Farm succession planning is an underlying issue in many farm businesses — although not always at the forefront. Still, it is important, especially when considering the future direction of the family and the farm business. Some farm operators have a difficult time considering the topic of succession due to emotional connections — both to family members and the farm business. This can then lead to avoidance, which is not the best strategy. Some tough questions have to then be asked. Is there a potential successor? If yes, does he or she have the skills, abilities, knowledge and desire to successfully operate a sophisticated farm business in today’s agricultural economy? If there is no successor, what are the options? Is harvesting the business (selling part or all of the farm assets) an option? How long does the current operator(s) want to continue running the business? Only the individual(s) involved can answer these questions. Here are some do’s and don’ts to help start the thought-process.
Do's
Do think of succession planning as a process rather than an event. It takes time and effort.
Do start planning now. The earlier planning begins, the greater the number of options.
Do keep the big picture in mind (long-term, strategic direction) along with a positive attitude. These can make all the difference.
Do a financial analysis of the past and present farm business along with some financial projections. Look seriously at profitability. If the farm is not making money now, what can be done to make it profitable? Is the farm business viable in the long run? Profitability is the "show stopper" when it comes to developing a succession plan.
Do become educated about the subject — participate in workshops and seminars, read articles, complete self-assessment questionnaires related to succession — become an active participant in the planning process.
Do consider using a "family meeting" mechanism to open the lines of communication among family members. An objective, third party facilitator can help ensure that the initial meetings run well and everyone has an opportunity to voice their interests and concerns.
Do develop a strategic plan for both the family and for the business at the start of the process. This plan includes a long-term vision of what you want to happen to the business. Write it down and plan towards this vision.
Do discuss family and business goals and objectives as part of the strategic planning process.
Do communicate with family members about plans, strategies, issues and problems.
Do discuss the issue of fair (equitable) vs. equal division of the farm early in the process — especially if there are off-farm family members involved.
Do prepare a legal will early. A will can provide guidance on how the estate should be settled.
Do develop a "successor development plan" for any family member(s) who is (are) planning to take over the business. This is a plan to train and develop the successor(s), so he/she has the appropriate skills and knowledge to successfully run the business.
Do continue to generate and discuss various options — be creative. These will need to be narrowed down to just a few ideas.
Do assemble a "team" of professional advisors (e.g., a lawyer, accountant, financial planner, banker) and work with them; communicate and ensure they fully understand what is wanted.
Once there are some clear ideas of how the transfer might take place, the team of advisors can assist in looking at the pros and cons of certain ideas. The family members involved will decide upon the best plan and strategies for their situation. The advisors can then help document and fine-tune this plan.
Do consider the advice and ideas of different advisors as the plan develops. Each advisor will have a slightly different perspective to consider. Remember that this is the family’s plan, not the advisors. Family members have to buy-into the plan for it to be successful.
Do consider the tax implications, but don't emphasize them as the most important thing. For example, "We don't want to pay any taxes."
Instead, the goal should be to determine and select the best process to transfer a profitable and viable farm business while considering the tax consequences and preserving as much family capital as possible. Sometimes paying a little tax now is better than getting hit with a big tax bill later (if the strategy was to defer taxes).
Don'ts
Don't procrastinate — start talking about succession now.
Don't be afraid to ask questions and listen carefully to the answers — even though you might not like them.
Don't assume you know how others feel about the process or what they want to achieve from the succession plan. Listen carefully and ask questions if you don't understand.
Don't be afraid to share responsibilities. Both generations will need to work together to ensure the transfer of labour, management and assets. As mentioned above, a "successor development plan" (a plan to ensure the next generation has the skills, abilities and knowledge to successfully operate the business) can help.
Don't define one’s life as the business. There is more to life than work — family, friends, leisure enjoyment, sports, hobbies, etc.
Don't put all your eggs into one basket. Plan ahead, think early about retirement, save and invest off-farm, so that you will have some options in the future.
Don't rely on just one professional advisor. While each individual is important to the process, one person cannot possibly provide all of the answers to everything involved in a farm succession plan.
For example, one advisor might be a tax expert but they do not necessarily understand all of the family dynamics or legal pieces. If an advisor says they can provide all of the services, they may be doing the family a disservice. These are a few points to consider regarding farm succession planning. Other succession planning resources available from the Ontario Ministry of Agriculture and Food include OMAF Factsheets: Farm Business Partnerships, Farm Business Joint Ventures, Farm Corporations, Taxation on the Sale of Farm Business Assets, Taxation on the Transfer of Farm Business Assets to Family Members.
OMAF also has a succession planning resource kit available called Between Generations. This $30 kit includes a video, a workbook and an informative technical resource book. Between Generations is designed to give the farm family the tools to develop a workable succession plan. The Between Generations resource kit and OMAF Factsheets are available by calling the OMAF Order Centre at 1-888-466-2372.
For more information: Toll Free: 1-877-424-1300
From the Archives:
OMAF Update 1, October 2004
