You’ve got a successful farming business but what if something happens to you tomorrow – have you got a plan in place? Do you want peace of mind for your family? Have you thought about a succession plan?
You’ve built a successful business with significant assets, knowledge and skills, but how and when do you pass these on? This is not just an issue for retiring farmers as illness or death can strike at any time. You want your business to have a planned future that will provide financial security for your family and leave a legacy for future generations. To do this you need to be thinking about succession planning. The most important step is to start as early as possible – the best time to start was yesterday but now is better than tomorrow. Around 90% of New Zealand businesses do not have a formal succession plan. Don’t be part of that statistic!
Succession planning is the process by which farm assets, knowledge and skills transfer to the next generation. Remember that this involves your family and will involve emotions – it is a transition rather than a transaction. Get the transition right and it will mitigate the tension and emotion. However, when making your plan you will need to consider whether one or more of your children continue to run the farm or whether you will need to sell it, if they don’t want to run it. Any succession plan needs to be an inclusive plan that outlines the process for the transfer of both the financial and knowledge of the business. It needs to be fair to everyone and it needs to be agreed on, understood, monitored and reviewed. You should also make sure that your will reflects your succession planning wishes.
Having informal family discussions years before a possible succession is a good way to prepare. Family needs and wants change over time so regular discussions provide all the family with information on what each of you need, fear or envisage for the future. Be open, honest and transparent in these discussions. These discussions need to include topics such as your needs, your children’s wishes, where the business is at (how it’s doing), your vision and values for the business. If you don’t intend on letting your children inherit the farming business, you need to be clear about it from early on.
Fair isn’t always equal – make sure all family members understand what the structure looks like and what obligations the sibling(s) taking over may have. Explain to them what is necessary for the farm business to survive. Talk through any conflicts. Get consensus if possible so that your succession plan is inclusive. Talk about the continuance of the business rather than succession as this makes the conversation wider than just assets as it includes people and management of the business.
You need to make it clear to your family what your expectations are – what you need from the business to give you the lifestyle you require for your life beyond the business. The business needs to be capable of giving you that lifestyle. If it isn’t, then you have to look at the overall viability of the business.
Your children need to let you and any other siblings know whether they want either singly or together to run the farm in the future. If the expectations of each sibling are communicated clearly then it can be determined what they may need from the business. It may mean helping with home loans for the children who are not taking over the farm or providing other financial support or gifting. It may also mean you need to sacrifice some capital and security to help get this next generation established.
For any child or children who want to be involved in the future of the business, these early discussions allow you to build skills and capability in this next generation sooner and to identify areas where there may be weaknesses in knowledge or skills that can then be worked on and supported. You need to train the next generation to take over the business.
If you have no evident successor, when no one in the family wants to take over the farm business, then it may be wise to look at partnering with other young people who are motivated and passionate about your business. Teach them in anticipation of passing the business over to them in the future.
As well as regular family discussions it is important to get specialised advice. Getting someone with succession planning experience involved early along with your other advisors (lawyer, accountant etc) can help you clarify your vision for the business and put in place a strategy and structure to achieve this. Growth creates options. Establish a governance structure early on with clear roles and responsibilities. Use your professional and advisory group throughout the life of your business. Having an advisory group who have been involved in your business for some years makes it much easier when it comes time to implement your succession plan – they will understand you, your business and its history better. They can help you monitor and review your plan on a regular basis. The plan will evolve over time. Rushed or poorly planned strategies can have major impacts on family relationships along with serious financial implications on the business.
You need a profitable business for succession which means you need to optimise profit from the beginning. If you don’t have a profitable business, then it is very difficult to transition this to the next generation. Every business has a life cycle. It will go through bad times when the business is struggling or less valuable and viable than at others. It may only consist of assets near the time you wish to transition it. This is where the value of your advisory group and open communication with your family is invaluable. Just looking at the accounts may not tell you enough but understanding the strategy and vision for the business, and particularly over the years, gives colour to the business and a much better overview.
There may be some hard decisions that need to be made during the transition where, again, your advisory group can help, for example, letting the new generation stamp their changes but acknowledging how hard it is for the outgoing generation to give up and hand over. A farm business is often a labour of love and identity is tied into the farm and being a farmer. It may be that you are getting older and want to start the transition but still enjoy the business and are unwilling to let it go. Sometimes the independence of the advisory group can help take the emotion out of this so an objective decision on what is best for the business and all parties can be made.
When is the best time to retire? Farmers will always be farmers, but it may be time to transition to the next generation. If your business is ready to grow, then capitalise on the passion from that next generation. This does not mean that you stop being of value to your successor or imparting the knowledge you have gained over a lifetime. Your knowledge will always be valuable.
Succession planning may seem difficult but is essential for the future of your business. If you haven’t already started along this path then do so now, while the choice is yours. This may be the best thing you ever did for the continuing success of your business – your legacy.
MCI’s Advisory team can help you with all aspects of succession planning. We can help you identify where you are at in the process and develop a plan that is relevant for your farm business. We can provide assistance with advisory board structures. Our advice focus will be delivered with the aim of providing transparency and fairness for your family.
