When was the last time you reviewed the succession plan for your farm or agribusiness? Do you even have one?
Even if it feels like your retirement is years away, you still need to think about what happens next. Most succession plans take a couple of years to work through. Having a solid succession plan will help you balance your aspirations with what the next generation may wish to do. And if you’re close to retirement, you need to work on your succession plan now.
Succession plans and financing
Having a succession plan is about ensuring for future continuity and stability on your farm or in your agribusiness.
However, when there is tension around a succession plan, it can raise red flags for financial institutions. Banks and other lenders are risk-adverse, so any suggestion there is instability or uncertainty about the future of your business can make them nervous.
In this blog, I explore the reasons banks get apprehensive when there aren’t solid succession plans in place. I’ll also explain how that might affect their lending decisions.
Why a strained succession plan makes your bank nervous
There are 5 key reasons a strained succession plan can make your bank nervous.
1. Uncertainty and instability
Banks need to see stability and predictability when they are assessing loan applications. A strained succession plan introduces uncertainty about the future management and ownership of the business. Instability can lead to disruptions in the farm or agribusiness operations. It could also affect the business’s ability to generate consistent revenue and meet loan obligations.
2. Potential for disputes
Internal disputes are not uncommon for family-run agribusinesses during the process of handing over from one generation to the next. If you haven’t carefully thought out your succession plan and communicated it with everyone involved, it’s possible there will be tension. Conflicts among family members over roles, responsibilities and ownership can escalate, leading to legal battles and operational inefficiencies. If the bank thinks there is potential for disputes, they’ll be wary of providing finance. They know from experience that these sorts of disruptions may affect timely loan repayments.
3. Lack of clear leadership
Your succession plan should outline who is taking over the leadership roles in the business. Banks want to be confident the future leadership will continue to manage the business and keep paying the loan. Strained or unclear plans and concerns about the competency and preparedness of the successors will undermine the bank’s confidence.
4. Financial risks
Succession plans often involve significant financial transactions, including buyouts, restructuring and tax liabilities. If you haven’t planned and managed these financial aspects, they will strain cash flow and financial stability in the business. Banks look at these sorts of risks closely. They will be hesitant to provide a loan or extend financing if there’s any sign of strain in the succession plan.
5. Impact on business continuity
Banks are interested in the long-term viability of the businesses they finance. Succession plans, especially if relationships are strained, can lead to a loss of key personnel, expertise and clients, and this affects business continuity. It’s important to ensure a smooth transition to keep the ongoing financial health of the business and maintain loan obligations.
Strained succession plans and the impact on lending decisions
If your financial institution feels there’s tension around succession, it could affect lending decisions in the short and long term.
Increased scrutiny
If the bank thinks there are problems with a succession plan, they’ll increase scrutiny of the business’s financial health, management structure and future prospects. The bank might ask you to provide more detailed financial projections, contingency plans and evidence of a clear transition strategy.
Higher interest rates
If the bank feels uncertainty around succession plans could lead to future financial risks, they may charge higher interest rates.
Tighter lending terms
Uncertainty around succession might cause the bank to impose stricter lending terms to mitigate potential risk. This might include shorter repayment periods, higher collateral requirements and more frequent financial reporting.
Potential loan rejection
In some cases, the bank might decide the risk posed by the strained succession plan is too high and reject the application. This can be an immense challenge if your farm or agribusiness relies on external financing for operations and growth.
How to mitigate the bank’s concerns about succession
As you can see, your succession plan isn’t something you can ignore. But the good news is, there are things you can do to make sure a shaky succession plan doesn’t derail your financial and business plans.
1. Develop a robust succession plan
Take the time and invest the resources into developing a comprehensive succession plan for your farm or agribusiness. Having a well-documented plan identifying successors, financial planning, and addressing potential legal and tax issues, shows stability and foresight.
2. Engage professional advisors
Succession planning isn’t something you (or your family) should try to do on your own. Work with financial advisors, accountants and lawyers who specialise in succession planning. With their expertise, you can address complex issues and put together a plan which will help you put a strong case to your bank.
3. Communicate with the bank
Keep your bank up to date with your succession planning. Being transparent, having open communication and providing regular updates will build trust with your bank and ease any concerns they might have around succession.
4. Plan for contingencies
As with other parts of your business, you need contingency plans to address challenges that arise during transition. This might include strategies to resolve conflict, financial buffers and interim management arrangements.
Case Study 1 – How to go about a succession plan when someone wants to exit the business
Background
The farm was co-owned by siblings, Mark and Sarah, who had inherited the business from their parents. Mark had always been passionate about dairy farming. Sarah, while involved in the business, had other interests and was contemplating a new career in agribusiness consulting.
As Sarah’s desire to leave the farm grew, the family faced the challenge of restructuring ownership and operations without disrupting the farm’s stability. There were concerns about fairly compensating Sarah for her share of the business and adjusting the farm’s management structure to reflect Mark’s sole ownership. The family also needed to ensure the farm continued operating smoothly without Sarah’s involvement.
Their Succession Planning Process
They engaged advisors to facilitate Sarah’s exit from the business while maintaining the farm’s financial health and operational continuity.
Business Valuation: They began with a valuation of the farm to determine the fair market value of Sarah’s share. This included assessing the farm’s assets, liabilities, cash flow and future earning potential.
Exit Strategy Development: They developed an exit strategy that satisfied Sarah’s financial needs while ensuring the farm’s continued success. They explored options such as a structured buyout, where Mark would purchase Sarah’s share over a set period to ease the financial burden.
Financing the Buyout: To facilitate the buyout, they prepared a detailed business plan and cash flow projections to present to the bank. This showed they had confidence in the farm’s ability to sustain operations and meet loan obligations without Sarah’s contribution.
Restructuring Operations: With Sarah stepping away, Mark needed to reorganise the farm’s management structure. This included identifying key areas where Sarah’s responsibilities needed to be redistributed and ensuring the support systems were in place.
Legal and Tax Considerations: They worked with their legal and tax advisors to navigate the legalities of the buyout and minimise any tax implications. This included drafting a buy-sell agreement, detailing the terms of Sarah’s exit and protecting both parties’ interests.
Communication and Transition Planning: They held many family meetings to ensure open communication throughout the process, addressing any concerns and ensuring a smooth transition. Together, the family developed a timeline for Sarah’s gradual exit, allowing time for Mark to adjust to his new role as the sole owner.
Outcome
Sarah exited the family farm with a fair and agreed-upon financial settlement. The structured buyout allowed Mark to assume full ownership without placing undue strain on the farm’s finances. The farm’s operations continued without disruption, thanks to the careful planning and redistribution of responsibilities.
Mark and Sarah maintained a positive relationship. Sarah pursued her new career in agribusiness consulting but was available for advice and support. The farm continued to thrive under Mark’s leadership, with a renewed focus and clear direction.
This case study shows how a well-planned exit strategy can preserve family relationships, ensure the continuity of the business, and provide a fair outcome for all parties involved.
Case Study 2 – How NOT to go about a succession plan when someone wants to exit the business
Background
Brothers, Robert and James inherited their family’s grain farm, which had been in the family for generations. Robert was committed to the farm, managing daily operations and exploring innovative farming techniques. James had gradually lost interest in the farm and wanted to pursue other opportunities outside agriculture. He decided he wanted to sell his share of the farm and use the proceeds to start a business in the city.
The brothers initially agreed James would exit the farm, but tensions quickly arose over how to fairly value the farm and divide assets. With both brothers holding strong opinions and having little experience in managing such a separation, the process became increasingly contentious.
Their Succession Planning Process
The family engaged advisors when the relationship between the brothers had significantly deteriorated. Their role was to mediate the discussions and attempt to find a mutually agreeable path forward. Here’s how the situation unfolded:
Initial Assessment: They conducted a valuation of the farm to determine the market value of the assets and James’s share. However, there were disagreements between the brothers on the valuation method and the future potential of the farm complicated the process.
Attempted Mediation: Their advisors facilitated several mediation sessions, aiming to agree on how James could exit the business. Robert wanted to keep the farm intact, but he was concerned about taking on significant debt to buy out James, especially in a challenging economic climate for grain farmers.
Financing Challenges: Robert approached banks to secure financing for the buyout, but because of the strained nature of the farm’s operations and the rising costs of agricultural inputs, securing a loan on favourable terms proved difficult. The banks viewed the situation as high-risk, given the unresolved family conflict and uncertainty about the farm’s future profitability.
Legal Complications: As negotiations dragged on without resolution, both brothers involved lawyers. This move, while necessary because of the increasing complexity, further strained their relationship and increased costs. The legal battle over asset division became protracted and emotionally charged.
Operational Impact: During this time, the farm’s operations suffered. The lack of a clear direction and the growing tension between Robert and James led to poor decision-making. They missed key planting and harvesting deadlines and the farm’s productivity declined. Farm employees were also caught in the middle of the conflict, leading to a drop in morale and efficiency.
Outcomes
Unfortunately, the case did not end well. After months of legal disputes and failed negotiations, the brothers could not reach an amicable agreement. In the end, they had no choice but to sell. Neither of the brothers wanted to keep working together, and Robert couldn’t secure the financing needed to buy out James.
The sale of the farm was a heartbreaking outcome for Robert, who had hoped to continue the family legacy. They divided the proceeds, but both brothers ended up with less than they had hoped for, as the forced sale did not yield a favourable price. The conflict damaged the relationship between Robert and James, with little communication between them after the sale.
This case study serves as a sobering reminder of the importance of early planning, open communication, and the need for professional mediation in family business disputes. When emotions run high and conflicts are left unresolved, the consequences can be devastating, not just for the business, but for family relationships as well.
Make sure your succession plan supports your financial goals
Strained succession plans make banks nervous because of the inherent risks and uncertainties they introduce. Having a smooth and well-structured succession plan helps maintain financial stability and gives your lenders confidence in the long-term stability of your business. Being proactive, addressing potential issues and getting professional advice helps minimise risks and puts a stronger case to your bank.
If you’re not sure where to start, you’ll find my previous blog on succession planning useful. It includes links to resources to help you establish a succession plan for your farm or agribusiness.
Over to you
How do you think your bank would view your succession plan?
If you need help to understand how your succession plan affects your financing decisions, please get in touch. And if you know someone who would benefit from this blog, please share it with them.
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