Succession: are you and your farming business ready?

Succession planning of the family farm is often taken for granted as the transition to the next generation is assumed to be an uncomplicated process. Little or no thought is given to planning and grooming of a successor.

Succession: are you and your farming business ready?

According to the University of Minnesota’s 2013 ‘Transferring the Farm’ series by Gary Hachfield, David Bau and C Holcomb, a successful succession plan ensures:

  • The farm continues to operate with sufficient efficiency to ensure it can support multiple generations.
  • Children are treated fairly, which may not mean they’re treated equally.
  • The exiting generations and the incoming generations estate planning are in sync.

The process is a journey that will effectively guide an heir during a crisis and should be part of the farming operation’s business practice, and an agenda item for regular family meetings where, according to Hatchfield et al:

  • Honest, open discussions on succession are encouraged.
  • Concerns are addressed.
  • Clarity is obtained.
  • Direction is decided.
  • Accountability is established.
  • Milestones are measured

For the exiting generation, security of retirement is paramount, and the current generation has to balance a sustainable livelihood for themselves and the exiting generation.

The idea is to retire independently of the farming operation. However, the reality is the farming operation usually finances retirement.

Therefore, a succession plan needs to consider how the change will affect: access to capital; liability; management control; flexibility; continuity; taxation; and costs.

Choose well

The right advisors are vital. Your advisory team should include your legal advisor, accountant, agricultural banker and investment, risk and insurance advisor.  Independent unbiased opinions will prevent conflict while ensuring practical, smooth transitions.

Grooming your successors, starts with defining who ‘family’ are.  Does this include blood relatives and/or in-laws? Not every family member will be interested in being in the family business; others will have particular skills that could enhance the business.

Once you’ve decided who to involve, draw up detailed job descriptions of key positions in the business.  And draw up a short- and a long-term plan that includes a transition from one generation to the next.

Annual review

An annual review will update the plan, making changes where necessary. The plans must reflect a factual growth and not your best tax position.  An independent appraisal that considers the business, economy, environment and future potential of the farming operation is valuable.

The clearer the succession plan, the more successful succession it will be. The key is for the plan to address ownership and daily activities.

Estate planning goes hand in hand with succession planning. Knowing the impact of administration charges, disbursements and taxes on death on the farming operation and the heir is essential.

Keep abreast of changes in legislation and ensure sufficient liquidity to prevent assets from being sold to cover shortfalls at death.

There should also be a plan for emergencies.  Divorce, disability and disagreements can compromise the daily operations of a farming business.

The operation should have a plan on how to function in an emergency by ensuring key people in the business are multi-skilled and able to multitask.

Nevetha Maharaj CFP®
B. Soc. Sc. LLB. B. Com (HONS) (IR), PG Dip in Fin Plan
Legal Adviser Specialist
Broker Distribution: KwaZulu-Natal

Disclaimer

The material is not intended as and does not constitute financial or any other advice. The material does not take into account your personal financial circumstances. For this reason it is recommended that you speak to an accredited broker or financial adviser to consider all your options and draw up a plan to achieve your financial goals.