By: Carole R. Engle, Ph.D.*
Engle-Stone Aquatic$ LLC
Many aquaculture businesses are family farms that involve multiple generations. However, what happens when the principal owner passes away or experiences a serious illness? In the absence of a comprehensive plan to transition the farm to the next generation, serious problems can arise. Disputes among heirs are not uncommon and can lead to hard feelings at best and serious financial problems at worst.
Transitioning the family farm business to the next generation is a complex and serious task with many issues to consider. For example, there may be heirs who have worked on the farm all their lives, with substantial “sweat equity” in the business in addition to non-farm heirs. There may be formal partners in the business in addition to informal business relationships that are critical to the farm. The business structure itself may need to be re-examined and such considerations have income and tax consequences. A smooth transition of a farming business to the next generation requires careful planning and implementation over a period of 5 to 10 years.
A good starting point is to visit the AgTransitions web site (available at: www.agtransitions.umn.edu). Similar to AgPlan, the farm business planning site, AgTransitions allows users to build a transition plan online by responding to prompts, instructions, and tips. The plan can be modified at any time, and printed out for the farm’s records. The web site is maintained by the Center for Farm and Financial Management at the University of Minnesota and is available at no cost.
There are three main components of a transition plan for your aquaculture business: 1) business transfer plan; 2) retirement plan; and 3) estate and bequest plan. The first step is for both the owner and the successor generation to put on paper their expectations and vision for the farm business. The expectations of the succeeding generation may be quite distinct from those of the owner generation. For example, the owner generation may be content to have generated sufficient income to provide financial security for the family and their current lifestyle, while the successor may have expectations of a different lifestyle that requires expansion or diversification of the business. Expectations for how to treat both on-farm and non-farm heirs fairly are important topics throughout the planning process. Such discussions, while sometimes difficult, are essential to have periodically throughout the transition process.
The next step is to plan for a slow transfer of decision-making responsibilities in the management transfer portion of the transition plan. Planning, operations, staffing, accounting/bookkeeping, and marketing/sales all need to be addressed. The plan must be based on assessment of the level of preparedness of each successor to be involved with the farm. Levels of formal education, business experience in aquaculture or another business, and critical management skills must be considered in the assessment of what level of management he/she is ready to assume in the business. Over time, what specific skills and experience must he/she develop that are currently lacking? The best approach to groom a successor is to delegate increasing levels of responsibility and authority slowly over a 5 to 10-year period. Throughout the process, it is important to create and maintain an environment of trust and to allow for mistakes.
The third step is to develop a plan for transfer of ownership of the assets of the farm business. Assets often are substantial in an aquaculture business and include the land, production facilities (ponds, raceways, tanks), buildings (hatchery, grading shed, shop), hauling trucks, and equipment. Broodstock, on-farm inventory of fish or shellfish, trademarks, patents, brands, and customer lists are all part of the assets of the business. Asset transfer typically involves sale of the assets to the successor over a period of time, with the owner using the proceeds as part of his/her retirement income. Lease agreements can be useful to ease financing needs for transfer of land, production facilities, and equipment. Careful financial analysis can indicate if leasing assets from the owner would be preferable to borrowing capital during the transition.
The fourth step in developing the transition plan for your aquaculture business is to ensure that the business can provide sufficient income to support both the owner and the successor and their families. A phased-in approach to transfer income works best. In the early stages of the transition, the successor often is an employee of the business, with a job description and wages. An incentive plan can be helpful at this stage to motivate the potential successor to seek to develop management skills and abilities.
When the successor is ready, an enterprise operating agreement can be used to establish a management role for the successor in one of the business’s enterprises. In this capacity, the successor shares income from the enterprise that he/she manages in proportion to the successor’s contribution of labor, capital, and management responsibilities. An alternative to this approach is to allow the successor to run a separate business and either share or co-own some of the assets of the business. As the successor’s management skills grow, the degree of ownership should also grow to the point where the successor is no longer an employee and becomes a part owner. Changes in the business structure to a partnership, LLC, or a decision to incorporate may facilitate this type of growth.
The final step is to transfer the management of labor. When the successor begins to make management decisions, either for one of the business’s enterprises or for his/her own business, they also should begin to supervise employees of that business. When the successor becomes a part owner of the entire aquaculture business, then supervision of employees typically is also transferred. In some aquaculture businesses, the original owners continue to be involved with the business after the transition as an employee or consultant.
Those involved in the transition should meet once a year to review the transition plan. Accomplishments should be tracked, adjustments made, and new goals set for the upcoming year.
The plan to transfer the business should be accompanied by a retirement plan. There are many resources available for retirement planning that should be used to develop a formal, written retirement plan. The retirement plan typically includes income from sale of assets to the successor.
The estate plan is the last part of a comprehensive transition plan and describes the owner’s wishes for how personal assets are to be distributed. Beneficiaries are designated and a will included. A tax advisor, attorney, and financial advisor should be consulted throughout the planning process.
In summary, it is never too late to begin planning for the transition of your aquaculture business to a succeeding generation although it is best to plan for a 5 to 10-year transition. Your farm is a business, even if run by the family. Written plans and annual meetings to assess and adjust the plan are the best approach to ensure a smooth transition of your aquaculture business to the next generation.
The slides and recording of the webinar this column is based on are available at:
Carole Engle holds a B.A. degree in Biology/Rural Development from Friends World College and M.S. and Ph.D. degrees from Auburn University where she specialized in aquaculture economics. Dr. Engle is a past-President of the U.S. Aquaculture Society and the International Association of Aquaculture Economics and Management. She is currently a Principal in Engle-Stone Aquatic$ LLC, and can be reached at firstname.lastname@example.org