Why would your farm need a succession plan? The primary goal is creating a road map to ensure a smooth transition of the family farm to the next generation. A critical piece of that is creating a financial structure so the next operator gains an enterprise that’s both viable and profitable. Careful planning, analysis and open communication, along with intermittent reviews, are key to a successful hand-off.

That takes us to a blind spot that often arises in succession planning, and that’s anticipating the future generation’s cash flow once they take the reins. Understanding the liquidity challenges common to beginning farmers can help you address that in the succession plan. One factor is young farmers lack the lending history and business experience to access favorable lending terms that cater to their cash-flow needs. In your succession planning, don’t be caught off guard.

Further reading: Next-generation farming: 6 succession planning tasks that should not be put off

By following these action steps, you’ll be better equipped to anticipate and address these cash-flow needs.

1. Map out the capital needs of the farming operation

Every solid succession strategy accounts for future capital needs for the farming enterprise, in the short and long term. Inventory short-term and long-term capital needs, to forecast whether operations could support them.

  • Updates or replacements for aging facilities, housing and sheds
  • Equipment updates, particularly precision agriculture
  • Expansion by purchasing acres and adding facilities
  • Changing or adding commodities
  • Settling the estate with non-farming heirs

Working with financial professionals today can help you understand the tax burdens and potential impacts on cash flow, particularly loan and lease payments. Armed with your lender’s insights and guidance, you can plan and adopt strategies that give you the most bang for your buck and avoid unintended outcomes.

2. Choose your ag lender with care

Being proactive about choosing the right ag lender can make a tremendous difference on succession planning. More than just about any professional, an ag lender can be a tremendous resource, providing specialized guidance during the planning process.

After the hand-off, that ag lender will be an even greater asset to the next generation. Right out of the gate, they’ll know its history, challenges and strengths, so they can pick up where they left off. Not only that, but the right ag lender can help bridge the inexperience gap when it comes to loans.

If the lender is already familiar with the character of the successor, including their business acumen, track record and financial savvy, they'll have valuable data points to vouch for their creditworthiness, and be better equipped to create tailored solutions that meet the young farmer’s cash-flow needs.

Lay the foundation for this critical relationship today by including the successor in each and every lender meeting, and raise their involvement and visibility over time.

Read more: Beginning farmers: What new farmers need to know

3. Schedule regular reviews with a financial professional

Once the analysis is complete and your plan in place, don’t let it gather cobwebs on the shelf. Most succession plans are years out of date. That’s unfortunate because the economic conditions that influence agriculture are constantly in flux.

For example, between the years 2020 and 2023, we’ve seen significant shifts. The values of commodities and farm land are higher, and interest rates are also elevated. Any of these by themselves would trigger a much-needed review of the succession plan and a possible update. Higher land prices can put more pressure on cash flow when it comes time to settle the estate with other heirs.

Every four to six years, we recommend setting up a consultation with your ag lender or another trusted financial professional. They can help you understand how recent economic changes might influence the outcome of your plan. They’ll also provide guidance so you can be sure the farm venture stays on track to viability.

Protect your legacy

Minnwest is the local bank where you can forge a strong relationship with an ag banker you trust. As you work through succession planning, we’ll help you understand and anticipate the challenges so you can protect working capital.

Ready to discuss long-term plans for your operation? Connect with an ag banker that lives in your community today.

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