The farm succession challenge
The average age of kiwi farm owners is 58-65 years. Given this, the topic of farm succession is a big issue across the country. Over the next few years there will be a large number of farming businesses theoretically changing hands.
Two of our major banks have estimated that over the next 10-15 years the farming industry will require between $50 and $65 billion dollars for succession and development. They also say that they will only be able to fund around two thirds of that. Whilst the trading banks estimate there is $800 million or so that their customers might currently want to invest in farming, and while dairy farmers have the prospect of Fonterra’s Equity Fund there is still going to be an obvious large shortfall. This is yet another hurdle for those facing the farm succession challenge.
In my experience, vendor finance, when available, will be in the realms of at least 60% and sometimes much more. So finance will sit alongside the other major issues that need to be faced in addressing farm succession within the family.
As with many things in life, there are a number of ways to address farm succession. Some advisors favour a single approach that they have always used and are tied to. Others are certain from the outset what entities should be used and the relationships that need to be created between them.
Others, including myself, would not approach any farm succession event with any preconceived ideas and prefer to see the outcome of the process dictate such matters. The process needs to include consideration of:
Who are the relevant parties and what are their relationships?
What are the possible takeover and operating options relative to assets, finance, appropriate personnel and proposed modus operandi?
On occasions an appropriate questionnaire completed by family members, possibly initially on a confidential basis, can be an effective way of collecting the relevant information and determining the further questions that need to be asked and issues that need to be addressed.
Which of the same are viable alternatives that deserve further development and consideration? A case of option generation, full consideration and determination.
Will one or more of them meet the essential requirements :
Leave the parents as comfortable as can be expected given the circumstances that prevail.
Deliver the family member(s) who will (albeit eventually) take over, a viable business with true potential to succeed.
Ensure the remaining family members are treated equitably.
Overall reality testing.
Ensure use of appropriate structures and drafting of appropriate documentation deemed prudent for the circumstances.
This can include trust deeds, company shareholder agreements, wills, enduring powers of attorney, trust memorandum of wishes and relationship property agreements.
The lawyer and accountant engaged by the parents need to be mindful of the fact that the parents are the instructing clients. It is their welfare and interests that should be the first priority for them. The child/children taking over the farm need to have a reasonable chance to be successful, and any remaining children need to be treated fairly if the plan is to work for all. Other advisors, such as rural farm consultants, may also be used to provide any required guidance in farming direction and practice, and should be availed of where relevant and worthwhile. A team approach is essential and a facilitator can also often add value.
Farm succession is a process more than an event. It needs to be undertaken with good judgment, practical advice, understanding of, and empathy with, all family members.
If this article raises questions for you regarding succession planning in your family farming business, give Brett a call on +64 6 370 6475, or firstname.lastname@example.org to discuss your options.