During an open forum this summer, Dr. Freddie Barnard, who recently retired from Purdue University, and I were asked some interesting questions. One of the topics that surfaced was business transition management. A farmer asked, “What is the most important focus a baby boomer farmer should pass down to the next generation of millennials, Generation Z, or other potential owners or managers? What is your logic behind this recommendation?”
Dr. Barnard’s comments focused on the financial aspect of business transition, which he has spent decades teaching at Purdue and through extension and outreach events. There is an old saying in business that, “The first generation builds the business wealth, the second generation preserves it, and the third generation loses it.” One of the major reasons for business transition failures is that the production knowledge during transition management is emphasized rather than focusing on transferring financial, marketing, and overall business management skills.
As Dr. Barnard explained, if financial management practices are passed on, it often occurs too late in the transition process. In other instances, the finances are turned over to an accountant with marching orders to minimize income taxes. This tardiness in financial transition, along with a focus on tax minimization versus overall financial management, can result in negative long-term outcomes.
Another point Dr. Barnard made was that it is imperative to develop a working relationship with your lender early in the transition process. This can develop confidence and trust in the relationship.
I stated that some innovative producers are carving off segments of their business for the younger generation to take responsibility over managing. Whether it is a crop or livestock operation, this includes selecting the production method, preparing a cash flow, and borrowing money to operate. Borrowing money from a third-party lender, rather than from mom, dad, or grandparents, requires the younger generation to be more accountable for their finances. This process can be invaluable in building confidence in financing and teaching both responsibility and accountability.
Both Dr. Barnard and I could lecture on this subject for hours. The basics described in the aforementioned comments are often overlooked, but are critical for successful business transition.
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