The Early Stages Of Succession Planning

Article by Nanda Aung | 

Succession planning has become much more personal and relationship-based than the traditional understanding of the transfer of assets.

With many futures on the line, we spoke to Jack Hayes, a Manager within the Agribusiness division at Byfields Business Advisers, to get his advice on succession.

In this blog, we will cover the advice from Jack regarding good communication, planning, and ideally, a long lead-in time to maximise the chance of successful transition.

Open Up Lines Of Communication 

Succession conversations can be challenging, but there are no advantages in waiting until the end. Having open and honest communication is vital. It will give everyone a chance to voice their concerns and allow the whole family to be on the same page.

The financial aspect of the division of assets is one step in succession planning, but it's not the first step to consider. According to Jack, the initial discussion should be to ask direct questions such as: 

  • Who wants to return to the farm?

  • Do they see a future for themselves working on the family farm? 

  • Do they have the necessary skills and experience? 

  • Understand the expectations of both the older and the current generation. 

"These blunt questions need to be asked to see what page everyone is on. It's the first step before you even start looking at numbers or even thinking how you are going to fund for your parents." 

Outline Roles & Responsibilities

After high school, it is normal for children to continue their higher education, complete a trade, or work on a neighbour's farm. Doing so provides an opportunity to explore different career paths and learn both technical and life skills. If they decide to return, these skills, knowledge, and experiences can positively impact the farm. 

"We've seen some families with children where they are both back on the farm, and one is an ex agronomist, and the other has a business ag degree – this business is an outperformer….you can probably understand why. And there appears to be a trend with most growers; children are returning just before they turn 30." 

However, returning to the farm with different industry experiences can generate challenges. The younger generations might have different expectations of their responsibilities to their parents.

"Younger generations are keen to expand, grow the business and whatnot. But they also need to see it from the older generation's point of view - that they've been through an 18% interest rates period, been through some horrific years, so that could be the reason why they are a bit more conservative when it comes to change." 

It's critical to have open and honest communication from the beginning. No particular person is right or wrong, but discussions are essential in establishing ground rules between the generations. 

Set Clear Salary Expectations

It's normal for those returning to the farm to expect a salary. If you can't match the salary from their previous job, clearly communicate how much they can expect, including non-monetary benefits.

For example, they might receive $60,000 a year. However, additional costs, such as food, accommodation, vehicle, will be paid for as part of the farm business. With these expenses are factored in, the overall salary can be around $90,000 or thereabouts.

"If there is a shortfall of "package" to a commercial farm manager wage, then this can be documented or at least acknowledged as "sweat equity" for when the time comes for succession, sale or exist."

Sweat equity is a difficult concept to discuss, and it's recommended to record what was said and reviewed by the family so everyone is aware.

"It is best to have these discussions early and often; don't put them off. You may be surprised by how easy future financial decisions become when every family member involved in the business is aware of what is going on and why."

Introduce The Financial Aspect

"When the younger generations return to the farm, their initial focus is on the farming side of the business - agronomy, mechanical, livestock management etc." 

But understanding the financial aspect is equally important. Limited involvement and exposure in the financial space is the most considerable risk any business will face. 

Financial literacy is not something you can teach overnight. It takes years of experience, even for those with a business degree. 

Eventually, the younger generation will take over the books. Parents must introduce them to farm finance from the very beginning. They may not be controlling the chequebook straight away, but attending budget meetings/accounting meetings is a good start. 

"I really encourage the children to attend these meetings, be an observer and actively ask questions to try and actually understand the meaning behind the figures. It's just so crucial to get into it nice and early." 

Clear Expectations For Off-Farm Children 

It's critical to discuss the expectations of both on-farm and off-farm children early. Depending on the farm's financial position, it's highly encouraged to build off-farm assets dedicated to off-farm children's long-term welfare. 

"Land values are consistently rising, leading to increasing on-farm assets value. With this in mind, we need to accept that it's probably not going to be equal for that on-farm child and off-farm child, unfortunately. For example, if you have $10 to $15 million upwards of farming assets, it's near impossible to build that up off-farm." 

Jack's last piece of advice is for both the younger and older generations to appreciate each other's experiences, knowledge, and enthusiasm.

While the technical and legal part is daunting and complex, it's usually more manageable than the emotional aspect. However, your accountant/consultant is there to help.

"Our role is almost acting as a mediator in the situation and having an open discussion with everyone, giving everyone their chance to speak and everyone else to hear them out."

Need A Hand

Start the conversation with your family sooner rather than later, and contact your local Byfields Business Adviser today. 

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.

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