Want Your Farming Business to Continue?

Eamonn Lanagan, Succession Planning

Special feature article by Eamonn Lanagan

as featured in the Farm Weekly issue 18 March 2021

“G’day Brendan” says Scott the accountant to the second-generation farmer from Narembeen.

“So Brendan, your father indicated you’re wanting us to prepare a succession plan?”

Brendan, “Yeah, I’m wanting to get the ball rolling, I’m 45, been on the farm for 15 years and the kids are 12 and 15, and I’m starting to see the eldest has an interest in farming, so I want to make sure things are setup for all of us”.

Scott responds, “Well this is refreshing, I have been suggesting it’s something to tackle for a while now… you know this is a process…. not a single action that happens overnight?”

Experience shows our industry “it’s never too late to start planning, and rarely too early either”.

Let’s dig around and consider why?

Hallmark characteristics of a good family business have always been communication and planning. Inclusive, practical, and non emotion driven discussions by the family around longer term planning is important for a successful business, whether a machinery dealership, or broadacre grower.

Undertaking a planning process in a formalised manner including all parties, some which are often forgotten, including spouses, children, lawyers, bankers, and even consultants, has enormous benefits.

Generational transition always starts with the transfer of management responsibility, then draw of profits (subject to family business goals such as debt reduction, expansion, etc), and finally asset transfer. Typically, any business including a farming business, finds itself following a business life cycle.

Business Life Cycle, Succession Planning

Being at different stages in this life cycle shouldn’t preclude practical planning at any point, after all succession is a process that evolves over time.

Think how your farming business fits into an example of a transition process and where it might be in respect of the business life cycle.

2 to 6 years        Management and responsibility.

3 to 10 years      Profits – trading structure control.

10 to 25 years    Existing assets (not new acquisitions).

Industry literature indicates the following with regards to ages for these transitions in a farming business.

22 to 28 years of age    Management and responsibility.

27 to 37 years of age    Profits – trading structure control.

35 to 55 years of age    Existing assets (not new acquisitions).

We can see this process spans over many years and acknowledge all businesses are different, not forgetting its people too. Despite this, often the question is raised “When is a farming business ready for transferring assets?” There is no right or wrong answer, however there could be some financial indicators relevant to you. An example of these indicators for a grower like Brendan to work towards could be.

Guidelines – are you ready?

Primary Indicators

Guideline Values

Accounting Profit (3 Yrs)

Greater than $90,000 / family

Equity Growth (3 Yrs)

Greater than $170,000 / family

Equity % (3 Yrs)

Greater than 80%

Return on Capital (3 Yrs based on Accounting EBIT)

Greater than 5%

  

Secondary Indicators

Guideline Values

Finance (Interest & Land rent) as % of Income

7 to 12%

Livestock Value to Livestock Income

1.5 to 1 ratio

Machinery Value to Cropping Income

1 to 1 ratio

Income per Labour Unit

$300k - $400k/2,000 hrs

If you take a look at your own farm business. Are you ready? If not, what plans are in place to get there? Start planning early and talk to a professional with the right attitude and skills, like us.

Next Step

To discuss this article further, we encourage you to contact Eamonn Lanagan on (08) 6274 6400, or your Byfields accountant.

The sooner you start planning, the better the outcome!

If you are interested in the services we have to offer or simply want a second opinion regarding advice you have already sort, please don’t hesitate to get in contact with us as we are more than happy to help.

Call to find out more:

Perth 6274 6400          Merredin 9041 6100

Narrogin 9853 9300    Esperance 9071 2511

Northam, York, Beverley 9621 3200

 

Disclaimer: This content provides general information only, current at the time of production. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice before acting on any material.

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