Read the scenario and answer questions:
A farm in eastern Montana called Circle J Farms is currently growing alfalfa (500 acres), wheat (2,500 acres), and beef (100 cow-calf pairs). The family business is run by John, who is the father and sole-proprietor. John is 70 and widowed, but has a daughter and two sons. John does not draw a salary but rather takes farm withdrawals whenever he needs to pay for personal expenses.
John would like to retire over the next 5 years and would like to start the process of transferring the farm to his children. John was raised with the philosophy that everything should be divided equally amongst his children. However, John realizes that his oldest son Trevor has been invested in the farm for the past 10 years and he wants to make sure the farming tradition can continue and potentially be passed onto his grandchildren.
John’s son Trevor is 45 and is married with 3 kids (ages 8, 5, and 3). Trevor lives on the farm in his childhood home with his wife Cecilia and their children. John lives with Trevor and Cecilia. The house is paid for, so neither Trevor nor John pay a mortgage. However, if repairs are needed, John pays for them. Trevor currently draws a salary of $2,000/mo, but does not have benefits. Trevor is John’s right hand man and has been making management decisions with John for the past 5 years. He has worked on the farm with his dad since he was 30. Cecilia (age 40) has her B.S. in soil science and previously worked as a crop consultant. She has taken an 8 year leave of absence, but would like to start working part-time until all of her children are in school. The family spends $1,600/mo on health insurance; the remainder of the salary goes to food and other child expenses. Trevor typically receives a bonus at the end of the year which is 25% of the after-tax profits for the farm. This end-of year profit has ranged from $12,000 to $100,000 over the past 10 years.
John’s daughter Sarah is 37 and has her B.S. in Animal Science and Agricultural Economics. She currently works for a veterinary supply company, but one day would like to take over the beef operation from her father. She feels there is a niche market for selling affordable organic beef over the internet. Sarah is currently engaged and her fiancé, Craig, works in the oil industry as a crew manager. Craig has no interest in the farm, but sees the potential in creating a niche beef market and would like to support Sarah.
John’s youngest son, Hunter, is 30 and went to school to be a computer programmer. Hunter is currently employed by HP in Fort Collins, CO and has no interest in farming, but is considering becoming a ‘silent partner’ as an investment rather than putting his money in the stock-market. Hunter is willing to invest $25,000 for a 10% return on his investment annually, regardless of how the agricultural markets react. He expects that return to be added to his base investment and included for future investment returns.
John has decided to hire you as a consultant to create a 5 year transfer plan. Specifically he would like you to address the following questions in your recommendations.
1. Should John split the farm equally amongst Trevor, Sarah, and Hunter? If no, how should it be divided? How does this affect the ownership structure? Please provide a flow chart as well as how the decisions should be made within this ownership structure. Within the flow chart, please discuss salary and benefits as well.
2. John is interested in the niche beef market, but does not have the time to devote to it and questions if Sarah can find the time to do this with her job. What should be the short-term and long-term goals to evaluate and possibly start this strategy?
3. Should John allow Hunter to be a ‘silent partner’, or is that a decision that needs to be made after John decides how to split the farm? Assuming Hunter becomes a ‘silent partner’, please discuss how the return on investment should be distributed (Note: part of this may have been addressed in part 1 based on how you organized the business.)
4. Provide a time-line of when major events should occur within the 5 year transfer process.
5. Discuss how the functions of management (planning, organizing, directing, and controlling) factor into this transfer process. Do these decisions, or the people who complete them, change over the 5 year transfer plan?