Keeping a Swine Business Going for the Long Haul: What Our Family has Done to Ensure Success14 May 2013
At the 2013 Kansas Swine Profitability Conference, Roy Henry of Henrys Ltd (Longford, Kansas) shared his experiences of passing a business asset from one generation to the next with minimum business interruption.
The art of passing a business asset from one generation with minimum business interruption creates its challenges, but can be very beneficial and rewarding to all parties involved if properly done. Because of the vast amount of capital required in agriculture today, it is becoming increasingly difficult to transfer assets with minimal tax consequences. There are many different resources to help with this process. It is important to identify the ones that are best suited to help our families make and implement the decisions that will allow our businesses to carry on, if that is the goal.
One of the most important aspects of having a successful outcome is the active involvement of trusted non-partial third parties to help with the decisions. Sometimes it is very hard to follow the advice that you get because, at that moment in time, things seem to be going along just fine and “the future” is a long way off. Almost to the day when Mr Henry and his wife, Linda, became sole owners of our business, they started the transfer to the next generation, learned from the experience and teaching of their parents. He would have liked to have smelled the flowers a bit longer, but it really wasn't possible. Looking back, his parents started the transfer before they really had very much.
At the Kansas conference, Mr Henry explained what his parents did, having one child involved in the business, one kind of involved, one not so much involved and one not involved. What you will hear is about the process that worked in this one specific situation. Were all siblings treated fairly? He hopes so. If there was a financial winner, it was Mr Henry himself, he says. He will always be there for his brother and sisters if needed. His parents would have wanted that.
Ten things to do to assure the next generation will appreciate your efforts.
- Keep total control of all money decisions until the next generation is eligible for social security.
- Share your desire for them to learn the hard way, like you did.
- Keep all estate planning to yourself. No one else needs to know.
- Do research on your own about the best way to pass assets to a successor. Consultants, financial planners and lawyers are too expensive and they’ll leave you a lot less to pass on.
- Be tactful, but be sure the sons-in-law/daughters-in-law know that you love them, but the money is only going to your kids and grandkids.
- Don`t get any long term care insurance. You don`t need it because that is what your assets are for and your family can just take care of you, right?
- Be critical of others that are philanthropic. What are they trying to prove anyway?
- Live like a pauper. You never know what the weather is going to do and we won`t have any money.
- Go to a lot of meetings, especially at busy times. Tell the family they’ll appreciate you when you trust them to take care of things for a day or two while you’re gone. Call often.
- Keep reminding them of the guy that lost his farm because his worthless kids didn't know how to run a farm. They got it given to them and they still lost it.
He said he can see himself in some of the above, but he cannot see his parents in any of the above. That is why he is one of the lucky ones, he says. Steve, Mary and Ruth all seem agreeable with the final outcome. If they actually feel differently, they have never even suggested that they wish it had been otherwise.
Mr Henry explains what his parents did and why it worked for them and hopefully all of their four children. Everyone has a different set of circumstances but there are choices that must be made even though the future is uncertain. The responsibility to set the course of transition is one that must start early and be reviewed often and can only be done by those who are the owners. It does not come from ‘someone outside’. If we do no estate planning, the government and attorneys will decide where an estate to goes. Then usually others, not family, are the happy benefactors of all your efforts.
Mr Henry's parents were happy when he came home to the farm. They felt the same gratification with Marc coming home, but adding generations to the business does not necessarily make it easy. It changes what once could have an easy estate and succession division into something a bit more complicated. Some non-agriculture friends have the fourth generation taking over management of the business right now with most of the family members involved. How can they possibly keep everyone happy? They are doing some things correctly and share lessons learned that can benefit some of us also. Look to others in your communities that have been successful in the transition of a business and ask for some suggestions. They are a very valuable resource, if they are willing.
Mr Henry explained what his parents did and why it worked. Mom and Dad moved to the farm from Belleville in 1951 and began farming and, a few years later, dairying. That was the life their kids knew; always home, had to milk and scraping by from milk check to milk check. Even as small kids, they learned the checks came every two weeks.
K-State Extension played a big role in the evolution of the farm, thanks to Wendell Moyer who said: "Jim, you need to think about pigs….done properly sows can be a lot more productive than dairy cows….." And so, in the late 50’s, they started producing feeder pigs - only to be slapped with a rhinitis quarantine when the first set of pigs went to the Sale Barn. (Yes, there was once a quarantine on rhinitis!! And, yes, almost all pigs then went through a Sale Barn!) And that led to the first of what has now become the first of multiple depop/repop events in production life. They came back as an SPF herd in the days that was in vogue. By now, the mid 60’s, kids started to leave for college. Dad was a crop and pig farmer with his labour source idling away at Manhattan. Mary and Ruth are still in high school. Pork production is now farrow-finish, crops are milo and wheat.
Back to business and finances, it was at this time that Mom and Dad incorporated the business, again as a result of K-State Extension education. The structure was as a family agricultural C corporation, formed long before limitations were placed on corporations in agriculture. Mom, the meticulous bookkeeper and stickler for detail, made sure all minutes, reports and notifications passed all requirements. This is the business as it stood when Mr Henry returned to the farm in 1972.
Fast forward to the 90’s. The farm had been successful and Mom and Dad began the process of asset transfer to their children and their spouses as well. How they reached the decision that it was time, Mr Henry still does not know as it was several more years before they finally ‘retired’ and moved to Lindsborg.
Their parents annually gifted shares of the C-corp stock to each of the kids and their spouses. When Mr Henry looks back, he is still in awe that they felt they had the assets they needed to start that process. After a few years of that madness, they decided that maybe that only the kids should own stock. In his experience, when parents choose to give cash, Mr Henry believes it is extremely important that children and spouses get equal amounts. Stock is a different issue as deaths, divorce and just personalities may have consequences on the core business that are unanticipated and can be very costly to deal with. Stock is the business; cash is not.
Mr Henry's sister Ruth sold her stock early on when she needed the money and he was young enough to think that, since he was on the farm and working, he had already earned it once and now he had to pay for it again! When you are part of up-valuing the stock it is a shock to realise that the passive investor has to be paid! (Probably not real smart to articulate that thought to your parents.) He would recommend not having an opinion in that case. He had failed to appreciate the fact that hw was being well compensated for his labour and his stock value had risen also. He started to realise that he had very little equity at risk at that point in his life. Dad’s comments about how things were not set in stone and they could be changed helped him grow up a bit.
His sister Mary and brother Steve hung around longer and got more expensive with time, as shares became more valuable due to the success of the farm. Mary helped with the books for five years because Mom had macular degeneration so she needed help. Since Mr Henry is not the bookkeeping type, hw was happy Mary was willing to drive 120 miles two to three days a week to help. By doing this it allowed their mother to still feel valuable and engaged in the business a lot longer than it would have been possible otherwise.
When both his parents were gone, Mary, Steve and Roy Henry were the sole owners of Henrys Ltd with Roy having majority ownership. Marc, his son, had decided to come home so they had another family member and the new generation wondering where he would fit in. After Marc had been home for about a year it was time to meet with a tax and business attorney that their parents had worked with. It was a normal event that they would have every three years or so.
The “normal” left shortly after they got there because Steve told the tax attorney that it was time to figure out how to get him and Mary out of the corporation since the next generation was now home. Mary was blindsided and so was Mr Henry. His only thought was: "Wow, I thought life was going to get simpler and now I've got to try to buy them out" and it looked like a big number. Here is where really skilled and experienced advisers became invaluable. The firm, and Cindy McClannahan, knew all of the family and the business. Because of the long term relationship his parents had with the firm, they knew the drill and how to go forward and in a short time, the process was done. The transition to another generation had begun.
What Mr Henry just explained is something for which he will always be indebted to Steve and Cindy. When this transition occurred, they had just started boar multiplication so the business had taken on a new level responsibility and excitement. That is not the time that most owners would chose to exit a business. If Steve does not start the process, how would it occur and who would have started it? Because of what Steve does with many of his clients, this is just a normal thought process and action to suggest. This is a perfect example of the value a third party brings to the table. It just happened to be Mr Henry's brother in this case. Legal council is important, but the right third party is paramount.
Hopefully Roy and Linda Henry can get their assets transferred to their children as successfully as his parents did. "If we don't die broke, it just means we miscalculated," he said.
Ten years later, they still are reevaluating the plan that started when Steve and Mary left the business. They are in no position to say what they are doing today is right or wrong. Mr Henry is sure they will make many changes as the government changes its mind. Since they don't believe the government is the best steward of their resources, they will continue to look for charitable causes to support as well as the transfer of assets to children.
Finding the capacity and will to give to others is perhaps the most important first step in a transition, strange as that thought may seem. But it resonates because transition is truly giving something that is “mine” to someone else. Once this commitment is made, all else becomes much easier.
Mr Henry concluded: "Find something you like and support it. If you don't have anything that you would like, support something that you dislike the least. This will help in ways far beyond the tax deduction."
You can find other papers presented at the 2013 Kansas State University Swine Profitability Conference by clicking here.