Succession Planning: An Overview

Farm Table - Airlie Trescowthick

Type: Article
Knowledge level: Introductory

Farm Table says:

Our wrap up of all things Succession Planning from the Farm Table.

This article brings together our series of blogs looking at Succession Planning.

The three-part series on succession planning included:

  1. Farm Succession Planning: An introduction and helpful guides
  2. Do’s and Don’ts: What do the succession planning experts advise?
  3. Learning from Others: Succession Planning Case Studies

An Introduction to Succession Planning

Succession Planning is explained as “the development of a plan that will allow a smooth transition of the business and any assets with minimal disruption to the business or, importantly, family relationships”(Succession and the family farm – A plan for permanence, Deloitte – Agribusiness Bulletin).

The topic or process of succession planning, when brought up in conversation, can conjure up images and feelings of stressful conversations, family disputes, poor communication, and intense emotions. Why is this? Andrew Beattie of ProAdvice Pty Ltd stated there a number of reasons why a family farming business adds to the already complex nature of succession planning:

  • The emotional nature of family connections and the associated difficulty in having conversations about these difficult subjects.
  • Often only some of the next generation will be involved in the future running of the business and others children are not.
  • There are varying needs and wants of the “retiring” generation as compared to the new farmer(s) and their partners;
  • There is often a long multi-generational family history of the land and business in question.
  • The farm is a large tangible asset with a value that is independent of the operational return of the business. The business return on the asset value is generally low and variable (relative to other investments).

Beattie notes that typically the oldest son took over the family farm or family estate. If it was a possibility, other sons who wished to farm were helped to get established in other farming regions being “opened up” and daughters where left smaller “tokens” of the family wealth. Today, this is changing towards an expectation of equality. Now, Beattie explains, there are two key competing factors at play:

  • Modern estate planning is leading to smaller farms, or farms with heavy debt burdens, via division of assets or sale of the farm because “fair” division is not possible; and
  • The scale required for a viable operation is increasing.

Research by Chapman and Eastway and Charles Sturt University found that the proportion of farms being transferred to a successor is declining. In their 24-page report, they examine the current and changing dynamics of succession planning in Australian farming families and the potential impact these changes will have on regional communities and the broader economy. The study found that:

  • many succession plans fall apart because of the limited understanding of legal and tax implications of transferring land, income and assets
  • significant deviance in ownership preference between generations (younger people prefer more collective models of ownership and older generations prefer sole-proprietor models)
  • younger generations prefer open communication and collective-decision making
  • succession planning is still influenced by a deep-seated, patriarchal ideology
  • young successors are returning to family farm at later age (averaging 27 years) after taking a ‘professional detour’
  • young farmers are increased required, and willing to, seek professional advice
  • many farmers find the options available to fund retirement are limited if they leave planning too late usually because of an under-estimation of the ease of which sufficient funds can be accessed, given tax implications of withdrawing farm income.
  • over half of respondents state they do not expect the distribution of assets to be equal, but fair.
  • primary factor affecting the decision to sell or return to a family farm is financial viability.

What are the key components of Succession Planning?

Succession has been referred to as a three legged stool as there are three equally indispensable parts of the process:

  1. Estate planning – transfer of ownership of family/individual assets.
  2. Retirement planning – transition of labour and management
  3. Business transition/succession planning– transfer of management and/or control of the family farm business (or a part of) to another member(s) of the family.

Geoff Tually in his Farm Succession Guide stated that we must understand the difference between Estate Planning (wealth distribution – inheritance options) and Succession Planning (wealth retention -option or build on what parents have built up).  Tually explains that by separating the land from the farm business and using separate ownership structures creates more options for farm families.

He separates the succession planning process into Family, Ownership and Business.

Family:

  • Farm family goals
  • Family cash needs
  • Family opportunities
  • Wills

Ownership:

  • Selecting an appropriate ownership Structure
  • Ownership strategy

Business:

  • Farm family cash needs and farm business cash flow
  • Changing economic environment
  • Business planning
  • Business plans

In our next post, we outline what succession experts outline as the ‘Do’s and Don’t’s’ of Transition and Succession Planning, but before that, we have found the following to be useful end-to-end guides to assist in understanding the succession process and providing a handy guide through the stages of the journey (please note not all are Australian sources).

Succession Planning Tools and Guides

Succession Online: Proagtive

Succession Online is an online program, the first of its kind, which enables up to 8 family members to work through this program together. The topics that you will be coveredinclude, what succession planning is, family communication strategies, individual goals and working out the purpose of your business. In addition, you will learn how to understand your business figures and farm finance needs along with understanding your family dynamics and intergenerational differences.

It is $770 incl. GST for 8 family members, you can work at your own pace and it can be accessed for up to 365 days.

A Guide to Succession – Sustaining Families and Farms: GRDC

Developing a succession plan that meets the expectations of all involved is not easy and this booklet is a good starting point for people looking to broach the subject of succession planning. This booklet is a sound, factual guide that will provide an important starting point for many families. The inclusion of various professionals’ perspectives provides some wonderful ideas on the succession planning process, with each providing a slightly different take on the subject.

Production Horticulture Farm Succession Planning Toolbox: Bundaberg Fruit and Vegetable Growers – Greg Weir

Good introductory overview to planning process that covers barriers to starting a succession plan, too many children too few assets?, treating family members fairly and equitably, steps to developing a plan and a guide to inheritance.

The Farm Family and Their Family Farm (2016 edition)

Geoff Tually has produced 145 pages of thought-provoking advice. Tually really tells it how it is and his work is based on decades of experience and research. The Guide contains a Workbook that allows a farm family to work through family, ownership and business issues commonly experienced by farm families.

Tually states: “This Guide might seem large, but there are two HUGE assets involved, your family and your family farm.”

Farm Succession Guidebook – California FarmLink

The US-based Guidebook opens with “Congratulations! While far too many farming and ranching families wait until it is too late, you are now embarking on the farm succession planning process. You’re in for a difficult but highly rewarding journey!”

This Guidebook has six chapters that link out to other resources. The complication of resources are organized by key subject areas and there are also worksheets to guide the process.

Farm Ownership and Transition Workshop Resource Book – Beef + Lamb NZ

This is a 48-page resource book compiled by Beef+Lamb NZ is a really fantastic document that is comprehensive and insightful. Complete the family business meeting checklist on Page 6 to see how your family is performing. There is also a family business transition readiness assessment on Page 15 that may be helpful to get you started and an exercise to calculate “sweat for equity”. te

Legacy Workbook – Farm Journal Legacy Project

This is a US-Based workbook designed to help you start navigating the succession planning process. Handy exercises at end of each chapter and some insightful commentary/case studies at the start of each chapter.

Planning the Future of Your Farm – A Workbook Supporting Farm Transfer Decisions: Virginia Cooperative Extension – Robert Andrew Branan, Attorney

The workbook is built from materials first used in an education campaign – begun in 2004 in Virginia and North Carolina – meant to help aging farmers and landowners understand farm succession principles. US-workbook that stresses risk management, protecting relationships and wealth. Over 100 pages and not all relevant to Australia, but a nice guide nonetheless.

View all resources in our Succession Planning section of our Build Library here.


Do’s and Don’ts: What do the succession planning experts advise?

Today, we bring a range of perspectives on what is encouraged, and what is discouraged, throughout the succession planning process. This Do’s and Don’t list is by know means exhaustive or prescriptive, but may help in bringing clarity to your own progress and help you get the process started.

Andrew Beattie of ProAdvice Pty Ltd states the following as belonging on the list of to-do’s for succession and estate planning in family farming businesses.

  • Separate the succession and estate plans.
  • People matter most; set the ground rules and guiding principles for decision making. Start with needs and objectives.
  • Time frame is important.  i.e. do it early, take your time and don’t barge through.
  • Allow for a balance of flexibility and certainty.
  • Ensure education on the future implications of the plans.
  • Go through and understand the “What ifs”; all the D words : death, divorce, disagreement, disability.
  • Formal agreements are vital; deed of family arrangements.
  • Succession is a process or a journey not a destination.

Plan to manage family changes and your farm business (GRDC) stated the following as integral to the process:

  • Clarifying the aspirations and expectations of family members is an important part of the planning process and can help build understanding and balance to family and work life. ■
  • It is essential to involve legal and accounting professionals in the process when considering changes to the farm business structure.

Ken Solly for Sheep Connect SA BestWool/BestLamb Conference in 2017 looked at what young farmers should consider when  starting out on the family farm. The key points provided by Ken on what young farmers must do to succeed include:

  • you must have farming in your guts. If you don’t have that intrinsic love for the land, you’re probably going to struggle, because the two most important things in agriculture – the weather and the market – are out of your control, and both will have a huge impact on your livelihood
  • secondly, stay on a fast learning curve because you must aim to be in the top 20% of producers
  • have defined 20-year goals. You need to know where you and the business are heading. If you don’t know where you are going, any road will get you there, but there is a fair chance you will be dissatisfied with your destination
  • get some very good mentors around you; people you can really learn from, people who will actually help with your discipline. There are too many ‘gunnas’ in agriculture; you need to have discipline to follow through with your plans
  • lastly, hang around with better farmers than yourself. Make sure you try and ascertain who the top farmers are, and try and learn from them all the time

Kerry Ryan from the Australian Dairy Farmer suggests the following is needed to succeed in succession:

  • Acknowledgement of the difference between “management succession” and “ownership succession”.
  • Confirmation of shared values so that everyone is aware of the behaviours and outcomes that will deliver these is key to a solid foundation.
  • Putting time into understanding their respective personality styles and the impact of these on leadership, management, and interpersonal dynamics.
  • Commit to making a start.
  • Develop, define and follow a process.
  • Succession must be considered as a process
  • Feelings before facts
  • Treat succession as an ongoing discussion, not one discrete conversation
  • Address the financials
  • Respect differences in personalities
  • Develop a vision
  • Include all family members
  • Build flexibility into the process
  • Seek advice
  • All family members must commit to the process

However, shortcuts are dangerous, explains Ryan. High-risk shortcuts include:

  • Casual approach to meetings and communication
  • Absence of documented sharemilking or employment agreements
  • Insufficient consultation to establish a shared vision
  • Lack of transparency around management decisions.

The Farm Journal Legacy Project outlines three broad reasons why family operations do not successfully transition to the next generation as a going concern:

  • Incompatible estate planning
  • Insufficient capitalization
  • Failure to prepare the next generation for a leadership role.

Paul Neiffer, US Farm CPA Blogger identifies steps to be successful in the farm succession planning process and things to avoid.

He states do these things:

  • Think of farm succession planning as a journey, not a destination.
  • Complete a financial analysis of the past and present farm business. A project where you think it will be in five years. If the farm is not making money or cannot support all of the families involved, what can you do to change it?
  • Become educated on succession planning. Participate in workshops and seminars, read articles and stay involved.
  • Consider using a family business meeting to open lines of communication. An objective third-party facilitator can help the process.
  • Determine the most important values and priorities for each family member. Some of them might surprise you.
  • Figure out each person’s personal, family and business goals.
  • Address the issue of fair versus equal division of the farm early in the process, especially if non-farm family members are involved.
  • Develop a successor development plan for any family members who plan to take over the business. This training and development strategy will provide future operators with the appropriate skills and knowledge to successfully run the farm.
  • Discuss various options in a free-form conversation. You will shrink the list down later.
  • Assemble an advisory team (lawyer, accountant, financial planner, banker, etc.) to help you in this process.
  • Consider income and estate taxes but don’t focus on them.
  • Write it down so you’ll be sure to finish it.

But, don’t do these things:

  • Be afraid to ask questions and avoid listening carefully to the answers. You might not like the answers, but they are important to the process.
  • Assume you know what others are thinking. Instead, let them articulate their views.
  • Be afraid to share the load. Instead, results likely will be better if you let go and allow others to help.
  • Define life or family as the farm. There’s more to life than work on the farm, including family, friends, sports (yes, it is OK to golf!), hobbies, etc.
  • Put all of your eggs in one basket. Instead, plan ahead, think early about retirement or succession, and save and invest in off-farm assets so you have options.
  • Rely on one adviser. A team can do a better job.

Kellogg Rural Leaders Programme – Mark Stevenson, stated that four major categories of inhibitors to successful farm transition were found:

  • Poor communication
  • Lack of a structured process
  • History, harmony and family dynamics
  • Delayed timing of succession

In The Farm CPA: Top 10 farm succession-planning roadblocks, Paul Neiffer lists a checklist of hazards to avoid during the change in ownership process.
The list includes:

  • Start planning too late
  • Assume a family member will take over the business
  • Divide the farm equally among heirs
  • Wait too long to transfer real authority
  • Distrust your successor
  • Fail to have potential successors gain experience at another business
  • Be secretive about your plans
  • Dread your retirement years
  • Plan on your own
  • Avoid the journey and look for a cookie-cutter process

There are definitely some overlapping and key themes that arise out of those lists.

Let me leave you with this. Kellogg Rural Leaders Programme – Mark Stevenson stated that:

“If starting is daunting, think about what will happen if things don’t start, succession discussions are avoided and no planning takes place? Will that be harder? Delaying starting allows expectations, realistic or not, to further cements themselves and assumptions to grow. This can lead to disappointment and resentment within the family.”

In our final post, we will focus on presenting a range of case studies that show different approaches to succession planning in alternative contexts.


Learning from Others: Succession Planning Case Studies

We often hear of succession planning going wrong, so today we wanted to share with you some successful succession case studies to close out the week.

What if one child had to buy out the other children?

In this case study by Geoff Tually, a property was left to three children and the son was planning to buy out his siblings, which meant that he would go into significant debt. The solution was to:

  • Brother and sisters think of growing the business as opposed to the sisters getting a windfall and the son going into debt with the possibility that the viability of the farm business be stressed to breaking point.
  • Agreement be formalised so that they reviewed their collective goals at specific time periods and provided a mechanism that a partner could leave without unduly affecting the farm business viability.
  • The siblings thought this was an excellent way to go and that no one else had suggested this option to them.

How can the next generation earn ownership of the farm through ‘sweat equity’?

An article by CLA Connect article introduces the concept of profit interest as a planning tool, whereby it lets your children earn ownership of the farm through their sweat equity through a share in the business profits and losses. In this case:

  • Frank is Nathan’s and Eric’s father.
  • When Nathan and Eric decide to return to the farm and help their dad, Frank gives each son a 20 percent profit interest.
  • The farm is valued at $1,200,000 and profits are historical $130,000 per year (assume 3 percent growth in profits per year to keep up with inflation).
  • Frank takes distributions, but Nathan and Eric only take out enough to cover their tax liability.
  • The children will take on a gradually increasing role in the farm.
  • However, the children have a choice each year: They can take a distribution of the profits or opt to keep them in the farm partnership.
  • If they opt for a distribution, their ownership percentage does not change (they are pulling out the earned equity).
  • If they opt to keep the profits in the farm partnership, they effectively contribute money that increases their ownership percentage.

What if the parents want to exit the business as soon as possible?

In this Farming Ahead case study, the parents want to exit the business, ensure they have a sound retirement income and have a fair plan for their children. The results were as follows:

  • Business & Land value- $2.3 m. The agreed transfer price to James and Claire is set @50% – $1.150 m
  • Plant & equipment – $300,000
  • Stock – $300,000
  • Less debt position ($140,000)
  • Total transfer price – $1,610,000
  • The parents are prepared to vendor finance the transaction with an initial down-payment of 10% and balance of $75,000/year for 20 years.

Structure

  • Land help by family trust
  • Operations through separate entity

Off-farm children:

  • Joseph to become beneficiary and member of a self-managed fund
  • Parents to make non-deductible contributions of $10,000 for 15 years
  • Nominated for binding death benefit of $150,000
  • $5,000/year into education bond for 2 children for 10 years

What if no one wants to return to the farm?

In this case, none of the children were interested in returning. the family made the following decisions:

  • Mother will retire from nursing at 60. Father cannot continue to farm without permanent help. The business is not profitable enough to employ full time labour, and continue to partially support parents.
  • It was decided to take up the lease offer made by neighbouring family.
  • All children will be treated equally parents to make an appointment with their accountant investigating the implications of selling stock and plant, taxation implications of leasing agreement, and potential to establish self managed super fund with proceeds from stock and plant sale
  • To undertake a five year lease option in response to offer
  • The parents do not wish to move away from the farm at this point
  • The family will reconvene at the end of the 5 year lease option

What if the parents are wanting to retire and move off farm? In this GRDC case:

  • son is owed by the partnership for half time wages. He will receive block 2 as payment.
  • block 1 is to be transferred to the son with a sunset clause: if he sells in the first year each daughter will receive $500,000; in the second year the daughters will receive $450,000 each; in the third year $400,000 etc. By the eleventh year nothing will be paid to the daughters if the son sells the land. An exception to the clause will be if the son becomes disabled or deceased.
  • block 3 is to be purchased by the son and daughter-in-law for $300,000 (borrowed), $200,000 to the parents, and $50,000 to each daughter
  • the son to join the trading partnership at 25% from the beginning of the financial year, and will take over 100% of the partnership in following year
  • daughters 1 and 2 will receive their parents’ investments as inheritance
  • parents to purchase a town property
  • investigate rolling parents’ investment portfolio into superannuation with their financial planner in order to fund their living expenses.

What if there is conflict increasing between those working on farm and the succession planning process has halted?

In this case, the structure was a family trust, trading as a company (as trustee for the trust). All family members were beneficiaries. Equality was not possible and conflict was increasing. The family did the following:

  • To give the farming child 50%, others 25% each
  • To transfer blocks 1 and 4 (secured by second mortgage to parents – amount agreed) to son 3
  • In the event of land sale by son 3, a loan will be used to establish equity to other sons
  • Block 3 also to be transferred to son 3 with a mortgage of two thirds the value to be paid within an agreed time to parents at agreed interest rates
  • Block 2 remain with parents and leased to son 3 at 5% of the market value. This land to be distributed in the parents’ wills to son 1 and 2 with all other assets
  • To guarantee full market valuation to ensure the best cost base for CGT moving forward
  • Son 3 to buy plant and equipment from parents interest free loan to be forgiven in the will.

What if the poor working relationship between the generations?

In this case, there was estrangement and conflict and this was how they resolved the case:

  • All agreed to separate the farming operation, splitting the stock and plant equally between the two sons, accepting that they will lose the advantage of scale.
  • The amount of the debt owed to son 1 for unpaid wages was agreed upon.
  • The land portions were decided: son 1 receives blocks 1 and 2, son 2 receives blocks 3 and 4, block 2 (understanding that it may be sold by its new owner), block 5 to remain in parent’s ownership to be distributed in wills, son 1 is to retain his current home in the town,investment land is to be developed – corner block for son 2, agreed inequities in division of blocks would be offset by debt, water licences remain with the land.
  • Sons 1 and 2 to pay an annual figure to the parents: the amount was agreed and payment will be made in cash or in-kind.
  • Daughters assistance to buy real estate and to inherit in the wills.

What about when land values are high?

The GRDC presents a case study concerning Dane Sommerville and his farming who farm on land worth $7000/ha for good cropping ground. What did they do to overcome issues with expectations while maintaining the asset base? The report states:

  • Dane and his wife Natalie applied to lease 1052ha as a stand-alone business to provide themselves with security, but they were unable to secure a bank loan to finance it.
  • They searched for alternative sources of finance and found a private financial backer to support them and another couple who were interested in operating the business with them.
  • Each partner established their own trust and each of these was a beneficiary of the joint business trust.

What if you don’t come from a traditional farming background?

Newer business models and case studies are covered in Farm Succession: Tools and methods to promote a successful farm succession (Farm Succession EU) and include:

  • Transfer to an employee: Gildas Guiavarch used to grow vegetables in the French town of Concarneau. At 48, he wanted to quit this physically demanding business. He transferred his farm to a long time employee, Gwénaëlle Le Sant.
  • Succession financed by a land co-op: Damien and his wife Danielle Jacquemart manage 30 hectares of dairy cattle and sell dairy and meat directly from the farm. Brother David Jacquemart
    keeps cattle, bakes and sells bread plus vegetables and meat. Both brothers are in their fifties. They are buying their rented land with landfund Terre-en-vue before transfer, which uses citizen investment. Citizen funding through Terre-envue makes the farm transferable, which would have been much harder with a bank loan plus interest to buy the land.

These are just some family and context-specific examples.

Further reading:


Disclaimer: We note that there are many farming models at work in Australia and the inter-generational family farming model is just one of them. Although this series concentrates on the family farming model, there are still some important takeaways for all. Stayed tuned for later themes on alternative farming models and pathways into farming.

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