You Been Farming Long? – Succession and Transition is About Business, Not Family
I remember growing up, every farmhouse in Saskatchewan had the picture on the wall of the two young boys in overalls that exclaimed, “you been farming long?”. This is one of those iconic rural landmarks that if you’ve been farming long enough, you’ve seen it hanging in the hallways. If you are too young, Google it.
Agriculture, and more specifically primary producers, have always thought of succession and transition as an emotional topic. After all, we are a family farm. As an accountant, I used to say the goal was to always be able to sit down for Christmas supper.
I think the industry often fails when it comes to proper strategic thinking when looking at the next generation. We use an emotional response to a business decision. Other industries don’t make the same mistake, so why do farms?
Throughout my career I have seen numerous succession plans fail. It wasn’t until I started seeing successful succession, that I realized the shortfalls of many operations.
Succession of a business is based on dollars and cents, not emotions and feelings.
No other industry treats family succession as such, so neither should agriculture. Fair and equitable is the true determinator of a strong plan – but that is only the starting point.
As farmers, we must first come to terms that we run a diversified operation. I am not talking about livestock, grain, or it being supply-managed. I am talking about our role as farmers, investors, and real estate holders.
- Farmers – First and foremost, we know how to grow grain or raise livestock. In 98% of my experiences, this is the area that is never misconstrued. All farms got into the industry because this was what they wanted to do. And when we talk about legacy and succession? It’s seen as the primary driver. We were born a farmer, and we will die a farmer.
- Investors – A simple question to start the conversation is how many farms have investments outside the farm? Some do, but most don’t. As farmers we’re taught to reinvest 100% of the profits (aside from personal living expenses) back into our operations. But this makes us investors. If you pulled out your profits and bought shares of a big company, would you not be an investor? Then why when we reinvest in our own companies, do we not feel the same way?
- Real Estate – Even though the land we buy is used for our farms, we could also be farmers running 100% rented land. There is a distinction between owning land and farming. This is a crucial point, as many farms have made most of their wealth through land appreciation, not the act of farming. But those same farms join the two operations and believe that they are profitable due to farming. Wouldn’t we have made the same appreciation as landlords?
When approached this way, most farmers are running three different businesses. So the succession and transition discussion should be much easier. By working backwards, we can identify what is fair and equitable.
In terms of real estate, most farms fail at succession because they transition land somewhat early on to their ‘estate’ – usually their kids, or immediate family. Personally, I don’t believe that land should be gifted to the next generation until there is a legitimate reason (usually planning around death).
By gifting land to the next generation, you’re not only transferring your retirement assets out of your control, but you’re taking all motivation out of the next generation as they are being given a booming business without putting in the work to understand the nitty gritty. I have seen this numerous times and it’s a big contributor to why so many farms don’t make it past the third generation. When real estate is viewed as a retirement asset, the ownership of it should earn fair rent until the transfer upon death.
As an investor, I expect a return on my investment from the companies I buy stock in. Farming is no different.
When mom and dad leave their retirement funds in the farm, rather than selling to the next generation (something that can be nearly impossible when evaluated at fair market value), they should be paid for their contribution. They are essentially a replacement for the bank as the next generation would have to borrow to buy out their parents.
This means a fair or equitable return on investment should be earned. Most of my coaching clients use a 5% return – a number that is relatively close to the bank borrowing rates, and the average return in the market. As the bank of mom and dad, you should be paid a fair return on investment.
After paying land rent and a return on equity to the investors, your remaining funds should be based on being a farmer. If the next generation wants to increase their potential earnings , they must take over the labor and management of the farm.
Here we see many succession ‘experts’ being their discussion – evaluating the roles and responsibilities. In my coaching practice, this is where I like to end the discussion.
Through hour tracking, and breaking out who makes what decisions, we can easily come up with a percentage of ownership. The remaining profit after rent and interest return is then split based on these parameters.
Due to the tax act in Canada, often the above land rent and interest returns are not paid as such. They are just used to determine the percentage of net income paid to each party. It’s with this understanding that I find joint ventures and partnerships come in as the best methods for operation. I never want parents and children in the same corporation as it makes fair and equitable succession and transition much more difficult. You will find yourself back in the emotions and feelings camp.
Remember my discussion on Christmas from above. You must concentrate on business before emotions – because I don’t care how close you are, if the business goes bankrupt, you won’t be sitting down together for Christmas anyways.