A farm management specialist says succession planning must be emotional but it also requires a formal process
Satisfying all the members of the family tree during a farm transition will take an emotional investment by the farm owners, but it will also take discerning decision-making that requires formal planning, says Bob Tosh.
“You’re not going to go through any kind of intergenerational transition without actually getting emotional about it. And if you don’t want to get emotional about it, chances are you’re not going to be discerning,” said Tosh.
Even the decision to retire isn’t as clear as some people think, he said.
“The three biggest lies in farming are — one day all of this will be yours, one day I’m going to retire and don’t worry about your brothers and sisters,” said Tosh, noting that male farmers often delay the decision to retire well past original intentions.
Speaking at CropSphere in Sask-atoon last month, the farm management consultant at MNP’s Farm Management Consulting Group said formalizing a process for farm transition will help families deal with the “fair versus equal” dilemma.
The owners of a long-term farm have likely seen their operation grow in value over many years — in many cases with a valuation in the millions of dollars. But the transition must address those who want to farm and those who have not farmed and are not likely to be involved in the business, said Tosh.
That forces farm owners to address the “classic challenge of fair versus equal.”
“If you’re going to look at your non-farming kids and say you’re not getting any of the farm assets, we’re going to split the life insurance and the cottage at the lake to you and that amounts to $500,000, meanwhile your brothers are getting $10 million or $20 million (in farm assets) and everyone says it doesn’t matter because it’s land and you’ve got to farm and it doesn’t really count because it’s not cash — I would suggest good luck with that conversation.
“But it’s yours and you do what you like with it. If you decide that farming assets go to farming children, that is your choice.
“Fair versus equal aren’t the same thing.”
Tosh advised farm owners to ensure a fair process, but “don’t focus on the outcome, focus on the process.”
A fair process is “opening up the conversation so that they can have a voice, so they can express what their thoughts are, so that you can make a decision that is informed and you are making a decision using … discerning judgment.”
He advised farm owners looking at transition to consider the operation in three distinct circles: family, ownership and the farm business.
“Working on the farm or managing the farm … is different from owning the assets and that is different from being a family member,” Tosh said. “When we view the farm business we tend to stack these circles on top of each other. What I’m trying to do is get you to pull them apart so you’re thinking slightly differently for decisions that you need to make for each circle.”
Ownership tends to fall under three categories, said Tosh: controlling ownership, sibling partnership and cousin consortium.
There are typically a lot of sibling partnerships in agriculture, a mechanism that is “reasonably successful,” said Tosh. “It’s usually about where brothers between 50 to 65 who’ve worked together their whole lives are beginning to see the cracks; beginning to want to pull in different directions, have slightly different succession interests.”
And while sibling partnerships have about a 30 percent chance of success (in succession), cousin consortiums have about a five percent chance, said Tosh.
Going through the process, “formality will be your friend,” he said. “You start needing to change the way you communicate and you start needing to change the way you make decisions. Because it can’t be just Mom and Dad’s decision anymore.”
Transition discussions will face stress points, such as who has involvement in running the farm. As an example, one son or daughter might have stayed on the farm to work, while another may have left and wants to return to help run the farm once it’s passed down. And second-generation children, as well as in-laws, may want to play a role.
Regardless, the transitioning owners — Mom and Dad, as Tosh calls them — are likely going to have to help financially.
“In order for an intergenerational transfer to truly work in farming, Mom and Dad really do have to act as a bank. I think we’re kidding ourselves if we think the next generation is going to go and take on third-party debt.
“The bulk of the wealth is in the farm and Mom and Dad will probably have to remain as owners in order to transition the residence.”
A key objective of transition is to preserve relationships, said Tosh.
“You are concerned about your relationships, you’re concerned about your family’s ability to keep having Christmas dinner together after this. And that’s probably why we procrastinate (having difficult conversations) because more than anything … we don’t’ want the conflict.”
Many farmers “will know a farm family who no longer talk to each other as a result of a poorly thought out, poorly worded estate plan will. And they could have avoided that by having the conversation.”
Those stressful conversations will offer the farm a better chance of success, said Tosh.
“My version of success is that we reach consensus decision. Consensus decision is not absolute agreement; it’s generally that the family agrees that this is the direction we’re going to take and that all family members have the opportunity to prosper.”
He advised farm owners to revisit their wills and read them carefully.
“I had a conversation with a couple who said they had just updated their will, so I said, ‘OK, what does it say?’ And they couldn’t tell me. You need to go and read the document, the one that’s going to distribute your assets, and make sure that it says what you think it says because it might not.”