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The Succession Effect [Agriculture
Posted on May 28, 2013 @ 07:31:00 AM by Paul Meagher

In the year 1995, Isreali researchers reported that farms with a successor lined up outperform farms without a successor on many different measures of farm success (e.g., profitability, Total Farm Assets (TFA), etc...). They called this phenomenon the succession effect.


Source: http://ageconsearch.umn.edu/bitstream/44131/2/249.pdf

There are many reasons why the succession effect is believed to occur:

  • The exiting farmer does not cannibalize their business as they grow older.
  • The exiting farmer is more willing to build up farm assets.
  • The farm has more incentive to expand and forward plan.
  • The younger successor brings new ideas, vision, and energy to the enterprise.
  • Long term survival becomes more important that short term gain.

The way succession in farming often occurs is that the successor goes away to a secondary educational institution and/or works outside the farm for awhile and then returns to the farm at a later date. When the successor returns there is often an increase in farm spending and investment. If the successor proves out during this expansion phase then a legal partnership arrangement is drawn up. Assets and business responsabilities are gradually transferred over to the successor with responsability for major financial decisions being the last responsability to be transferred over. The ideal age for a successor to be chosen is when the exiting farmer is around 45 years of age.

At least that is what I gleaned from the lead article Here They Grow in the Country Guide magazine article.

What is true of farming may generalize to other types of business. If you are 45 and older and don't have a successor lined up to run your business, does that affect how successful the business will be relative to if you had a successor lined up to take over the business? If you had a successor lined up, how would that affect how you run your business. Would you be willing to take on more risk to expand the business further?

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