Succession planning means planning for the future and making as informed decision after consulting family, business partners an appropriate advisers.
Instead of “succession planning”, people might prefer:
- Planning for the future
- Risk management
- Disaster planning
Why succession planning?
Why do people have fire extinguishers and security alarms?
People need to:
- Plan for the future rather than just hope and pray that things will work out;
- Plan for the worst/hope for the best; and
- Communicate. The key to succession planning is communication.
Often it is necessary to bring in an independent person to facilitate communication between different family members and different generations. Sometimes family members have difficulty expressing themselves and sometimes unintentionally say “the wrong things”.
What is succession planning?
Succession planning is the review of the options available to a person or business, including:
- Has the business a future?
- Is a sale an option?
- What are the options available in relation to:
- The handing over of management and control (gradually)?
- The transfer of assets?
- How are the priorities of the older and younger generation to be balanced to achieve economic security for both parties?
Myths of succession planning
- A will is a succession plan;
- Don’t tell anyone what’s in your Will;
- Women in the family will be supported by their spouses’ jobs;
- You should only leave assets or give people assistance on your death. (What about an early inheritance?)
- Women are not to be farmers;
- A succession plan is set in concrete.
I generally recommend to clients that they:
- Submit a copy of their will or draft will to all family members for comment. It is better to have “a blue” whilst the parents are alive than after their death;
- Consider a living will whereby they put their plans into effect during their life time by way of deed or family arrangement, gifts, release under Section 31 of the Family Provision Act.
Handing on a farm is not child abuse – too many people believe this joke. People have worried about the younger generation for centuries, as is highlighted by the following quote:
Farmers and other small business people should be encouraged to give consideration to the following:
- Examining, in conjunction with the younger generation, the viability of the younger generation taking over management, control and ownership of the business assets;
- Taking into account the economic and non-economic factors when examining the viability of a hand-over to the next generation;
- Consulting and encouraging all family members to contribute to the succession plan;
- Preparing a disaster plan for the young and the old;
- The Wills of the family members involved in the business should complement each other. For example, if the younger generation die, the will should specify whether all or part of the farmlands/farming business passes to the spouse with or without insurance proceeds and whether all or part of the farmlands/business together with part of the insurance passes to the parents.
Rob Brown quotes:
“the risk of premature death of a farmer is higher than most people expect and is 100 times more likely than a header or house fire.”
We have been involved in many estates where the farming son has died prior to attaining 40 and where a disaster plan has been put in place, the business has been able to continue in a harmonious family atmosphere. If there is no disaster plan, the situation can become a nightmare.
And don’t forget to consider term insurance and loss as income insurance as part of that plan.
Too much emphasis on big is better
Gross turnover is not the issue. Net turnover is the key issue! Small communities have successful businesses, but if they are lost, they are hard to replace. At the grassroots, people together with their advisers must identify a business’ strengths and weaknesses to plan for the future.
Economic rationalism has resulted in a number of small farming businesses and other small businesses being sold or wound-up for the wrong reasons.
For example take a family with two brothers and their wives working together with a total debt of $150,000.00. The bank would not continue financing the business as a joint enterprise. However, by organising for each family to have separate ownership and control of a different block of land and business, they were each able to refinance their half share of the debt of $75,000.00. ‘The Experts’ would not doubt maintain that such a business arrangement is not viable. However:
- They each had their own home;
- They enjoyed what they were doing;
- They raised their families on the farm;
- They were and are part of the community.
If the farmlands were sold, the surplus would have been only sufficient to allow each family to buy a house in a regional centre but the older generation faced the likelihood of unemployment. Too many small farms haven’t been given the opportunity to continue under a streamlined arrangement whereby a combination of restructuring, fine-tuning and off-farm income could enable a family to enjoy life in the community and contribute to the community. The women were the motivators. The major infrastructure for many small businesses is MD & K (mum, dad and the kids), with women playing a dominant management role.
Lack of succession planning
One of the biggest risks to the family farm or a small business’ long term viability is not droughts or interest rates but the lack of planning. A succession plan involves an examination of the following:
- A future plan for the business, including issues such as change of ownership and change of control.
- Retirement plans for the older generation.
- A feasibility plan to consider whether the proposal is practical and attainable.
- A review of Wills; some viable farms and small business have been sold because the parents have not updated their Wills or the Wills provide that the farm or business be left to the children equally. If there is more than one child, it is difficult for the child operating the family farm or small business to pay out the other children and a viable farm or business could be lost to the community. The loss of one family to a rural community can have a snowball effect on the school bus, community committees, schools and local business.
- A clarification of economic and non-economic issues, dollars versus the heart. It is important to bind a good balance between financial issues and issues that affect human relations.
If your family or business wishes to explore Succession Planning further, we suggest that you contact us to arrange an appointment.