Securing the future for you, your farm and your family

‘Nothing is as certain as death and taxes. We’ve all heard variations of the quote, often attributed to Benjamin Franklin. Given the certainty of death, succession planning is an issue all farming families must deal with. It’s an emotionally charged issue, but one that doesn’t go away. In fact, ignoring the issue will not help.

Succession planning is a complicated issue for farming families and agriculture businesses. It’s more than just the business. There’s family history, the family home and memories, not to mention financial and emotional relationships.

Well-thought out, considered and (agreed) succession plans are absolutely critical to the survival of your farming business. There’s no easy time to have these discussions, but harder during difficult periods.

Now more than ever, it’s important to have a formal plan in place. You need more than an informal understanding of who is interested in taking over the family farm. It’s also something you need to continually revisit, especially if there are changes in your family or in the business. A formal, written and regularly updated agreement will protect everyone involved.

What is succession planning?

Good succession planning should involve all interested parties and your advisors. Once you have a formal, written document, you should have regular meetings to discuss the plan and make any necessary changes.

Your succession plan should include:

• What money do you require to retire?
• Who will take over the business?
• When will they take over the business?
• How will they take over the business?
• How will the assets be transferred?

Your advisor, whether it’s your accountant, broker or lawyer, will probably have a standard form or template they will use to guide you. Most of the banks will also have information on their websites.

If you’d like to do some research, here are some useful articles:

• Succession and the family farm – Deloitte
• The Do’s and Don’ts of family succession – Grain Research Development Council
• Succession planning – the good, the bad and the ugly – ABC Rural

You can also listen to my interview about succession planning on the Pass the Baton podcast here.

Why succession planning is important for your farm business

Having a succession plan is important for the long-term future of your business, and for you. After putting in years of hard work, you want to know that plans are in place for the future costs and management of the business. You need to understand how you can exit from the business and still have a roof over your head and funds to cover your living expenses.

The next generation needs to understand what they are walking into, especially if they’re giving up off-farm incomes and have personal financial responsibilities that the business won’t cover.

Succession planning will help all parties understand the future costs and management of the farm business. The next generation, those coming into the business (or those expecting to benefit from the farm) need to understand if they get paid and how much.

How to negotiate a strong succession plan for your business

Succession plans involve discussions about money and death. Even in families, these are often very sensitive subjects, so succession planning needs to involve careful negotiation.

Here are some ways you can ensure your succession planning goes smoothly.

• Have more than one advisor

You don’t want so many opinions and people that you’re confused. But your lawyer, broker and accountant all bring unique skills and perspectives to the table. Surround yourself with skilled advisors and be prepared to pay for the people that can deliver the right outcomes.

• Have a picture of the future

This is especially important for the outgoing farm owners. You need an idea of what life looks like when you leave the farm. Where do you want to live? How much money do you need to sustain a comfortable lifestyle?

• Be prepared to consider different scenarios

When working with your advisors, all parties should look at the long-term analysis of different options. This might change over the years due to changes on or off the farm.

• Create financial flexibility

Having off-farm assets like super and shares and low debt can make succession planning easier. For example, you might need to increase borrowing to pay out family members. While it can be tempting to pay off all the farm debt, this should come at the expense of financial flexibility once you’ve passed the responsibility of the farm onto the next generation.

Roadblocks to generational change

Not wanting to discuss a succession plan doesn’t help anyone. It can be very stressful, but here are some tips to smooth the path to succession planning:

                        It can be very stressful, but here are some tips to smooth the path to succession planning:

• Set up documentation and communication before you need it so the rules of the game are clear and everyone knows what is happening.
• Decide who needs to be around the table – and make sure they are there. Get the next generation involved early, especially as they are likely to have different approaches to things like debt.
• Ignore the horror stories and rumours you’ve heard. Listen to your advisors who can guide you through the process.
• Invest in off-farm assets as soon as you can. The next generation doesn’t expect zero debt, so make sure you have off-farm assets and superannuation.
• Work out where you’re going to live in the future. Invest in property if you can and ensure you continue to maintain all housing assets on the property.
• If you’ll have access to drawings from a trust in the future, be clear on what it covers.
• Set up your succession plan well before you think you need it. Not only does this allow the next generation to be more involved, but it will remove the stress of trying to make succession plans during economically tough times or when someone is dying.

Why your bank is interested in your succession planning

While succession planning might seem like a private issue for you and your family, it’s something your bank (and thus your broker) really needs to know about. The strength of your succession plan can affect the long-term viability of the farm. Having a strong succession plan, made with the help of various advisors, can reassure the bank you’re able to pay back any loans you take out, especially as you get older.

Operations with few risks to profitability and sustainability will find it much easier to access finance. A strong, updated succession plan is also a key indicator to the bank that you’re running a well-managed operation. Your succession plan can reassure the bank that the ownership of the land is clear, allowing it to be used as security.

Conclusion

A succession plan is a plan at a point in time. And as a plan, it’s only as good as the communication, cooperation and flexibility that follows to implement it. To be effective, you need to regularly review and update it to make sure it reflects changing priorities, roles and goals.

Over to you

Do you have a succession plan? Or does the one you have need updating?

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