Protect The Family Farm

More than 75 farmers and family members gathered in a downtown Sacramento law office in late March to learn how to protect and maintain their most important asset — the family farm. It was the first of four sessions of a year-long series titled, “Keeping the Family Farm in the Family” sponsored by the Downey Brand law firm and the WestMark Group, a strategic consulting firm.

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For many farm families it is a familiar story: a sudden death of the family patriarch or a messy divorce combines with the lack of a transition plan, forcing the business to close and ultimately resulting in the sale of the farm. But such action isn’t limited to a sudden crisis. It could be the selection of an unqualified family member to run the farm who doesn’t have the skills to profitably run the business instead of an outside manager, or the pressure of children who have moved away from the farm wanting to liquidate family assets to support their lifestyle despite having one or more siblings who are reliant on the farm as their primary income. This push to liquidate often strains relations and leads to the loss of the family farm.

“If you look at family farms that have been successful in transitioning to new generations, there is a common key that we must all recognize — they have a culture of stewardship that accepts the responsibility to safeguard and preserve the business and puts the interest of the business ahead of the interest of individual family members,” said Mark Burrell, head of the WestMark Group. He added, “Providing equal opportunity to each family member does not work as not everyone wants the job or performs at the same level. Being equitable is the key.”

The group learned about best practices for estate planning, different types of compensation agreements, and tools for succession planning. Estate planners, tax attorneys, and strategic planners shared their insight and experiences.

“One of the big mistakes families make is confusing “equal” with “equitable” when trying to provide for family members involved in a business,” said Sil Reggiardo, a tax lawyer at Downey Brand. He added, “The goal for any family business is to be profitable so you can build and preserve that business for your family in the future, but the reality is fewer than 10% of family-owned businesses are still in the family ten years after the third generation assumes control.”

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Another challenge facing family-owned businesses is the growth of the family. As children marry and have their own kids, the business suddenly has an influx of brothers, sisters, aunts, uncles, and cousins, with many expecting the family business to provide for them. Adding to the problem is that many family businesses fail to establish a clear set of standards so that everyone — family and non-family employees — are held accountable.

“Family businesses need to establish market-based compensation practices and commit to it,” said Gina Lera, a presenter and an estate and tax layer at Downey Brand. She added, “They need to ask, what would family members earn in the same position at a non-family-owned business? They should consult with non-family experts and get a true sense of salaries so they don’t put the company at risk by overpaying a family member.”

Often times, when family farms are sold, the buyers are investment services firms, pension funds, and insurance companies acquiring the farmland as an investment. In fact, according to the New York Times, TIAA-CREF, one of the nation’s largest financial services companies, now owns more than 600 farms.

“The failure to maintain the family farm in the family has a broad ripple effect that includes the loss of community involvement and the sustainable management of land, resources, and the environment,” said Steve Meyer, co-chair of Downey Brand’s Food and Agriculture Practice. He added, “By their nature, family farms take a long-term approach that publicly traded companies cannot afford to do. Family farms can invest in the land for the long term and in their facilities for the long term, which strengthens a community and helps the local economy.”

Family-owned businesses dominate the U.S. agricultural sector. Agricultural assets in the U.S. total more than $2.4 trillion with nearly all those assets being privately held. With a vast majority of family farms and family-owned agricultural operations transferring to new ownership in the next 25 years, planning now for succession will be critical for a family farm’s success in the future.

More Sessions Coming Soon

Downey Brand, the largest law firm in California’s Central Valley, has teamed with the WestMark Group, a leading strategic consulting firm, to create a year-long series of programs titled “Keeping the Family Farm in the Family” to provide the framework for the best practices for the successful management of the multi-generational family farm, designed to ensure there will be another generation of the family working in the family business. The learning sessions will be held in Northern and Central California. For more information, call 916-444-1000.

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