1. Knowing you makes the difference. TM 4-Nov-2015 – PDMP Fall Issue Forum Business Transition Michael Hosterman – Ag Business Consultant

2. Knowing you makes the difference. TM “Estate Planning” People use the word “estate planning” interchangeably with “succession planning” and “transition planning”; however, these are not all the same. Estate planning is the orderly transfer of assets after you die.

3. Knowing you makes the difference. TM “Tran·si·tion – noun – Passing or changing from one place, state, or condition to another.” We use intentionally to indicate a complete & successful change (not just a distribution of assets) It’s about preserving legacy & a way of living “Suc·ces·sion – noun – The act or process of succeeding to the rights of duties of another.” We use the word to identify & develop potential successors to key positions It’s about successfully developing & transitioning leadership

4. Knowing you makes the difference. TM Elements Of Farm Business Transfer Senior Generation Next Generation Transfer of only two of three elements leads to many farm transition problems Transfer Ownership Transfer Management Divide Income

5. Knowing you makes the difference. TM Objectives Senior generation advice Business characteristics for successful transitions Next generation advice

6. Knowing you makes the difference. TM Senior generation advice

7. Knowing you makes the difference. TM Sad History of Farm Succession… ~10% of family farms pass to 3 rd generation Why? 3 Key Factors (per Farm Journal): –Inadequate planning –Insufficient capitalization (too much debt) –Failure to prepare the next generation We would add a 4th factor –Poor Communication

8. Knowing you makes the difference. TM Get Your Financial House in Order Income supporting at least 2 families –Even if one is retiring Balance sheet strength –Net worth of 65% or greater Generating profits –Return on assets of 8% or more –Paying taxes regularly Business growing Attractive to the next generation

9. Knowing you makes the difference. TM Build Respectful Adult Relationship Limit traditional child/parent roles to personal matters Demonstrate respect for next generation’s potential –Critical to show respect in order to earn it –Commitment they are making is significant, risky, and voluntary Welcome new energy, ideas, and change

10. Knowing you makes the difference. TM Get Them Ready… Don’t prepare the path for the child, prepare the child for the path Have them work somewhere else to start their career Education requirement – college or technical? Set expectations for ongoing learning or continuing education Have them prepare a business plan Have them run a popcorn stand within your operation

11. Knowing you makes the difference. TM Don’t Wait Too Long Fathers’ focus:  40’s = grow the business  50’s = emphasize family & business philosophies  60+ = hold onto control Sons’ focus:  Under 27 = break free  27 to 33 = look to fathers as role models  33+ = seek recognition and independence

12. Knowing you makes the difference. TM Business Characteristics for Successful Transitions

13. Knowing you makes the difference. TM How many of you make decisions like this?

14. Knowing you makes the difference. TM “In preparing for battle I have always found that plans are useless, but planning is indispensable.”- Dwight D. Eisenhower

15. Knowing you makes the difference. TM Keys to success PlanImplement EvaluateAdjust Written plans have greater chance of being successful! Process is ongoing & not once and done!

16. Knowing you makes the difference. TM Consequences of Not Planning: Family conflict Taxes Divided business assets Power struggles among successors A business unfit to survive and compete

17. Knowing you makes the difference. TM Business Lifecycle

18. Knowing you makes the difference. TM Business Transition Lifecycle Next Gen Success Senior Gen Startup Knowledge / Asset Transfer

19. Knowing you makes the difference. TM Show Interest in Financial Management of the Busine ss Office work ≠ nap time! Understand financial statements Prepare Budgets Include everyone in financial management meetings Transition success if greatly improved if all are involved

20. Knowing you makes the difference. TM Planning for Management Transition Clarify roles & responsibilities for everyone Set goals and expectations for performance Measure production and financial results Communicate frequently about results, preferably in management team meeting Plan for the orderly transfer of responsibilities over time

21. Knowing you makes the difference. TM Communicate Openly Become an outstanding listener –Stop talking, hear, & think about what is said –Ask questions to gain further understanding Get it on the table – Be open –Tell them your goals and ask what they want Learn to talk about difficult topics –Usually your fear is worse than the reality –Assumptions are deadly, don’t keep them around

22. Knowing you makes the difference. TM Practice Leadership Leaders set and achieve worthwhile goals –Know your personal goals and work toward them –Help others to achieve their goals (Owners, employees) Commit to the farm’s mission and goals Build respectful, working relationships with non- family employees and outside advisors Leadership requires practice, start now and build up to bigger challenges

23. Knowing you makes the difference. TM Build Profitable Business Pay reasonable wages Build a reasonable recapitalization plan Develop a growth strategy Have regular business meetings Encourage leadership from others Use sound tax planning (not tax avoidance)

24. Knowing you makes the difference. TM Next generation advice

25. Knowing you makes the difference. TM Build Respectful Adult Relationship Limit your traditional child/parent roles to personal matters Demonstrate respect for senior generation’s achievements –Critical to show respect in order to earn it –Farm business they have built reflects huge investments of time, effort and money Establish your independence –How independent are you if mom still washes your cloth

26. Knowing you makes the difference. TM Seek & Demonstrate Responsibility Responsible: “answerable or accountable, as for something within one's power, control, or management” One of the primary attributes the senior generation is looking for… Be willing to assume responsibility for important business functions Responsible people: set goals, perform tasks consistently, measure results and take the glory or the heat for their actions

27. Knowing you makes the difference. TM Show Initiative Initiative: “readiness and ability in initiating action; enterprise” Senior generation often welcomes energy and ideas from younger partners Don’t wait for instructions on routine tasks, take charge and get the job done Seek new opportunities, technology, ideas –Consider how they apply at your farm –Do a partial budget (What it costs, How much it makes or saves us)

28. Knowing you makes the difference. TM Show Your Desire to Learn Don’t: –Be embarrassed about a lack of knowledge, learning is the cure –Don’t pretend that you know when you don’t, this is a serious barrier to learning that adds up over time Take advantage of learning opportunities Leverage the knowledge of advisors for your business

29. Knowing you makes the difference. TM Demonstrate Personal Financial Discipline Spend less money than you earn Eliminate credit card debts Establish a personal or household budget and stick with it Save money for emergencies and for opportunities Know your credit score This will affect your future borrowing ability

30. Knowing you makes the difference. TM WRAP UP

31. Knowing you makes the difference. TM A Thorough Transition Plan Family discussions to reach shared goals Business structures that you can understand and manage (partnerships, LLC’s, FLP’s, etc.) A business plan and financial projections for the next generation Post-farming plans to fund the senior generation’s needs Estate plans that are equitable for all heirs Leadership and management development plans Risk management plans such as elder care and key person insurance Buy-sell agreements and funding sources A good plan requires significant discussion, analysis, expertise and time. The investment is considerable, but far less than the cost of poor planning!

32. Demand a plan that is understandable, not simple Pick a team leader It Takes a Team… Farm Family Financial Planner Accountan t AttorneyLender Consultan t

33. Knowing you makes the difference. TM Michael Hosterman, Ag Business Consultant AgChoice Farm Credit 109 Farm Credit Drive Chambersburg, PA 17202 Office: 717-263-3315 Mobile: 717-215-3179 Email: mhosterman@agchoice.commhosterman@agchoice.com