The following is an article I wrote some four years ago. Like myself, many others have written and spoken on this topic - yet nothing is changing other than farmers are getting older. Seemingly, we need to keep repeating ourselves until the penny drops and this is at a time where we read about the likes of alarm in the farming sector over the Reserve Bank of NZ's capital plan!
Given the average age of farm owners is 58-65 years this topic is an issue across the country. Over the next few years, there will be a large number of farming businesses supposedly changing hands. Two of our major banks have estimated that over the next 10-15 years the farming industry will require between $50 - $65 billion dollars for succession and development and, that they will only be able to fund up to two thirds or so 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. 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 families need to face in addressing farm succession.
As with many things in life, there are a number of ways to address farm succession. Some advisors favour the one approach that they have always used. Others are certain from the outset what entities they will use and the relationships that need to be created between them.
Others, including myself, would not approach any farm succession event with any preconceived ideas. I prefer to see the outcome of the process dictate such matters. The process needs to include consideration of:
- Who the relevant parties are, and 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 of:
- leaving the parents as comfortably as can be expected given the circumstances that prevail?
- the family member(s) who will (albeit eventually) take over being viable and having true potential to succeed ?
- the remaining family members being treated equitably?
- overall reality testing?
- use of appropriate structures and drafting of appropriate documentation including any trust deeds, company shareholder agreements, wills, enduring powers of attorney, trust memorandum of wishes and relationship property agreements deemed prudent for the circumstances?
The lawyer and accountant engaged by the parents need to be mindful of the fact that the parents are the instructing client and that it is their welfare and interests that should be the first priority for them. The child/children taking over the farm needs 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. Where relevant and worthwhile, make use of other advisors, such as rural farm consultants, to provide guidance in farming direction and practice and other matters. A team approach is essential, and a facilitator can often add value.
Farm succession is a process more than an event. One must undertake the succession process with foresight, good judgment, practical advice, understanding of, and empathy with all family members.