Basic financial statements include the balance sheet, income statement and cash flow statement. Use them to confirm your financial position. You also could ask to review the incoming producer’s financial statements to assess their ability to complete the transfer. 

A balance sheet lists your tangible assets and your liabilities—any amounts owed to others. It shows your net worth (the value of your assets minus your liabilities) to provide a snapshot of your current financial position.  

An income statement is a summary of all sources of revenue and expenditures for a specific time period. A farm’s income statement is typically generated annually and used to calculate the net profit or loss for the entire year. However, some farmers might generate them more frequently for internal analysis.  

The difference between your income and expenses represents your net income – in other words, your bottom line. If income exceeds expenses, the farm or ranch is generating profit; if expenses outstrip income the operation has a loss. Use the income statement to show your business is profitable and has value and to determine how much income you will need to replace after the transfer.  

A cash flow statement records sources of cash and details how it is spent over a time. It includes cash flows from operating, investment and financing activities essentially showing how much liquid cash the business has generated or used throughout the reporting period.  

Typically, on a farm or ranch cash flow statements are prepared monthly because cash flow can vary widely from month to month during a calendar year. Use your cash flow statement to show how you spend money over time, based on how much cash is flowing in and out of your business.  

A budget is basically a forward-looking cash flow statement. It estimates future expenses relative to expected income. The easiest way to develop a budget is to look at past spending and think about what is going to change once the farm or ranch transfer is complete.  You can fill out the Budget Worksheet below to get started.  

Use your budget to determine the amount you need to net from the sale of your assets. Consider the costs to execute the transfer, like hiring advisors, providing for heirs, and/or transaction costs (e.g. attorney’s fees, recording fees, taxes, etc). Things could change considerably after you transfer your farm or ranch. Consider which will stay the same while also anticipating future needs including health care, housing, and so on. 

Estimating the value of the assets you plan to transfer helps prepare you for future discussions . You can use preliminary numbers in your budget to get a sense of your bottom line. Fill out the Financial Assets Inventory Worksheet to describe your assets and estimate their value. 

Think about the value of the asset to the incoming producer. Is it something they need for their farm or ranch enterprise? If not, you may need to sell it to someone else. Also consider the condition of the asset. Places where the numbers are far apart will need further conversation. Formal appraisals can fill in gaps and inform talks later in the process.  

Valuing Land and Infrastructure  

A good place to begin is by consulting the Census of Agriculture and other reports on  Land Values and Cash Rents compiled by the USDA National Agricultural Statistics Service. Consult Cooperative Extension  and county and municipal experts, such as assessors and building inspectors, who can provide specific, localized information. Private sources include real estate agents and listing services, like Zillow or Trulia.  You also can gather information by talking to other producers and/or agricultural service providers. Review the Assets Inventory Information Sheet to find common sources of information. For a more definitive assessment later in your process, hire an appraiser. 

Valuing a Business  

Assigning value to a farm or ranch business is both art and science. Valuation methods range from financial estimates to approximate net profit to estimating each tangible asset separately. This could be based on current market value or the book value from the balance sheet. They include inventorying assets like grain, feed, supplies, and livestock usually determined by current local market prices and other real-life valuations. Other approaches analyze comparable businesses or assess the capitalization rate by estimating the potential return on investment by dividing a property’s net operating income by its market value. Farm Credit or another qualified business valuation specialist can help.  

The four main ways to transfer assets are through gift, sale, inheritance, or lease.​ You may use one or all of these depending on your situation.  

A gift is an asset transfer where the giver receives no payment—or payment less than full market value. A sale is an exchange where the buyer pays the owner something to acquire assets, goods and/or services. Sales are the most common type of exchange. The buyer may pay the full value of the property, or the parties may agree to a partial or discounted amount. Payment may be made in a lump sum or in installments. “A bargain sale” is part gift and part sale when land or other assets are sold for less than its fair market value. An Inheritance is when assets are passed on to heirs after the owner’s death. A lease is a temporary transfer of some of the rights of ownership. However, lease-to-own and other provisions like written, long-term leases can make leasing a viable tool to gradually transfer the ownership of an asset. Leases also are used for transferring machinery and other assets. 

What follows is an alphabetical list of the common tools used to transfer real estate and farm or ranch business assets. Transferring real estate and other tangible assets is more straightforward than transferring the business itself. When transferring a business, it is important to consider how to transfer intangible assets like management skills and responsibility.  

Review the Farm Transfer Action Plan and the Asset Transfer Information Sheet [In development, will be linked once complete] and discuss with your transfer team to determine which tools are right for you.   

Business Structure 

There are four main types of a business structure: Sole proprietorships, partnerships, Limited Liability Companies (LLC), and corporations, including cooperatives and nonprofits. See the Business Structures Information Sheet for a detailed description of these types and how they impact the transfer process. 

Business structure affects ownership of land and other assets as well as the people and activities involved in the farm/ranch operation. It can limit liability and influence how decisions are made. It affects how assets can be transferred to someone else and may allow gradual transfer over time.  

Buy-Sell Agreements 

Buy-sell agreements are contracts that enable one business owner to buy all or a portion of a shared business upon the retirement, death or disability of another business owner. It can help determine asset values, outline the process for transferring the business, and provide payment and/or financing terms. The contract specifies who will buy the ownership interest, how much it will cost, when it will happen, and the terms of the sale. There are three main ways to fund a buy-sell agreement: savings, life insurance, and loans. Buy-Sell agreements help ensure an orderly transfer of farm and ranch assets and outline what will happen in the event of dissolution, divorce, disability, disaster, and death.  

Conservation Easements 

Conservation Easements are voluntary deed restrictions landowners place on their land to protect conservation values such as farmland, wetlands, wildlife habitat, scenic views, and so on. An agricultural conservation easement protects working farmland, grassland, and ranchland to keep it available for agriculture by restricting nonagricultural development and/or subdivision.  

Many state and some local governments administer Purchase of Agricultural Conservation Easement (PACE) programs and pay property owners to place a conservation easement on their property. Land trusts and other qualified entities also may purchase conservation easements or accept them as donations. The federal Agricultural Conservation Easement Program (ACEP), administered by the USDA Natural Resources Conservation Service (NRCS), provides funds to help conserve and protect farm and ranch lands, grasslands and wetlands. 

The sale of a conservation easement can generate cash to buy out business partners or other family members, help fund retirement, and create equity among heirs. The donation or sale of an easement can lower the value of your estate which helps make the land more affordable for the next generation. 

Family Tree  

A family tree detailing all heirs is a good way to collect and organize family information. This is a good way to identify everyone who has an ownership interest in your property, which is especially important in heirs’ property situations. Showing a family tree can help get family meetings off to a good start and identify overlooked family members and relationships. 

Gifts  

A well-planned gift can be an effective way to transfer assets, often tax-free. A gifting schedule is a way to designate when the gifts will be made, which can vary based on life events like marriages, births, divorces, and deaths. 

Heirship Affidavit 

The heirship affidavit is a type of sworn statement made to establish the deceased person’s heirs. It describes the relationship of the person making the statement to the deceased party and can be used to transfer property ownership. 

Heir’s property refers to land that’s inherited without a will—or inherited by multiple people in equal shares through a will. Heirs hold the land as tenants in common. In this situation, all heirs share an undivided—or equal—interest in the property whether or not they live there, are farming it, or even are aware of their ownership interest.  

Life Insurance Policy 

Life insurance is a contract that pays a landowner’s designated beneficiaries a cash benefit when the landowner dies. It can provide heirs with immediate liquidity to cover estate taxes and ensure non-farming heirs are fairly compensated. It can facilitate buy-sell agreements if there are multiple owners and otherwise offset financial burdens associated with inheritance and ownership transfer. It also can replace the value of assets that have transferred to another family member, establish trusts, provide for non-farm heirs, or pay estate taxes.  

There are two basic types of life insurance policies: Term and Whole Life. Term life insurance is a contract that pays benefits when the insured person dies during the term of the contract; it is the less expensive of the two kinds of insurance. Whole life insurance provides death benefits similar to those of term insurance, but also builds cash value over time. 

Operating Agreements  

Operating agreements come in many forms depending on business structure. In agriculture they are used when two or more parties have a stake in a farm or ranch by investing capital, contributing labor and management, and sharing income from the operation. Although shared, these are not necessarily shared equally. The operating agreement spells out the terms so that the parties know what to expect and are treated fairly.  

Farm Business Operating Agreements often are used between generations working together on a farm or ranch. Often the senior party supplies land and/or other tangible assets, and the junior party contributes more of the labor, but there are many ways to share ownership of assets, like equipment or livestock. 

Standard Operating Procedures

Standard Operating Procedures are step-by-step protocols to outline how to complete routine processes and tasks performed on the farm or ranch. They help employees learn how to complete tasks without the need for constant supervision. If the farm or ranch business is being transferred, SOPs can be used to transfer knowledge and skills. 

Trusts 

Trusts are legal arrangements where assets are managed by a Trustee on behalf of heirs, receivers, or other beneficiaries. They provide legal protection for assets and ensure assets are distributed according to the wishes of the person or entity that created the trust. They also can save time by avoiding probate and in some cases reducing inheritance or estate taxes. The Trust document spells out who will receive assets and when, and what happens to the assets when the Trust period ends. In this way, they are used to transfer assets and provide financial security for surviving spouses, children and grandchildren.  

Will 

A Will is a legal document that expresses a person’s wishes as to how their property will be distributed after their death. Its use should be coordinated with other tools and the owner’s other planning efforts.  

If a person dies without a will—known as intestate—a probate court applies the state’s intestacy laws to determine distribution among heirs.  

Usually, both the landowner and the incoming farmer share the goal of financial security and peace of mind. But these may mean different things depending on whether they are entering or exiting. A successful transfer should meet the needs of both parties. In addition to the tools listed above, the following tools can help you plan for future security.  

Health Care Proxy  

A health care proxy—aka health care agent, representative, or surrogate—is a person who is legally authorized to make health care decisions for someone who is unable to do so themselves. The person works with the patient’s health care team to ensure they receive appropriate medical treatment. It is a useful tool to handle unexpected medical situations, such as a serious car accident or a stroke.  

Health Insurance  

Many farmers and ranchers worry about how to pay for health care, especially as they age and retire. This can have affect their transfer plans. Health insurance is the best way to prepare for unexpected medical costs as well as preventive services. The Health Care Information Sheet outlines options including Medicare, Medicaid, and the Affordable Care Act.

Life Insurance Policy 

Life insurance can provide immediate liquidity and can be used to replace the value of assets that have transferred to another family member, establish trusts, provide for non-farm heirs, or pay estate taxes.  

There are two basic types of life insurance policies: Term and Whole Life. Term life insurance is a contract that pays benefits when the insured person dies during the term of the contract; it is the less expensive of the two kinds of insurance. Whole life insurance provides death benefits similar to those of term insurance, but also builds cash value over time. 

Living Will 

A living will states your wishes for treatment if you become terminally ill or injured. Like a health care proxy, it is a useful tool to handle unexpected medical situations. 

Long Term Care Insurance 

Long term care insurance covers a host of services that are not covered by regular health insurance including help with routine activities and the costs of caring for chronic conditions. Most policies reimburse for home care as well as for care in professional facilities.  

Power of Attorney 

Power of attorney is a legal document that gives someone else authority to act on your behalf if you are unable to. It can cover financial matters, including making gifts and handling your business affairs, and managing your real estate interests.  

Retirement Savings Accounts  

Retirement savings accounts are tax-advantaged savings accounts that help people accumulate wealth for retirement. Both are subject to annual contribution limits. Common types include Individual Retirement Accounts (IRAs) and 401ks. IRAs can be opened by anyone with earned income, including self-employed individuals. The most common types of IRAs for individuals are Traditional and Roth. Traditional IRAs are tax-deferred, meaning you don’t pay income tax on the money in the account until it’s withdrawn. 401(k) plans are sponsored by an employer. A 401(k) allows the employees to contribute a certain dollar amount or percentage of a paycheck to the account. Roth IRAs and Roth 401 (k)s are funded by after-tax income so money withdrawn from the account during retirement won’t be taxed. 

Communication is the process of exchanging messages—e.g. information, ideas, and feelings with other people. Communicating effectively takes time and practice, but it’s essential to the transfer process. During the transfer process, effective communication involves several key skills: 

• Knowing your audience  

• Expressing yourself clearly,  

• Listen for meaning, and 

• Make requests not demands  

Whether it is to convey needs and motivations, make a pitch, tell your story, or address stressful topics, clear communication builds respect, trust and understanding which lead to successful negotiations.  

Know Your Audience 

Communication is a two-way street. It is not just about  you  getting  your  message across to another person; it’s about them, too. So think about who you are communicating with. Your audiences likely will include the stakeholders on your lists including family members, to the incoming producer, professional advisors, and so on. 

As you consider your audiences, put yourself in their shoes. What do they need? What do they want to know? What is their point of view? If you don’t know, you can ask. Also, consider their age and preferred means of communication. Nationwide, five generations are actively involved in farming and ranching and they each communicate in different ways. Will they respond best to a text, phone call, or face-to-face conversation?  Finally, reflect on what your audience wants to know. Tailor your message and how you deliver it to be best understood.   

Express Yourself Clearly  

People convey information using verbal and nonverbal communication. Verbal communication uses words and includes speaking and writing. Body language and eye contact are forms of non-verbal communication.  

When speaking to others, think before you speak. Use simple, familiar words and active language. In a formal situation, make sure you are prepared. It may help to start with an outline or bulleted list for the main points you want to make. If you are making a presentation, practice with another person or in front of a mirror. Follow your talking points to be sure you share important information. Also pay attention to body language. Consider what you may be communicating through eye contact, posture, gestures, and facial expressions. How you enter a room, lean forward or back, nod or shake your head may put your audience at ease or make them uncomfortable. If you don’t know what puts them at ease, mirror their body language. Also pay attention to what is the other person’s body language is telling you. 

When you communicate through writing—whether a text or a contract—reread what you’ve written to make sure clearly states what you mean to say. Check for spelling or grammatical errors; don’t rely on spell check.  

Listen for Meaning 

Listening for meaning helps you understand what is important to others. Pay attention to what the other person is really trying to say, to their tone and body language, not just to their words. To show the speaker you are listening, wait until they finish speaking before preparing a response. Look at them and keep your body language open. You also can show you’re interested by asking clarifying questions to learn more and encourage dialogue. To confirm you understand what they’ve said, repeat back what you heard.  

Make Requests, Not Demands  

An effective communicator asks for things in a way that encourages the other person to be open to what you are saying. Making requests help the other person understand what they can do to meet your needs. Effective requests are specific, doable, and result in a positive action. In general, requests are framed by using “I” instead of “you” messages.

During the transfer process, you probably will need to explain what you are trying to accomplish and why. Describing the history of your farm or ranch, how you built your business, or why you placed a conservation easement on your land conveys your values and goals in a compelling way.  

As you develop your story, consider sharing your personal history and the legacy of the land. Highlight key moments, challenges overcome, the values you instilled in the farm, and the future vision you hope to see carried on by the next generation. Anecdotes can make your story relatable and memorable. Use the Letter to Supporters template to outline and practice sharing your story. 

Building trust leads to successful transfers. Trust gives people a sense of security and confidence when dealing with each other. It is based on honest communication and considering each person’s point of view. It can be given and taken, earned and broken so it is important to build trust with the people involved in your negotiation. To build trust, practice the following behaviors: 

• Be Transparent – Be open about what you want, need, and plan to do—transparency.  

• Tell the Truth – Be honest with yourself and with others.  

• Show Respect – Consider the other person’s point of view  

• Be Accountable – Take responsibility for your actions and words. Apologize for any missteps or mistakes.  

• Keep Promises – Keep your word. Don’t overextend and commit to doing things you will not or cannot do just to reach agreement.  

• Give Appreciation and credit to others – Give credit where credit is due. Show you care.  

Farm and ranch transfers can be stressful. Learning how to manage stress helps sustain trusting relationships throughout the process. Stress interferes with the brain’s ability to use logic and reasoning. It limits your ability to receive and absorb new information, or really hear another person’s point of view. The following steps can help you regulate your emotions and maintain calm. You can also assist others if they are becoming stressed.  

• Name your feelings, needs, physical sensations, and emotions – Naming what you are experiencing can help you navigate a stressful moment.  

• Take a break – Sometimes you need to walk away in a moment to cool down and to reach the longer-term goal.   

• Be with someone who understands – This may require outside professional support or a trusted friend. In a negotiation process, it can be helpful to work with a mediator, a professional that is trained to work through stressful situations as a neutral ally. Mediators seek solutions that are fair to all parties.  You’ll want to ensure you find someone with integrity and sensitivity who listens well, has strong communication skills, and can define and clarify issues.  

• Reframe to the big picture – Details that might be points of tension can feel less heavy when taken in a broader context. Try shifting to look at a bigger context – a career instead of a job, overall health, the impact on family or friends and not just on yourself or the other person.  

• Refer back to when you originally identified what you are negotiating for – This started with revisiting your values, visions, goals and needs. In stressful situations, when our brain has narrowed its perception, we can forget to zoom out and see the bigger picture. Move out of the mindset of scarcity. There is a lot of possibility that rests between an ideal and an acceptable outcome that is easy to lose sight of when tensions are high.   

Negotiation is a dialogue between people to reach an agreement on matters of mutual interest. Ideally, it leads to a transfer that meets the needs of all parties involved. Identify the people who have authority to make decisions and the professional advisors you need to involve to complete transactions.  It can involve family members and other people with a stake in the outcome. Keep in mind the more people involved, the more complicated the negotiation may become.  

If multiple people are involved, it is helpful to agree on how decisions will be made. This can help inform who will participate and their role, and where, when and how to plan the negotiation. Several models can be used to guide group decisions. Lastly, you identify the best time and place to carry out the negotiations. If you are concerned that the negotiations may be difficult, consider holding them in a neutral place, like the office of one of your professional advisors.  

Now it’s time to agree on the specifics: which assets will be transferred, how much they are worth, the means of transfer, and a schedule for transferring them. You may have had preliminary conversations about what is being transferred and the value of specific assets. Now it is time to agree on the value of the whole deal—e.g. land, buildings and equipment, the farm or ranch business, etc. Bring along appraisals or other documentation to verify the value of your assets. Keep your budget in mind to make sure you are clear about areas where you can compromise and where you might have to walk away. Know your bottom line. 

Be prepared to go back and forth before you come to a final agreement. To get to “win-win” use effective communication, trust-building behaviors, and strategies to manage stress during the negotiation. Remember your vision, values and goals and rely on your support network to get you across the finish line.   

Once you’ve reached agreement, be sure to write down and record your decisions. You will need different types of documents depending on the tools you are using to transfer assets. Use the Farm Transfer Action Plan to list the documents you need to execute the transfer. Indicate who is responsible for preparing the documents, steps needed to finalize, and a date to complete them. 

It is not enough to finalize terms and agreements. You also need to implement your plan. Make sure to follow through on all the decisions that were made and ensure documents are signed. Implementation can take several years, especially if you are transferring a farm or ranch business. You also may have elected to transfer some of your assets as part of your estate.  Until all your assets are transferred, it is important to revisit your plan. You may need to revise it, especially after major life events. It is a good idea to check in with your advisors to help you stay on track.