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Having worked with numerous clients on succession planning throughout the years, I have seen firsthand the reluctance for farmers to actively work on on this important issue within their farm businesses.
This reluctance may actually be a lack of understanding as to what succession planning really means to farmers. Depending on the farm and family situation, succession planning can be thought of in two different ways. First, there is the situation where the farm is being sold to someone other than family. In this situation, there is no real succession. The other situation is where the farm is being transferred within the family, to the next generation. This is the one that tends to cause farmers the most grief.
Consider this example from a real-life, typical farm family. The family in question owns a relatively large farm that is progressive, well-managed and successful. The farm is incorporated with Mom and Dad as the common shareholders. Beyond the parents, they have a son and two younger daughters, one of whom is in post secondary school and the other in grade 11. The son wants to farm and has completed post secondary education. The farm has expanded recently, acquiring additional land, in anticipation of the son’s return. The farm generates good profit from year to year, is fairly leveraged and carries a considerable debt load.
Mom and Dad decide they need to get their ‘succession plan’ in place. They start by doing some research; talking to their accountant, their lawyer and an investment advisor. They collect a lot of great information and develop a good understanding of the tax, legal and investment issues they need to address.
But they still don’t feel comfortable with where things are at. And herein lies the problem and where ‘succession planning’ is more complex for farm families. Certainly, the tax and legal issues need to be resolved in a manner most suitable to the family. But from a family and farm perspective, the single most important element is the transfer of ownership and management. And this is not an event, but a process that should be started years and years in advance. A process that never actually ends. When a farm is transitioned to the next generation, the process begins all over again.
With the farm family example given above, the family was encouraged to think of their situation in terms of a long-term strategy. Rather than working on a ‘succession’ plan, they began working on a plan that would ultimately result in the farm being ‘transitioned’ to the next generation.
Here are some of the key steps the family worked through in planning for the transition to the next generation:
The family spent two or three meetings with all family members discussing the current state of the farm and what it might look like in five or ten years. They looked at the financial health of the business, the actual business they were in and discussed different, potential options. In the end, they collectively created a vision for what they wanted the farm to be in the future, including a transition of ownership and management to the next generation.
As part of the planning process, the family spent two meetings looking at four important areas: their strengths (both personal and business), their weaknesses, opportunities for the business and potential threats. This information is invaluable when the time comes to put plans into action.
All farms, in fact all businesses, have issues that need to be identified and addressed. Failing to do so will significantly and negatively impact successful outcomes. As part of their planning process, the family recognized that over the next five years, the key issues they needed to address to be successful were to improve financial performance and to effectively transition the ownership and management of the farm.
One of the traps that many families fall into when it comes to transition planning is getting caught up in the urgency of day-to-day operations. Establishing and monitoring some key indicators helps to keep plans on track. Without setting indicators or targets, it is difficult to measure progress and success. The family set down some key financial indicators that they wanted to use as a way to gauge progress. As well, they established some non-financial indicators to test individual commitments and family harmony.
It took three or four more meetings for the family to work through the details of the action items that were going to be required to address the key issues and to ensure nothing was overlooked. Detail is critically important as missed action items can potentially have huge implications.
It is in this area that the family applied what they had learned from their accountant, lawyer and investment advisor. They listed in detail and in order the steps each of their professional advisors had told them were required to be completed as part of the transition process.
The outcome? The family finished working through the planning process and are now implementing their plan. They will tell you the process they followed seemed to make better sense after going through the planning sessions. Ultimately the succession planning steps advised by their accountant, lawyer and investment consultant mirror a strategic planning process followed by businesses, large and small, all over the world. And herein lies the problem. Transition planning is really just part of a longer-term or strategic farm plan that includes a transition of ownership and management to the next generation. It should not be treated as an event or ‘one-off’ plan, but instead, address the immediate transition while also considering the long-term future of the farm.
To learn more, contact Jonathan Small, PAg, Business Advisor, Farm Management, at 403.346.8878 or [email protected], or your local MNP Agriculture Business Advisor.
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