LETHBRIDGE – A modern farm is a multimillion-dollar enterprise that carries a heavy load of emotional and historical baggage.
Passing that legacy to the next generation is one of the most challenging decisions farm families face.
John Anderson, who specializes in agribusiness and farm succession with KPMG, said families must understand that succession planning is not tax or wealth planning. Nor is it a waste of time.
“Make sure the business plan is there to complement the succession plan, retirement plan, the estate plan and the lifestyle of all parties,” he told a farm succession seminar in Lethbridge March 12.
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Idaho farmer and financial consultant Dick Wittman said those plans must be written out with goals, job descriptions and a vision so everyone knows where they stand.
“You as parents may not realize it but you are running your kids through their first business school. You are teaching them business habits,” he said.
In Anderson’s experience, only a third of farms have put their business plans on paper.
Families claim they do not have time or plead ignorance on how to do them.
However, he said most regions of Canada have provincial and federal agencies that assist family owned farm businesses to assess their economic capacity and viability and initiate succession plans.
Anderson said there are basic guidelines that clarify the succession process and override family emotion tied to the farm legacy.
Where are we now?
The books must be open to everyone so they can see the true income of the business and assess whether it is profitable. Partners need to have a balance sheet of net worth, income and cash flow statements. They need to know the debt structure and what terms exist to pay it off.
“I know of 56-year-old men farming with Mom and Dad (who) have no idea where the chequebook is,” he said.
Where do we want to be?
Those who want to participate in the farm must decide if it can support everyone. The retirement needs of the parents must be assessed.
Who replaces their labour if they move off the farm or cannot continue to work?
An agreement is needed on when the successor enters the business and when the senior partners plan to retire.
“Start thinking seven years out in front when you want to retire,” Anderson said.
How do we get there?
Question whether the business requires major change. Does it need to expand if more family members join or should assets be sold to avoid duplication?
Who’s in charge?
Wittman said all parties must feel ownership and commitment when they look at the written succession plan.
The document lays out people’s expectations on present and future operations.
If everything is documented, it is easier to recognize practices that are not sensible or could be changed for more profitability or tax advantages. It is also easier for professional advisers to help make decisions when information is written down.
That document must detail how money is handled and provide job descriptions. A boss must be named, and people need to behave professionally.
The farm tradition is often to put the oldest in charge, even if that person is not suited to it.
“Because we are family, we don’t think business rules apply, or family status trumps business roles,” Wittman said.
People may think they cannot be fired because they are family.
“One of the core problems in family businesses is that we don’t think we have to be accountable.”
Everyone must agree on job descriptions, salaries, bonuses and living expenses. Nothing will break up a family business sooner than if everyone’s cash needs are not met.
The advisers agreed that average household needs cost $40,000 to $70,000 a year.
Agreements need to state whether housing is provided and who pays for maintenance, insurance and utilities. If there is extra money left over once all expenses are paid, there needs to be a policy on whether it is reinvested in the business or paid out in dividends to shareholders.
If there is not enough money to go around, it may be impossible to bring in another person.
“The No. 1 credit problem was too many people at the trough,” Wittman said.
