Friday, March 29, 2024

Succession no simple road

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When it comes to dealing with farm succession, families should forget about finding an off-the-shelf solution to their particular situation.
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Hamilton lawyer and director in Davidson Twaddle Isaac, Neil Davidson, said it could be tempting for practitioners including accountants and lawyers to think that a solution that worked successfully for one farming family could be applied equally successfully to the next family seeking an answer.

“In recent years there have been a few ‘silver bullet’ type packages offered to farmers, but each family needs a bespoke solution that reflects what all the individuals want out of the exercise.” 

That in turn involved some serious groundwork and soul searching within the family well before the professionals were bought in to construct a structure that reflected those needs. He recommended having someone involved who understood the family’s business, had some knowledge of the individuals, and maybe some perception of the likely conflicts that could arise in the process. 

That did not have to be the family lawyer, and could be a farm consultant, bank manager or farming colleague the family were comfortable with, acting in a facilitator’s role. That process could be as simple as a will if none of the family were involved in the farm, bequeathing them the asset at the time of death. Almost inevitably, however, most family succession plans were more complex. 

Davidson said there was no hard and fast rule about what family involvement led to the most successful outcomes, rather it depended on the equity one or more siblings could bring to the business, siblings’ relationships, and was also textured by siblings’ partners’ involvement.

He stressed a successful plan was created sooner rather than later in the principal’s lifetime.

“The earlier you think about it, the more you can achieve to help the plan remain relevant and achievable.”

Rabobank research found that fewer than 20% of farmer respondents had a documented succession plan, 48% had an informal plan and 32% had nothing in place regarding future ownership and transition of the family farming business. 

This was despite almost two-thirds of respondents intending to “hand over” the farm in the next decade.

Those results prompted the bank to appoint a succession manager to its team as it tried to address succession and industry capability issues.

Once the involvement and commitment of family members to the farm business were thrashed out, the correct structures could be put in place to help achieve that.

One solution has been to set up a company operating as the “farmer” holding the livestock plant and dairy company shares. The land could be included but was often held in another entity such as another company or family trust.

Often companies had an advantage over trusts because they could facilitate the incremental transfer of equity over time. Trying to slice up land owned in a partnership or family trust could be problematic, particularly if the land was held in only one or two titles, and subdivisions weren’t always possible.

One approach could be for the farming sibling to set up their own company, funded with equity in the form of livestock, cash and dairy company shares, and having the land held by another company that offered family members, including non-farming members, the ability to buy into it.

Success with using a farming company required some clear shareholder rules, contained in the shareholders’ agreement laid out before launching the company.

There was always a risk in a family company that one of the sibling shareholders would want to exit with their funds, or worst case scenario that one of the siblings could die.

“This is where the share buy-back rules or pre-emptive rights in a shareholders agreement become critical. It could be the other siblings or the parents can’t buy them out, so the next possible option is to seek an outside investor, but that is potentially difficult and problematic,” Davidson said. 

“Plan C might be the sale of the farm business.”

The option could be that the partner of the deceased family member assumes a place around the farm business board table, but success could depend on personalities.

Consideration also needs to be given to what should happen if there was a relationship split.

“Those initial discussions are critical too, to ensure you don’t set out on a path that does not end up where you intended to be. That is where some sort of exit plan needs to be considered, if it proves the outcome is not working.”

Possible conflicts about management versus governance also need to be considered. The farming, shareholding family member will not take kindly to non-farming members challenging operational issues around the farm board table, and avenues for that to occur need to be laid out. One of the best examples Davidson had seen was a plan that started early with the parents accruing a significant portfolio of off-farm assets, with a view to being able to divest of those assets over time and distribute a portion
of them to the non-farming family members.

 

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