Next Rural has had the opportunity to work with many farming families and assist them through the journey of business transition and succession to create a new beginning for current and future generations. This month, we present to you a case study of one such family. Of course, succession means different things to different families. Each participant faces their own particular issues surrounding their business, their family and their future. Your circumstances may be quite different to those shown, however, it may encourage you to think about the various options you may have in dealing with this complex and challenging issue.
Bill and Julie run a mixed farming business with an estimated land value of $2.3m. They have plant and equipment worth $300,000 and stock valued at $300,000. They have $320,000 in their self managed superannuation fund and $100,000 in a Business Cash Management account. The business has debts of approximately $140,000. They also own a house and land in the local town valued at $350,000. They have a son and a daughter who work the farm (James and Claire) and one son who works off- farm (Joseph).
Bill and Julie have indicated they wish to exit the business as soon as practicable and they are willing to transfer management of the business, ownership of the farming properties and all other business assets to James and Claire. In addition, they wish to ensure they have established a sound retirement or semi-retirement income for themselves. They also want the Plan to be fair to Joseph.
James and Claire are seeking certainty and security for the future. This includes, ensuring the proposed transition does not burden them with too much debt and their ongoing financial obligations to Mum and Dad are manageable. At the same time, they wish to recognise and reward their parents’ significant contribution over many years. The whole family wants a smooth transition without creating tensions and acrimony.
Key issues to be addressed in relation to the business transition include;
- How will the business be transferred and over what timeframe?
- How is equity to be paid for?
- How should ownership be transferred to James and Claire and under what terms and conditions?
- What financial and legal structures should be utilised to transfer the business/ownership and how should these structures be documented?
- How will current and future banking arrangements be managed?
- How will equity issues be dealt with, in the unfortunate event of sickness or death of any of the parties?
Proposed Purchase Price
The proposed purchase price to be paid by James and Claire for the business and property is $1.6 m. This is made up of the following estimates:
Business & Land value- $2.3 m. The agreed transfer price to James and Claire is set @50% - $1.150 m
Plant & equipment - $300,000
Less debt position ($140,000)
Total transfer price- $1,610,000
Term of the Transition
It has been agreed that Bill and Julie are prepared to “vendor finance” the transaction to James and Claire over a period of time with an initial down payment of 10% of the purchase price and the balance paid by instalments of approximately $75,000 per annum for 20 years.
James and Claire are to consider a structure which separates their land holdings from their day-to-day operations. In this way, the land could be held in a Family Trust and the operations conducted through a separate entity (partnership, sole trader, company or other trust). These accounting and legal issues were attended to in consultation with their Accountant and Solicitor.
As part of this transaction process, Bill and Julie are to be released from any ongoing bank obligations and personal guarantees. Accordingly, James and Claire will assume the bank debt. A total finance review will also be undertaken for James and Claire.
Retirement and Estate Planning
In both personal and business terms, planning for the retirement of Bill and Julie is an essential component of their Business Transition Plan. Not only does this enable a smooth transition to James and Claire, but it can also help to minimise tax liabilities.
They are to consider the use of a testamentary trust. A testamentary trust is a trust created upon death and can only be formed if there is a specific provision in Bill and Julie’s Will. It provides for assets, upon Bill and Julie’s death, to be held in trust for the benefit of their children.
Bill and Julie’s financial circumstances will be reviewed. This will examine, amongst other issues, the capacity of current off-farm assets and the transition payments to fund retirement needs and meet their financial and lifestyle goals and objectives.
Off -Farm Children
Managing the expectations between different family members (those actively involved and those not involved in the business), is essential to meet their needs and at the same time, provide for the future success of the business. Joseph has agreed that he will become a beneficiary and member of the self managed fund and Bill and Julie will make non deductible contributions on his behalf of $10,000 per annum for 15 years. He will also be nominated for a binding death benefit of $150,000. In addition Bill and Julie will contribute $5000 per year into an education bond for his two preschool aged children for a period of 10 years.
The Future of the Business
James and Claire will need to ensure the ongoing business is secured, potential risks have been identified and mitigated and they are comfortable they can work together in the future. They will institute and fund through appropriate insurance a buy/sell agreement to determine any future buy/sell arrangements.
The Heads of Agreement
Finally, a Heads of Agreement will be entered into by all stakeholders to document the above arrangements and to alleviate any confusion in regard to the intentions and commitments of all parties.
Next Rural have put together a simple yet comprehensive guide to business transition and succession planning. To obtain a copy of this guide FREE, and with no obligation, simply email Next Rural on firstname.lastname@example.org or call 1800 708 495.