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AGRICULTURE
The Human Side of Succession Planning Download the fact sheet PDF Format
Succession planning is not an easy process. Discussing succession with your family brings up difficult issues like aging, loss of control of your business and your financial affairs, and death. These selling features don’t make succession planning very popular. However, if one of your life goals is to transfer a viable farm business to your child or children, then succession becomes an issue in much of how you do business and how you plan your life. There are a number of factors that make within family transfers of farm businesses easier. Families that have a history of successful transfers have a family model that works for them. First generation farmers, or farmers that received their farms through the death of a farming parent don’t have that historical family model to fall back on Family business skills like goal setting, open communication, planning for decision making, using outside advisors, wealth management, training successors, and retirement planning all help position the family and the business for successful transfer to the next generation. I find this helpful: Learn how to step back and take an objective overview of your situation. If you can’t do this yourself, find some outside advisors who can help you. Use their advice to help you and your family to build a plan. Goal Setting: Your long term vision feeds goal setting. Goals then provide direction. If you can’t see where you’re going how will you ever know if you get there? Start early: Build some off-farm investments to support you in retirement. These days, most within family transfers occur at prices well below fair market value. RRSP’s or other investments help to ease the cash flow crisis at transfer. Business Viability: Profitability is critical. It is pointless to talk about transferring an unprofitable farm to the next generation. Parents need income to support them in their retirement years. The money has to come from active business income (payments from your children), or from the sale of the business. Manage Farm Capital: Invest farm profits in the right assets. It is difficult to get any money back out of high cost overhead items. Keep the farm lean and get some capital invested off the farm. Tools for Security and Estate Planning: Take advantage of the legal tools that are available to give you some control of your assets in the event of incapacity or untimely death. Powers of attorney for property and for personal care allow you to put decisions you would normally make into the hands of a person you trust in the event you are incapacitated. An up to date will provides a backup transfer plan in the event of untimely death. Dying without a will (intestate succession) puts your assets into the control of the Provincial Trustee for distribution. Do you really want a stranger to decide how your assets and your family farm will be distributed? Changing Roles: Sole proprietors are used to working independently. Having to share decision making, especially with one of your children is a real challenge for most sole proprietors. Once two people have to work together, the working relationship has changed. Partners are team members who have to talk, share decision making, and who have to learn how to fight without hurting each other. Family relationships add more complexity to the new "team" relationship. As a parent, you have to learn to see your child as an adult and then relate to the adult person you are now working with. Human Dynamics: Human dynamics and variations in our behaviour add more challenges to the difficulties of working together effectively. People vary - some are natural born leaders and communicators, others make great team members but are less inclined to take the risks associated with leadership, while others just want to work alone. Learn to step back and assess your behaviour when human dynamics become a problem. Think before you act. Be diplomatic. Work it out, or get out. Hopefully you find this out during the time when you are testing your working relationship. Testing Period: It is wise to set up a short testing period with your child who may become your farming partner. A testing period of two full years where your child works for a wage, or receives a profit share helps to test your working relationship. Can you work together? If it doesn’t work out, your child can still go on to set up their own operation without your involvement. Using a testing period leaves doors open, and doesn’t create the trap that the new barn and the new mortgage does. If the working relationship doesn’t work out and you have left an escape route, you have protected the family relationship. The alternative usually means one less family to come over to your place at Christmas. Communication: Communication skills are of critical importance for the successful transfer of a viable operation. Agricultural businesses are growing. Larger businesses require teamwork and coordination. People can’t read minds, so they have to learn how to work together effectively. Regular business meetings where communication is open and decisions are made by consensus (as much as is practical) keep conflict to a minimum. Words: Watch what you say and how you say it. If you are going to work as part of a team, don’t hurt your team members with harsh words. Provide constructive criticism, not abuse. Train successors: How can a child take over a farm business if they don’t get any training? You would not want your son or daughter to say: "Dad taught me how to work but he never taught me how to run a business". As a parent, you are the mentor, and your child is the young entrepreneur and potentially your future business partner. Young entrepreneurs need to learn how to make good decisions and how to seek out advice they can trust. They need skills in strategic decision making, planning, communications, capital investment decisions, credit management, cost control, marketing, employee relations, and then they need to have the production skills that fit their farm. These days the business skills need to be better than the production skills. Feed them, fertilize them or fry them. I prefer feeding. Young farm managers need a college or university education (it’s also a good backup plan!). They should work for someone else to experience what being an employee feels like. They should learn that other people make mistakes, but they learn from them. They will discover that Mom and Dad have their own biases and fears. Let them experiment with another enterprise (with a fixed budget) and they will experience stress, success, failure, rationing limited capital, and critical decision making. Train yourself for retirement: I actually advise most farmers to keep farming because there are many tax advantages for small business operators. At the same time, the "retiree" has to find a balance between being available to help and being critical to the operation. If you want freedom, you cannot afford to be critical to the day to day goings on of the operation. Here are some other points to keep in mind: stay active, and take care of your hearing and sight; explore other interests or enterprises; take up dating again (with your spouse); stay technically up to date with the changes in your industry; and try to maintain a positive attitude - tell your child what they do right! Keep yourself physically healthy and mentally sharp - you will live longer and be a much happier person to live with. Business Agreements: Once you’re sure that you want to work together, the working relationship should be formalized by a business agreement. The issues addressed by the business agreement are as follows:
Professional Advisors: Most farm transfers will involve the following professionals - an accountant, a lawyer, a banker, a financial planner, and your farm management advisor. Professional advice can be costly, but with family farms being worth several hundreds of thousands of dollars these days, you want your farm transfer to be handled properly, with a minimum amount of tax. Don’t be afraid to modify your plan in the middle of the transfer process, or to change your mind about the type of business structure you choose. It’s your farm and your situation. Source: This article was written by the OMAFRA. It is used here with the permission of the OMAFRA. All rights reserved. |
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