Succession – A long and at times a bumpy road.

Every time I see or hear a statement that succession is the biggest issue facing farmers I cuss with annoyance. Whilst it is true that the process has become more challenging with the rapid hike in asset prices for families this statement only points to the far greater issue – a lack of profit in the business and planning to allow succession to happen.

The process of Succession isn’t easy, it is long (and needs to be), it involves participants being able to say things that they need to say, which may not always be what the family wants to hear and can be frustrating as stake holders work towards a final plan.

The real things that underpin successful succession are:

1.      A long-term profitable business – this is essential to allow for the capacity to enable at least one of the next generation to carry-on whilst still taking care of their siblings fairly (more on fairness later) Profitable businesses need to start from day 1.

2.      Parents - knowing what they want.

-          Retirement plan – Often, particularly the males, have no plan for retirement. It’s important to think through things like ‘where am I going to live’, ‘what will I be doing with my time’ (this can still involve work in the business), and ‘how much do I need to be financially independent’.

-          Prepared to give up control of farm assets. This is difficult particularly when you have spent a lifetime of hard work and trials to build the business up and again the importance of time to work through this cannot be underestimated.  However, it is equally difficult for the next generation to be getting out of bed each day thinking that everything they do is just making it harder for them to get their siblings out of the business fairly.

3.      Management succession - successful businesses are not a fluke, they are founded on good decision making and management practices. The transition of management is one of the most important steps. It involves developing good processes which allow the next generation to experience “How we do business around here”. This is about imparting the decision making and business admin concepts to the next generation and is an important step to avoid arguments and frustrations between generations.

4.      Fairness - this is getting more challenging given the large increase in assets prices. It is not likely that monetarily the wealth transfer will be even if you are looking to transfer the farming assets to only one or two family members with other siblings.  Non farming siblings generally get this and often it is not as big a deal as parents often think. That said, the profitable business should include provision for non-returning siblings off farm or a preparedness to sell assets to make provision. The other tool in the chest is access to cash early for non-farming siblings to use to pay out mortgages etc. to improve their financial position.  The value of money now compared to receiving it in 20 years time is very significant.

5.      Advice – the pathways to transfer assets have got very complex. The small business GST concessions are only available for turnover under $2m which isn’t much if you have dedicated your life as most of you have to building a profitable business.  My experience is that this is where the accountant becomes very important. It often pays to get a second look at things even if you have a great relationship with your existing accountant. Something overlooked could cost millions.

6.      Time – there is the word again. You need time and it’s best that succession starts on the first day.  Time is required for everyone to work through the process and get comfortable. It can be frustrating for some who have reached a position but is necessary for all to get there.

If you would like to discuss your succession plan, please call us.