Farm Succession – Who makes the decisions?

 

One of the most challenging aspects of farm succession to the next generation is the process of management transition and for many businesses the changing nature of decision making can be the most confronting of all issues. As the next generation develop their skills and gain experience they are usually keen to take a greater role in making decisions that affect the future of the business. This can be difficult if there is only one child entering the business, however, if more than one is involved then the business is likely to undergo a significant transformation if it is to stay in one piece.

The key reason for this is that the decision making process will often be transitioning from a single person, for instance, the father, to multiple people, the children. Once this process is extended beyond a single person, the dynamics of decision making changes exponentially with the number of people involved, and this may be totally foreign to them, particularly the father.

When generational change is underway formal scheduled management meetings using a third party facilitator can be a very good idea, at least initially, to get farming business into the habit of making decisions as a management team rather than as individuals. This will also allow the father to incorporate the sons’ and/ or daughters’ contribution whilst still having his own input into the decision making process until he gradually bows out.

Historically, an authoritarian style may have predominated where the decision ultimately rested in the hands of one person. This management style was probably fine when one person could dictate the entire process of decision-making and have the final authority on the outcome. As the next generation becomes more involved in the business, this style tends to have more disadvantages than advantages because the people whose opinions are disregarded might have negative feelings about the process.

As the business changes it is important to formalise the communication links. This may involve regular “business only” meetings with a structured agenda, minutes and action points.

When it comes to decision making, brainstorming can be a good means of evaluating various options and then prioritising them. This is a popular method owing to the complete creative freedom it offers to all the participants. There can be a facilitator to facilitate the entire discussion just to ensure that the people don't digress. The facilitator can merely help to start off the conversation, provide subtle hints and nudges when the participants get stuck and thus help to make effective and creative decisions. The positive aspect of this method is that it values the opinion of every individual member and the final decision is reached by a consensus. Where simple brainstorming doesn’t work, a “Voting Based Method” should be used. A voting system allows every participant to cast his/her vote for the option that he/she thinks is the best. There are two basic methods. One option is where a decision that gathers the maximum number of votes is selected. This method however does not value the individual opinion of each and every participant in the group. An alternative is to provide a right of veto. With this method, a decision is not passed unless all agree. This can be cumbersome for day to day decision making, so you may wish to use both methods and select which type of decisions apply to each. For instance, major capital expenditure may require the veto system but operational decisions can be made with a simple majority.

A group decision process gains greater commitment from all involved since everyone has his/her share in the decision-making process. It imbibes a strong sense of team spirit amongst the group members and helps the participants to think together in terms of the future direction of the business.

James Benson is an Executive Director of Next Rural.

Next Rural specialises in business transition and succession planning

Next Rural have put together a simple yet comprehensive guide to business transition and succession planning. To obtain a copy of this FREE guide, with no obligations, email Next Rural at info@ nextrural.com.au or Call 1800 708 495.

Beware the ‘Claytons’ Succession Plan

 

Succession planning can be a challenging process, however, if properly addressed, can result in long term benefits, confidence in the future and family stability for all concerned.

Unfortunately the dynamics of the situation may result in the family preferring to deal with the “easier” issues and putting off the “harder “ones to a day that never comes.

The circumstances may be something like this:

Dad is being pressured by the on farm children to undertake the preparation of a Succession Plan.

Mum is concerned that there are not enough off farm assets and is reluctant to let go of the land to the on farm children. She is also be concerned about equality for the off farm children.

The on farm children are looking for some certainty about their future.

The following simple solution may not be the best:

“Kids, your Mum and I have been to see the solicitor and this is what we have come up with. I’ll bring you into the trust as joint trustees and we will start making distributions to you. We will transfer some of the stock into your names but you will have to start securing some of the debt. As for the transfer of the land and how to deal with your brother and sister, we can deal with that down the track.”

In this scenario it may have been better to have not started the conversation. There are too many unknowns:

  • What would happen if the parents pass away and the land has to be dealt with through the estate? Is the Will robust enough to secure the position of the on farm children?
  • Have the parents really made the position of the on farm children more secure; or, in fact, is their position more onerous?
  • What happens in the event of a divorce of one of the on farm children, what is the extent of the entitlements of their spouse? What is the nature of the promises made by Mum and Dad?
  • Who are Appointors of the trust? Who is really in control? What happens in the event of the death of one or more of the Appointors?
  • How are Mum and Dad going to secure their retirement funds?
  • Are the off and on farm children being left in a position of future conflict?
  • What happens if Mum and Dad have a change of heart at some point in the future, for instance, if there was a dispute with their daughter or son- in law?
  • What is going to happen to the accommodation needs of family members as circumstances change?
  • What expenses will continue to be met by the farm?

Succession plans are not a one off event; they are a transition over time. The next generation do not need to receive the property or business up front. It may take many years. What is important, however, is that there is a framework to deal with the intended changes.

Documented future Options to secure the purchase for an agreed consideration build confidence and clarity for the road ahead. The time frame and terms and conditions can be determined and prearranged so everyone knows where they stand.

A Deed of Family Arrangement can detail the many aspects that need to be discussed and resolved. Once executed all family members will know where they stand.

A sound business transition and Succession Plan has many components to it, including, financial, legal and accounting matters that must reflect the needs and aspirations of all participants. There are no shortcuts. All key matters should be dealt with. Establish a clear framework and a blueprint for the future.

Don’t put off the issues that are challenging. Identify, discuss and resolve them while you are still in a position of control. You do not want your legacy to be clouded by conflict and disagreement.

Businesses need confidence to grow and prosper. Ensure that your planning leaves no stone unturned. Seek the advice of a specialist who knows what needs to be addressed and how you can best create positive and sustainable outcomes.

Is it time to review your estate plan?

 

An important component of succession planning is the maintenance of a sound retirement and estate plan.

A good estate plan, like any plan, must be reviewed on a regular basis and kept current as circumstances change.

It may well be that your estate plan is still appropriate for your circumstances; however, it is in your best interests to review your estate planning documents to make sure that they still look after you and your family in the years to come. Documents, in addition to your Will, that need to be considered would include powers of attorney, superannuation death benefit nominations and advanced health directives.

In order to focus and prompt your thoughts onyour estate plan, you might want to consider the following issues:

Changes in circumstances in your life: Has there been any change in your family structure since you last designed your estate plan? Has there been either an acceleration or diminution in your wealth which will make changes to your Will necessary? Or has life simply moved along a little, shifting your circumstances from when last you wrote your Will? Are the people you named as executors in your Will, still the people you want to administer your estate if you died?

Asset protection: Is your business wealth legally separated from your personal wealth? Do you have appropriate separation of holding entities and trading entities in your business structure to protect your assets against unforeseen circumstances?

Superannuation: While you control your superannuation, technically it is owned by the super fund until such time that it is paid through your nomination at retirement or death. Do you have appropriate nominations in place? Have you considered whether they might need to be binding or non-binding upon the trustee of your super fund (for Self-managed super Funds only)? Have any of these nominations lapsed because they were only valid for 3 years?

Family Trusts: The Appointer of your family trust is the person who hires and fires the trustee, and is the ultimate controller of the trust. Who will this be after you die, and have you documented them as your successor?

The following is a practical estate planning review checklist. If you answer yes to one or more of the questions on this list your estate plan may need reviewing

  • Is it more than 3 years since you signed your Will?
  • Have there been any major changes in the family structure since you last undertook an estate plan? For example, have there been any relationship breakdowns, new relationships or new children?
  • Are the executors nominated in the Will, still who you want to administer the estate?
  • Is there any person in the Will who you made specific provision for who no longer needs such special attention? Alternatively, is there anyone in your family who you now feel needs extra attention in your Will?
  • Have you decided who will control your family trust and self-managed superannuation fund if you die? How will your successor be appointed? There are strict procedures for the appointment of successor controllers of trusts and super funds.
  • Have you nominated who you want to receive your superannuation if you die? Has that nomination lapsed? Many nominations lapse after 3 years.
  • If you have a Self-managed superannuation Fund, has the deed been updated with all the legislative changes?
  • Are there any asset protection considerations for any of your beneficiaries under your Will? For example, if a son or daughter is at risk of divorce or separation, or becoming bankrupt, you may not wish them to receive personally, a large part of your estate. Instead, it might be appropriate that a trust be established for that child.
  • Has your life become more complicated so that your previous Will no longer adequately expresses your wishes?

 

 

James Benson is an executive director of Next Rural. 

Next Rural specialises in business transition and succession planning. 

Next Rural have put together a simple yet comprehensive guide to business transition and succession planning. To obtain a copy of the guide for free and with no obligation, email Next Rural on info@ nextrural.com.au or call 1800 708 495