How to succeed with succession

Industry experts and a pork producer share tips to get the ball rolling on what is often seen as a daunting – albeit important – process.

by Geoff Geddes

Like taxes and rumours of an early frost, passing the farm to the next generation is a topic we’d rather avoid. Given the high stakes and the size of today’s farming operations, however, dodging the subject is just not an option.

Fortunately, if you prepare properly, consult with experts and take it in bite-sized pieces, succession planning can be a life-changing experience.

“The language around this process is changing from ‘succession’ to ‘transition,’” says Elaine Froese. She is a Boissevain, Man.-based professional speaker, writer and coach who specializes in helping farm families work through the issues of transition, business and communication.

Succession Planning
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Change is in the heir

“Succession conjures an image of a king being kicked off the throne,” says Froese. “But we’re really talking about a transition of labour, management and ownership, and it all happens at different times. There is also a change in roles and responsibilities – something a lot of farm founders are hesitant to do. They fear a loss of control and identity.

“Transition implies a more gradual process which tends to be less unsettling.”

Producers can be overwhelmed by the idea of starting the process. So, to begin, Froese encourages them to answer three key questions:

  • What do we need as an income stream for the next 20 to 30 years to live well?
  • Where are we going to live?
  • How will we be fair to non-farming heirs?

The third question often leaves people stuck. They want to keep the hog farm intact but ensure fair treatment for themselves and all their heirs. Success with succession hinges on open and honest conversations from the outset.

“Clarity of expectations is crucial so that nobody has to read minds or make assumptions as to what parents, children and siblings need or want,” says Froese.

“There must also be financial transparency. I worked with a 44-year-old son who didn’t know that his dad had $2.5 million in debt because nobody talked it through.”

The old maxim – when you assume, you make a “donkey” out of you and me – could well have been directed at farm parents.

“Clear is kind,” says Chris J. Veilleux, president and CEO of Prairie Wealth Planning Consultants. He runs a financial advisory firm based in Brandon, Man. that provides consulting and financial planning services.

“Producers don’t always sit around the kitchen table and talk about these things. One of my clients passed the whole farm to a son and daughter, only to realize they weren’t a good team. One wanted to push the entire operation into grain farming and the other favoured cattle, so it turned into a mess.

“The business (also) didn’t have enough cash flow to sustain three households.”

When fair is unfair

Though fairness is a noble goal, producers with multiple heirs must tread carefully to ensure that their good intentions don’t backfire.

Certain cultures insist that all children be treated equally and require the division of the farm’s assets into equal portions. This situation can lead to tension among siblings and cause distress when only one of several children takes over the farm.

“The non-farming kids will get assets from the parents’ personal wealth bubble but, typically, the farm successor wants to keep farm assets together so (he or she has) total control going forward,” says Froese.

Families have a lot to consider in transition planning, so a team approach is often best. For some, the process might start with a financial adviser.

“I advise producers to first determine if the farm is staying in the family and, if it is, whether it will be going to more than one child,” says Veilleux. “The (parents) must also decide if they will do a one-time transfer or have it happen over time.”

The next issue is control. A difference exists between transferring ownership on paper from a tax standpoint and transferring control.

Who will make the fundamental decisions about the farm’s operation? Will the next generation call the shots, or does the senior producer continue to hold the reins for a period?

“If desired, we can structure things so future growth passes to the next generation but control stays with the parents,” says Veilleux. “An adviser should pose many questions to clients and dig deeper. This is much bigger than just saying, ‘Here’s a product to fix your problem.’”

A taxing process

An accountant is another integral part of the equation. The Income Tax Act in Canada has specific provisions for farming and fishing businesses, and these provisions could loom large in any plan.

“Under the act, if certain criteria are met, producers may qualify for two significant tax benefits: the lifetime capital gains exemption and the family farm rollover rules,” says Ryan Stevenson, an accountant who specializes in tax and valuations. He is a partner at KPMG LLP in Lethbridge, Alta.

“If you qualify, the first $1 million of gain on the sale of farm property can be tax exempt, and/or that same property can be rolled over from one generation to the next without incurring income tax.”

Properly managing both family dynamics and the transition’s tech-nical aspects will bring success.

“Start by communicating and understanding the goals of all family members,” says Stevenson.

“You should then surround yourself with experts like financial advisers, lawyers and accountants who can help map out a route to achieving those goals. Just because you have an objective doesn’t mean you can do it legally or tax efficiently but, with proper planning and patience, we can usually achieve the family’s goals.

“Once the plan is finalized, you enact it, and you’re off and running.”

Producers should remember, though, that a transition plan must be adaptable. Tax rules, laws, individual health statuses and family relationships are fluid, so a proper plan anticipates those changes.

Farmers should also revisit the plan over time.

If the process sounds long and involved, that’s because it is. The best time to start would be … yesterday.

Move it or lose it

“It’s so important to start early and understand that this is not a one-year process. You can’t just make the decision and do it,” says Andy Vanessen, who owns a 400-sow farrow-to-finish operation and 6,000-head feedlot in Picture Butte, Alta.

Grandparents kids on grass
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“If you start at age 75, it might be too late. Start at 55, if you can, so you don’t run out of time. It takes a lot of thought, meetings and money to do it right.”

As someone who built up his business over 40 years, Vanessen understands that nothing happens overnight. Yet the transition planning process still surprised him.

“My wife and I discovered that planning and implementing the plan is a slow, long-term undertaking,” he says.

“You need to build a team and incorporate their advice. We had some ideas that we ran past the accountant to see what would and wouldn’t work and to understand the tax implications. We then went to the bank and ensured that they were onside with it all, as they are a big partner in the whole thing.

“From beginning to end it took about three years, so you need to be ready for that.”

Producers should also be prepared for the change in mindset that accompanies the transition.

“Understand that, all of a sudden, you are giving up control and only owning part of the farm,” says Vanessen.

“That can be hard as you started and grew the business yourself. You really have to make up your mind that this is the way you want to go. Once you have a plan and have signed on the dotted line, you must accept that it’s done and you can’t go back.

“It’s like selling something; you can only sell it once. This is a sale to the next generation, and that takes some getting used to,” he adds.

For pork producers, transition planning is a “good news, bad news” proposition. It involves one thing at which they excel and one thing with which they struggle: doing their homework and asking for help.

“Farmers hate to be gouged, so they should invest some time in research,” says Froese.

“Go to the Canadian Association of Farm Advisers (CAFA) website. Talk to friends who went through succession planning. Arrange a 15- to 30-minute complimentary discovery call with professionals to get a sense of what they can and can’t do for you.”

Thanks to modern technologies such as email, FaceTime, Skype and scanning, producers can work remotely with people – even if they are in different provinces – and have access to excellent resources.

Then build on your research.

“Get clear on your priorities, build a great team of advisers, and don’t be afraid to ask for what you need,” says Froese. “Be sure to get cost estimates before you jump in. It’s just like buying a tractor.”

As with farming itself, the greatest hurdle in transition planning is also the most important: taking the first step. BP

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