Nov 2023
Farm succession – keys to success and an alternative to the norm.
Cameron Weeks
Nov 2023
Farm succession – keys to success and an alternative to the norm.

“Legal instruments such as wills and powers of attorney are important but the successful transfer of a lifetime’s wealth while preserving family relationships requires more careful planning than that.” Richard Milroy, Private Wealth Network, Financial Review, Oct 2023.

Back in the February edition of Landline I wrote about the substantial recent growth in the value of farm assets / businesses and the resulting need for families to adjust their thinking around the matters of farm succession and estate planning.

I think the quote highlights perfectly the challenge now facing many of you “…. successful transfer of a lifetime’s wealth while preserving family relationships….”. If the $15M farm and business goes to the farmer and the two non-farming siblings share the $4M of off farm assets will the family relationships be preserved?

That is the question only you can answer but you do have options that perhaps have not been considered. Here I will explore one option and touch on another that I will explore further in a subsequent article.
Firstly, though let me refer to the below chart also from the same Financial Review article.

 

 

Note the absolute importance of communication and trust within the family – get this wrong and no matter how you go about this challenging task you will struggle to preserve family relationships and family wealth!

 

What is successful farm succession (in my humble view)?

  1. Family relationships are preserved.
  2. The farm business continues.
  3. Ideally the distribution of assets is equitable(ish).

 

Who are the groups of people typically affected in farm succession and what is the broad goal for each?

  1. Mum and Dad – a well-funded and secure retirement.
  2. The farmer(s) – leave them a viable farm business.
  3. The non-farmer(s) – treat them fairly and ideally equitably.

 

Key Success Factors.

  1. Parents are well informed. For example:
    • How many families could the existing farm support?
    • What is the impact of allowing children to come back to the farm on a) their retirement and b) ability to cater for the non-farming children.
  2. An experienced / skilled third party facilitates the process.
  3. Professionals (facilitator, consultant, accountant, solicitor, etc) work collaboratively.
  4. Farming children are not ‘entitled’. They need to understand that they are privileged to be offered or allowed the opportunity to ‘go farming’ by mum and dad.
  5. Non-farming children are not entitled either and they understand the nuances of farming.
  6. Farmers come back to the farm because they are passionate about farming not to get their hands on equity.
  7. Parents must lead.
  8. Children working on the farm are well paid.
  9. Equity building contributions are recognized.
  10. No-one is or feels misled (this is critical!).

 

Underlying concept – splitting the land from the trading entity.

  • It is essential to split the land from the trading entity.
  • ‘Trading’ is the business of farming and making money. Yes, to trade one needs access to land but ‘owning’ is the business of capital gains with a relevant income stream.
  • Traditionally farmers have seen them as one and the same but clearly, they are not.

 

How to achieve a more equitable outcome?

 

Alternative – non-farmers get control of a portion of farmland which is then leased back to the farmer(s).

 

Key assumptions and principles.

  • The decision has been made not to sell land to better balance the division of assets. This allows for the retention of scale for the farming operation.
  • The farmer(s) gets the trading entity at whatever it is worth.
  • Land is ‘split out’ to family members and then leased back to the farmer(s).
  • The proportion of farmland allocated to the farmer(s) would depend on the value of off-farm assets available. It is of course ideal if more farmlands can be allocated to the farmer.
  • The proportion of farmland allocated to non-farmers would also depend on whether the owners (mum and dad) are striving for ‘equal’ distribution of assets or a ‘more equal’ distribution.
  • Long term leases on the farmland which goes to the non-farmers back to the farmer(s).
  • For the non-farmers the benefit of this option is that they receive a growth asset with the associated income stream. For many they also receive an asset that they feel some attachment to having been raised on the farm.
  • To have the above successfully implemented it is important to:
    • Determine whether you (parents) are going to offer all children equal opportunity to ‘come back to the farm’.
    • Develop rules around what a child needs to do to be eligible to come back to the farm (i.e., education, external work experience).
    • Develop rules around when a commitment to stay and become a career farmer is required (i.e., by age 30).
    • Communicate this effectively to children which really needs to start happening, in an age appropriate way, in the later high school years.

 

Key leasing principles.

  • The lease needs to be long term (15+ years??). This is not common in farming, but long-term leases are in commercial property. They also need to be formally documented and address matters such as:
    • Rent – commercial or because family at a discount of some sort?
    • Rent indexing included.
    • Rent reviews built in.
    • Options around buying / selling.
  • Could provide the farmer with the option to buy at any time at market value?
  • Alternatively, and likely as a minimum, include a first right of refusal clause.
  • Note – if the owner decides to sell it will likely be of reduced value on the open market as it would have a long-term lease agreement attached to it.

 

Impact on the ‘farmer(s)’.

  • The cost of annual lease payments reduces profitability.
  • Land not in the farmer’s control reduces borrowing capacity.
  • The farm has ultimately still been divided even if access is secured for the medium-long term.

 

Timing and execution of the plan.

Of course, this will vary across families due to circumstances, ownership structures, and family specifics however it is worth pointing out that the plan can be discussed, agreed, and at least partially  implemented even if actual execution occurs over a long period of time including via wills.
This is a whole subject in itself!

 

How to document the plan?

Once agreement is reached on the family’s intention it is a good idea to document so as to avoid confusion in the future. How?

  • A memorandum of understanding (MOU) is the ideal initial family agreement as it is not legally binding.
  • This is important as there is no doubt that whilst the objective of the process needs to remain fixed, the detail would be fluid depending on children’s intentions, farm scale, off-farm asset growth, etc.
  • Once there is certainty around everyone’s intentions this should be progressed to a ‘Deed of Family Arrangement’.

 

A word of warning!
Finally, if you are a parent reading this and you have had son(s) or daughter(s) back on the farm for quite a long period of time and on the premise that ‘some day this will be yours’ I suggest you tread carefully if this article has shifted your thinking. Remember the key and I believe most critical success factor – ‘no one is or feels misled’!!

 

A ‘Family Office’?
A second option, especially for particularly large family businesses is the setting up of a so-called family office structure. That being where all children will share equally with regards ownership via the effective corporatization of the family business with those who choose to work in the business rewarded according to contributions.

 

This option does come with its own complexities and tradeoffs of which I will attempt to explore later.

 

Good luck, tread carefully, but do move forwards.

Author

Your journey to success starts here

Grow your farming knowledge and take your agricultural endeavours to new heights with Planfarm. Join our programs and discover a world of possibilities in farming and agronomy.