The elephant in the room

It means disclosing the financial and physical performance of the business and essentially laying his life’s work bare to the only people in the world who really matter to him.
On top of that it’s a discussion about him stepping away from being “the farmer” to a role that might have no real status in his mind.
Guscott’s comments were part of a roundtable discussion on succession that involved nine rural professionals from around the country including bankers, accountants, lawyers and consultants.
Instigated by Fonterra-backed milk supply company MyMilk, the discussion generated ideas that have formed the basis of a white paper released by MyMilk this month and available at www.farmsuccession.co.nz.
MyMilk head of business development Hamish Hutton said the idea grew from the fact that time and again MyMilk clients brought up farm succession as one of the reasons they became involved in dairying.
While it went some way to dealing with the issue they found there were still hurdles to overcome.
Converting or expanding a dairy farm business could lift the value of the farming assets for successive generations but processes and structures still needed to be put in place to enable the transition, Hutton said.
Guscott’s observations brought home the emotional and very human aspect of the subject, giving context to why for many it can be the elephant in the room, creating tension and even long-lasting conflict.
But all participants agreed when succession was done well the family farming business and the family itself were strengthened.
It was essential that those involved in the succession conversation – both parents and all siblings – had an understanding of the farming business’ value and viability.
Westpac agribusiness manager Don Chamberlain said there was generally a good understanding of what the farm was worth because farm sales information was readily available but, when it came to the profit and loss aspect of the business, knowledge could be lacking especially among urban-based siblings.
“What they don’t understand is the profit and loss, the risks, the volatility we’re seeing right now and the need to set up a business realistically so it can handle that volatility,” Chamberlain said.
“They’re coming to this discussion just seeing a big asset and big wealth.”
Accountant Peter Glassford said as the ensuing discussions created a realisation of how profitable or otherwise the farming business was and its ability to support Mum and Dad as well as borrow to facilitate succession, there was also a realisation that, if the farm was going to be kept, not all children were going to be treated equally.
“That’s when it all starts getting a bit hard,” he said.
If the farming business had multiple farms or built up off-farm assets the process could be much easier but there still had to be an acknowledgement that fair might not necessarily be equal.
Glassford noted in some situations non-succeeding children could be open to trade equity for fairness if, for instance, they were provided for early enough to use the equity or whatever provision to build something of their own.
But care also needed to be taken to ensure fairness to a succeeding child so they weren’t either being shackled with a problem, because of poor viability of the operation, or that the succession issue wasn’t just delayed until both parents died.
If ownership remained with the family trust, or the structure meant there was a large debt tied back to the trust, the succeeding child could be faced with having to sell the farm anyway when the last surviving parent died to pay out the other siblings or beneficiaries.
There was also little fairness in tying the succeeding child to a structure that meant they didn’t have ownership of the property until the last surviving parent had died, because conceivably this might not happen until the “child” was 60 or 70 years old.
All agreed the earlier the conversation began the better and the easier the process could be if succession was a natural part of family conversation.
The general consensus was the initial step should be a meeting with the parents on their own without children present so Mum and Dad’s wishes could be worked through first.
The consequences could be dire and the process rough and protracted if a family meeting was the first place the discussion was formally broached and there was disagreement.
Lawyer Ian Blackman has written a book on succession and said parents had the legal and moral right to make succession decisions.
Their legal right came from having control of or direct ownership of the land. Their moral right came from the fact they’d spent the past 40 years working on the property or farming business.
Having a trusted adviser to facilitate the process was likely to be beneficial, particularly if that person had a holistic rather than single-specialty focus.
The lawyers in the group observed too many lawyers were “form fillers” when it came to farm succession, and there was a need for professional development in that area.
The family lawyer, accountant and farm consultant would all have a role in structuring the plan and there was some discussion about individual children also having their own legal and financial representation to ensure fairness, particularly if there was any level of disagreement.
Blackman didn’t believe it was prudent to start a succession conversation with the parents with “how much do you need?”
The income or return the parents received should be driven by the returns coming out of the succession structure.
He favoured a business structure where a company owned the land and the family trust could own shares in that company.
Farming parents needed to understand that if the family trust owned the land, the default option in the event of their death was typically that the trust be wound up and the beneficiaries received equal shares in its assets.
In that case the family farm would have to be sold.
By setting up a joint-venture company with the succeeding child, parents could gradually transfer ownership by selling them shares.
The parents would earn a dividend from their shares in the farming business and proceeds from the sale of shares to the succeeding child. They might also receive interest payments on any loans to the succeeding child, who was paid a management salary for running the business.
“That’s what we call above-the-line, arms-length, commercially determined,” he said.
“We don’t ask them (the parents) how much they want. We say, if we put this arrangement in place this is how much you’re entitled to – it’s your business.”
Usually parents found the income was more than they needed to live comfortably and it was then up to them if they wanted to make a gift of any of that income to non-succeeding children.
Participants agreed within the family trust there should be a memorandum of wishes which set out why the trust was formed and how the assets of the trust should be administered, including the succession plan.
The memorandum of wishes was a much better vehicle for succession planning than a will, the lawyers agreed.
In the past trusts had been set up with taxation in mind and working through succession issues under those structures could be more problematic.
It was therefore important to set the business structure up right from the outset so it facilitates succession and good governance.
The limited liability company was an effective vehicle for transferring ownership. It had built-in governance requirements that included directors being appointed and regular director meetings. It needed a constitution and used a shareholders’ agreement.
Lawyer George Forbes suggested that, as independent trustees in family farming businesses, lawyers or accountants should be bringing succession into the conversation.
“One thing that happens every year is the preparation of the accounts for the trust. That’s an ideal time for the solicitor, accountant, Mum and Dad to get together and have a conversation.”
Succession should be an agenda item. In the early years it might just be a five-minute conversation but as children come
along it becomes more relevant and because it has always been an item it’s part of the strategic thinking of the business.
It also gives plenty of time for options to be talked over before there’s urgency or stressful discourse among family members.
If you’re a succeeding child or want to be, the advice is to speak up, initiate the conversation yourself or make contact with an adviser who can facilitate the discussion.
For both succeeding and non-succeeding children a lack of clarity can be the biggest problem. What they really need is certainty and direction so they know what they’re dealing with.