? And I think they’re, you know, the owners of businesses have every right to keep on going. But if one of your goals, you know, if I were to ask you and your response is, well, I want to keep this in the family and, strong. Yeah, it may be your right to keep the business, but you have to think about that goal and you may actually be hurting that goal. so I think that’s where those trade offs come into play there.

So, and just to clarify, owners of businesses have every right to keep doing it. I love what I do. I’m probably going to be in that number two quadrant where I, you know, keep on working, but, you have to think about the goals of the transition here. what about the opposite here? We’re maybe not as quite financially off.

Renee Wiatt: Yeah. some businesses. they’re just not financially ready or it could be their age, right? If we have younger business owners who are in their 40s, 50s, even 60s, they might need to be in that stay and grow period. So that’s where they’re not mentally or financially ready to go. So they’re basically trying to grow the firm, improve efficiency, Maybe they bring in a financial partner at that stage, but they’re just trying to grow that business, and that is okay. it’s okay to be in that life cycle right there of the business on the other side, we have some business owners and farm owners who are mentally ready to go, but not financially. And at that point, they need to exit at the highest price, basically. They need to sell off what they can, try to get the most they can from the business, and exit.

Brady Brewer: And that may be, again, hurting the long term business goals or goals of the transition if they hold on too long in that case as well. So that is a way to think about the place of the current owner and where they are in relation to being able and ready to exit the farm business.

So, you guys did this study, on preparedness for succession. What do you think is the defining conclusion from this study? What’s the one takeaway that farmers should take away, and really take to heart in order to better prepare themselves for this upcoming transition?

Maria Marshall: I would say that you should be thinking about the transition of the business not when you think your age should dictate when you leave, but throughout your career. if you want the business

And I say that because if you have successors, and I didn’t say heirs, right? I said successors. Those are two different things. If you have successors, there’s professional development that you’re doing throughout the process. there are parenting choices that you’re even making throughout the process of making decisions, thinking about how you are going to be a leader and how you are then developing the next leader or leaders of your business.

And what we see a lot of times is we might have businesses that continue, but they didn’t continue intact. You might have split the farm in two. Or siblings don’t work. So how do you not only have this mindset where you want to grow this business, this farm with as many generations and how many people in those generations as possible so that they are invested as owners. They might not be running the business per se, but they’re competent owners, right? I always say the three C’s. You want to keep control, have competent owners, and have continuity or cohesive family. And so how do you think about that as you’re going along? Not just when you’re 70 and ready to get out or ready to let go, but throughout the process of your successors, of how you’re integrating them beyond thinking of your successors as labor for a long time until you’re like, Oh, no, they’re 50 and they’re ready to make a decision. So to me, I think it’s a really long term process that is kind of one of the, it’s the wonderful things of being a business owner and having this business, but it’s also the wonderful burden of having this business that has a legacy and a legacy that you want to continue.

Brady Brewer: Excellent.

Renee Wiatt: Ultimately for me when I think about this, I really think that the incumbents have to balance the trade off between the family and the business. You know, we’ve talked a lot about communication, trying to keep those two healthy systems going, but really they need to think early and often about how are we going to bring in that next generation. Like Maria said, how are we going to train them? How do we integrate them early? the last thing you want is that successor generation to be 50, and have resentment for the incumbent because they’re still working as a farmhand. They don’t feel like they own anything. They don’t feel like they can make decisions. We want to bring them in and have them act as an owner. Act as a decision maker and empower them to take on more of those responsibilities earlier.

Brady Brewer: So that is it for this episode of the Purdue Commercial AgCast. I just want to remind all the listeners out there to please visit us at the Purdue Center for Commercial Agriculture’s website at purdue. edu/commercialag and you can find the materials that were used as reference in this particular episode at the Purdue Institute for Family Business website which is at purdue. edu/fambiz. And that is F A M B I Z. On behalf of the Center for Commercial Agriculture, I thank you for listening.