This is the second of a series of articles where we are looking at the Succession Planning process from the perspective of each of the major stakeholders: Mum and Dad, the On-Farm children and the Off-Farm children.
Through an understanding of the viewpoints, aspirations and concerns of each of the parties, the family will be better placed to achieve a positive outcome with their succession plan and be able to complete it within a reasonable timeframe.
In our last article we discussed the issues relating to Farm Succession from the perspective of the “Off-Farm” children. This month we will consider the interests of the “On- Farm” children who wish to go on and manage the farm into the next generation.
The most common comment we get from next generation looking to purchase the farm is:
“We would love to take over the farm from Mum and Dad but we don’t want to be burdened by too much debt”
Other concerns include:
“We have worked for many years for lower wages than our brothers/sisters have been able to earn off the farm. How will this be recognised?”
“We need to know what Mum and Dad’s intentions are. There must be some certainty about the future. We need to think about our financial security for the sake of our own children”
“I know Mum and Dad need some retirement money but I can’t write them out a big cheque and take over the debts!”
“I want to professionalise the business but Dad says preparing a Strategic Plan is a waste of time”
For many current owners, the idea of continuing the legacy is part of their dream. They want a graceful exit in the knowledge that the business is in good hands however they also need to establish a sound retirement or semi retirement income.
These seemingly potential conflicts can be resolved if we understand that Succession Planning does not have to be a one- off event. It can be a process that may take ten to fifteen years. In fact, the longer the transition period, the easier it is to establish a sound retirement plan for the current owners and a sound business plan for the future owners. Transition payments to purchase the business can be under a “Vendor Term” arrangement and made gradually thereby reducing the debt burden and easing the pressure on the future owners.
Similarly Management Succession i.e. the handing over of responsibilities for running the farm can also take place in a series of phases over time.
Even if the transition is going to take place over a number of years there are still a number of issues that will need to be discussed to establish a sound framework for the Plan:
- How will the Future Owners assume ownership of the business and over what timeframe?
- How is business equity to be paid for and how is it to be calculated?
- When the time arises, how should property be transferred and under what terms and conditions?
- How should stock, plant and equipment be dealt with?
- What financial and legal structures could be utilised in any future restructure of the business ownership and how should these structures be documented?
- How will equity issues be dealt with, in the unfortunate event of sickness or death of any of the parties?
- If we are dealing with a transition period over a number of years, what business transition issues can be dealt with now?
- Should ownership be based on active participation in the farm?
- Do the next generation have the skills and knowledge to manage the business?
- What rights, if any, do family members not working on the farm have in the day-to-day running of the business?
- Does the Business Transition Plan consider those family members wishing to return to the farm in the future? If so, under what conditions?
- Should there be a financial distribution to family members not working on the farm, and if so, in what form and over what term?
- What has already been provided to non-working family members e.g. university education and off-farm career path?
If a “Vendor Term” arrangement has been established between the Current and Future Owners, it is vital that these payments be maintained by the Future Owners as they represent the ongoing retirement savings for Mum and Dad. Therefore, all parties will need to ensure the ongoing business is secure, potential risks have been identified and mitigated and that they are all comfortable with what is being proposed.
Key Issues to be addressed in relation to the future direction of the business include:
- Where is the business now?
- Where do the Future Owners want it to be?
- How are they going to get from here to there?
- Are their financial and legal structures tax effective?
- Do the financial and legal structures minimise risk?
- Have all the potential business risks and liabilities been addressed?
- Are the finance facilities cost effective and can the debt levels be managed?
- Are all parties comfortable they can meet their obligations under the terms and conditions of the proposed business and property transfer?
If there is a real commitment from the next generation to take over the farm at some stage in the future then Succession Planning can commence, even if the Current Owners are not ready to relinquish their existing ownership and responsibilities.
The sooner you act the better the plan.
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 email@example.com or call 1800 708 495.