The idea of Succession Planning conjures up a scenario where the parents are approaching retirement and somewhat neatly, there are one or more of the children ready to take over the business to continue the Family Legacy. Unfortunately, this is not always the case. Jim Benson from Transition Partners explores options for succession planning where the successor is not always easily identifiable.
In many circumstances, no natural successor exists. There may be no children or, if there are, they may have pursued alternative careers and have no wish to come onto the farm. This can present a particular dilemma for farming families. A farming enterprise is a unique business. It often has a deep legacy that lives on through generations and the family may have a strong desire to ensure it is not broken up or sold.
The role of Off-Farm Children
The next generation are often asked a definite ‘Yes or No’ question: “Do you want to work on the farm or not?”. This approach can put pressure on all involved. It may also prevent discussion on a range of alternative options that could be considered.
It is important to understand the role that ‘Off- Farm’ children can play in the future of the business. They are sometimes characterised as being worried that their inheritance is being given away and their biggest concern is any potential monetary loss. Our experience is that this myth is simply not accurate. As part of our Discovery process we send confidential questionnaires to all participants including off-farm children. When asked what their major concern is, the most common response has nothing to do with money or land. Interestingly, most off- farm children express a wish that their children have the same opportunity as they enjoyed, experiencing country life. They point to the influence that an outdoor life, family values, a relationship with nature and time away from the electronic world has on the upbringing of a child. It is this opportunity they wish for their own children.
The current owners can utilise this motivation to establish ongoing involvement in the future of the business, even where no children wish to return to work on the farm. Arrangements can be put in place to allow access to the property, as long as the family continues to be associated with the farm into the future.
Changing the nature the business but staying involved
One of the approaches that can be taken to retain the family’s attachment to the farming land when there is not a successor available to work the farm, is to make it available for outside use. Usually, the first mechanism that comes to mind is to offer the land for lease or agistment. If the sole purpose of the business was to manage a lease, it would lose its Primary Production status and this would prevent the use of income averaging, income equalisation deposits and other benefits. Most importantly, it would mean the land would not meet the ‘active asset test’. This could affect CGT concessions. Another drawback of leasing or agistment is that the quality and therefore value of the land could be degraded by poor farming and management practices.
To avoid these negative outcomes, an alternative could be a Collaborative Farming Arrangement whereby, care, management and maintenance responsibilities would remain with the existing business.
Under a ‘Collaborative Farming Agreement’ the existing owners (through the business) are responsible for ensuring that the ‘Farm Manager’ adheres to best practice.
The Collaborative Farming Agreement documents the rights and obligations of the Landowner and Farm Manager. It is the responsibility of the Business to see these are adhered to.
Establish a ‘Family Board of Management’
If the decision is made to hold onto the property, the prime purpose of the business will be transformed to focus on the management of the ‘family wealth’. This will be particularly important if family members have a future interest in the quality, integrity and sustainability of the land and believe it represents good potential for future capital growth.
A ‘Whole of Family’ approach can be taken through the establishment of a Family Board of Management, responsible for the stewardship of a revised business that reflects this approach.
A Family Board of Management can be an effective forum for creating an inclusive culture amongst all family members. If structured properly, it will provide an excellent communication framework, improve the transition of knowledge, and remove conflict.
The decision-making power over the business will need to be determined. Involving interested family members in this process increases their willingness to make a constructive contribution and to act in the best interests of the family and the business.
Family Board Meetings should be held regularly and be properly structured with minutes, agendas and action points.
The Board could develop a Family Charter to act as a link between the family and the business, in that it provides guidelines for those operating the business and at the same time protects the family’s interests and assets, both now and in the future. It will help to define the family culture and identity and is often an important step in cultivating a strong family connection and solid relationships. The family’s identity is expressed in its values, goals, vision and objectives.
Open communication and transparency, within a predetermined set of guidelines, creates both a healthy business and a healthy family life. It also promotes family unity and goes a long way in preventing future conflict.
Bringing in outside parties
There are many young farming families looking to establish themselves in agriculture. An option for an older farmer looking to ease the day-to-day pressure, but still stay involved, is to establish a Collaborative Farming Arrangement as described above.
It is important to keep in mind that succession is a journey not an event, and arrangements can be made to transition the ownership of the business and perhaps, all or part of the land, over a period of time. The possibility of this occurring provides incentive and drive for the incoming family.
To give this relationship the greatest chance of success it is important for all parties to have clarity and confidence in the future. To achieve this, it is important to separate the key elements of the farming business and establish a transition plan for each component:
- Management Transition
- Business Transition
- Property Transition
- Wealth transition.
Each of these components should be discussed, agreed and documented.
Therefore, succession does not have to mean simply handing over the farm to a child or children to work. Off-Farm family members could participate in managing the business rather than working on the farm and outside resources could be utilised for this purpose. Whether or not the family wish to be involved, there is also the opportunity to collaborate with an external next generation farming family, to allow them to develop their own farming enterprise over time.
James Benson is an Executive Director at Transition Partners.
1300 351 225