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What is Succession Planning?

Succession planning is how you pass the management and ownership of the farm to the next generation in a tidy fashion.

There are four considerations here with equal importance:

  1. Maintaining good relations within the family
  2. Supporting the people who wish to remain on the land
  3. Supporting those who do not wish to stay on the land
  4. Ensuring the parents have a living fund for their retirement

List of Contents

I am not your legal or financial advisor. This is simply my opinion.

I strongly suggest that Succession Planning be done with the professional guidance of your accountant and solicitor. They have likely done it before and will produce a better result.

Keep it Formal​

Succession is important to all parties for a number of reasons. The common ones are security of all parties and career advancement. If a parent is not happy about passing control, then the heir needs to know this – they may wish to work toward their own property and business instead to avoid wasting their life’s work.

Keep discussions regarding succession formal with signed minutes.

If there are multiple children, involve them in the discussion. They may not wish to remain on the land, but, do have expectations of the final distribution.

Where possible use a third party to chair the meetings – possibly the family solicitor. The task of the chair is to ensure that all parties have a fair chance to express their opinion, wants and needs. Record the meetings and get all parties to agree them by signature.

Succession (and the will in general) is a topic that can become emotional which has a habit of modifying memory.

Revisit every couple of years -situations and people change over time.

The Stakeholders​

It is a complex exercise trying to match the needs and wants of the current owners who will need an income to retire on, the next generation who wish to stay and work the farm, the partner/spouse of the next generation staying on the land, the next generation and their spouse who may not wish to stay on the land but do feel that they have a future value claim on the assets.

The Risks​

Consider in your discussions the risks of ill health and death of any party. Discuss and record a contingency plan.

Integrated in this puzzle are the risks of  divorce and the will being challenged. Both can seriously reduce the remaining asset value.

To minimise the risk of the will being challenged, a living will can be used where the assets are passed to the chosen heir before death. The risk here is divorce of the heir.

To manage the risk of divorce, the real assets stay in the name of the parents. You can cover only one of the two risks.

In most cases, the land is the only real asset available and the earnings of the land can only provide for one family. It gets even more complex if the children grew up on the parcel of land and wish to remain on the land.

The best case here is to start early and using the income from the property, purchase a property for each of the interested parties. This obviously cannot be done late in the life of the parents.

Experience Running a Business​

Just to make it more interesting, are the parents are certain that the management skills of the younger generation are sufficient to provide a living from the land. They may choose to die on the land and give the children their chance after the will is read. This usually results in the farm being sold and the nett proceeds distributed.

A Possible Solution​

Consider the land as two parts, the business and the property. You may pass control of the management of the business in steps to the heir as an employee of the business. As they grow in skill and have earned their way they take on more responsibility.

Separately pass shareholding of the business to the heir in stages. In this case the business leases the land from the owner which provides the parents with an income. Once the whole business has been earned by growth in understanding, the land may then be bought by the heir in stages as the heir via the business now has a viable income.

To achieve this, the heir will need to start young. They need time to learn their trade under the guidance of the parent. Ideally, the training will start in the mid 20s so he or she has time to gain the experience needed.

Parental training covers the two components:

  1. Managing the land and production
  2. Business management.

I am not your legal or financial advisor. This is simply my opinion.

I strongly suggest that Succession Planning be done with the professional guidance of your accountant and solicitor. They have likely done it before and will produce a better result.

Other Factors​

Just to ensure that the process is never easy, enter the Department of Appropriating Other Peoples Money. Tax may need to be paid on gifts or capital gains. Pensions may have a capital value test.

Create a Transition Plan

Getting Started

First organise meetings of all affected parties and organise someone to take formal minutes.

All parties sign off on the minutes to agree their veracity. People have different memories because of their differing thoughts and desires. The minutes must include any agreements and disagreements as in “I am happy to do this” or “NO that is NOT for me”.

The whole exercise will need multiple meetings with thinking time between. Ensure that all stakeholders have their say regarding their feelings and desired future. The object of the exercise is to create a written agreement that will:

  1. Maintain good relations within the family
  2. Support the people who wish to remain on the land
  3. Support those who do not wish to stay on the land
  4. Ensure the current owners have a living fund for their retirement
  5. Provide sufficient time for the heir/s to learn their trade and become competent
  6. Provide sufficient time for other properties to be purchased and developed if more than one wishes to stay on the land

Communicate

Open and honest communication is key to the success of a transition.

All parties must be free to state their feelings, desires and life goals. Expect surprises because the younger generation may have plans, desires and goals that they have not verbalised because of fear of upsetting everybody. For example, an older child may wish an alternate career while a younger child would like to run the land but has not mentioned their desire because “it is the province of the first son”. A daughter may express an unexpected interest.

Now is the time for full disclosure of both the current situation and what plans exist.

Select candidate/s

If the property is small and time is short, there may not be enough time and income to support more than one family. Define and agree the transition agreement with sufficient time to act.

Create a vision and set goals

Define clearly WHEN you would like WHO to have done WHAT and what it looks like. This will clarify the intent and actions required to achieve your goals – so make them realistic.

Keep your goals SMART. This means:

  • Specific
  • Measurable
  • Attainable
  • Realistic
  • Time based

Whims and wishes are not goals as they lack quantification. For example “I want to be rich” is pretty meaningless when compared to “Within 5 years I will have accumulated $500,000 through growing premium vegetables for the restaurant market“.

Define your goals, break your goals into projects, and your projects into tasks. You now have a plan, which you can follow to achieve your goals.

Look at the Recent, Current and Projected Financials

Analyse the recent, current and projected financials to determine if your goals are achievable. Can they be achieved another way? You are now looking to see if the land can support more than one family.

What debt loading exists? – is it manageable and can it be reduced?

Build a Business Plan

Your goals will provide direction to your business plan. A business plan contains the following:

  • Elevator Pitch
  • Vision Statement
  • Mission Statement
  • Statement of Purpose
  • Business modelling canvas
  • Expansion of the sections of the business modelling canvas
  • Market Analysis
  • Risk Analysis

Determine and Provide the Training Required

The heir will likely need considered and defined training to make him or her business ready. This may mean formal study and a series of hands on workshops and courses.

The goal here is to ensure that there is sufficient knowledge and understanding to actively take on the management of the property and any investments – initially under guidance then solo.

Plan Retirement

The property owners will wish to retire from active work and management at some time. This will create a need for a passive income, maybe in the form of rental income from the property paid by the business under the management of the heir.

Risk Analysis

It is necessary to ascertain the risks to your plan and determine a mitigation strategy for each. Some of these could lead to premature forced liquidation of the assets.

The topics to start with are:

  • Incapacity of any party
  • Death of any party
  • Divorce
  • Disagreement
  • Economic crisis
  • Weather crisis

Transition

The transition of ownership and management between the current owner and the heir will take place in stages. It is ideal to pass the management and ownership in defined stages as each stage is earned by understanding and passed as a reward for achievement of goals.

Business Handover

Once the heir has achieved a proven level of understanding. pass management responsibility in stages backed by a shareholding of the business. This will enable the heir to increase their financial stability in proportion to their ability. The original owner still receives a dividend or salary from the business in proportion to their remaining shareholding.

Estate Handover

When the business is firmly in the hands of the heir, the process of passing the estate to the heir commences. As the ownership by the heir increases, the capital payments for the land provide support to the parent. These payments will be earned by the heir from the business – everyone has a fair income.

Laws and Taxes

Care and professional advice must be taken to avoid the government receiving the lion’s share of the transactions. Further, the government may reduce the pension payments to the owner due to the level of cash or other assets held. The transition must be structured to conserve value for all parties.

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I am not your legal or financial advisor. This is simply my opinion.

I strongly suggest that Succession Planning be done with the professional guidance of your accountant and solicitor. They have likely done it before and will produce a better result.

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