Finances before transition?

Farm coach Elaine Froese responds to survey comments about the financial side of transition.
Family Farm Succession
Wednesday, 12 June 2019
By Family Farm Succession
At the end of the Ag Succession Survey, respondents had the opportunity to leave final comments about the topic of succession planning. We’ve collected a few of these questions and comments and posed them to an expert.

Elaine Froese is a family farm coach who has worked with farm families across Canada for 40 years. Froese has gone through the succession planning process three times with her own family and pulls from personal and professional experience when talking about succession.

Here are questions and comments regarding succession from you, our readers, dealing with the financial, tax, and business barriers that come up during the farm transition process:

“Succession planning would be considerably less difficult if the long-term stability of the agricultural industry was more predictable. Given the current hurdles, long-term profitability is very uncertain! I do not wish to transfer an operation [that] has a low chance to succeed.”

Froese: I found this response quite negative actually: “Succession planning would be less difficult if the long-term stability was more predictable.” So what do you do to mitigate risk? You communicate, you have family business meetings, you have financial transparency, and you have a risk-management strategy, (including, for example, things like crop insurance, hail insurance and knowing what your family living costs are so you’re not overspending or taking too large a draw from the business). You’re checking costs, expenses, and revenue.

Referring to the operation as having a “low chance to succeed,” that’s total negativity. One of the biggest barriers to succession planning, or transition planning, is feeling anxious and overwhelmed. That’s top response I see when I speak to audiences. This first response [above] is an anxious and overwhelmed response, so then the question is: what do you need to do to decrease your anxiety?

“We are pushing our teenagers to off-farm careers. The future of farming, in my mind, is not so bright, unless it changes in the next 30 years.”

Froese: Let’s define succession planning. All of the Canadian Association of Farm Advisors are using the new terminology – we're calling it transition planning. It's because succession planning evokes the word picture that somebody has to get knocked off the throne and then a new person comes over and the other person gets pushed out. But it's more like a process and a journey and an evolution. It's a transition into new roles.

So if you have a fruit and vegetable grower who doesn't see a future in their business, and they don't want to encourage their children to take it on, then they need to be clear really early on. Some children will have a passion for that business and say, “I don't care if it's not making very much money, this is my passion and this is what I want to do.” For them, the finances are not a negative thing – it's an opportunity to make a difference.

Succession planning is the transfer of labour, management and ownership. In a fruit and vegetable operation, it's high-intensity labour, and the management piece is a lot. What I have seen is that a founder might have $2 million in debt and he's 65 years old. In his head he says, “I do not want to pass on any debt to my children.” That's an unreasonable expectation, because he doesn't have the capacity to pay that debt down to zero before he makes a transfer.

The other piece is the ownership piece: how much does he want to continue owning into the future? What is the timeline for the next generation to start getting equity? If he's 65, and his child is 40 and they own nothing, they’re not happy. By the time you're 40, you need to be in control of your own destiny and your equity. For a lot of farmers, it happens in their mid-30s or earlier.

These questions have many layers. Another big question of founders is why are they so afraid to let go of ownership? It could be because they’re afraid of loss of wealth, afraid of failure – like they talked about in the first response. You have to have the ability to see if that’s a valid concern, or if is there another workaround and outcome that can shift that.

"Tax planning [needs to be] made simple. Accountant and legal advice is very expensive."

Froese: You can't afford not to have good advice when you're setting up these new business plans and succession plans. Accounting and legal advice can be very expensive, yes, but you can shop around and ask for quotes. You can also do a lot of the preliminary work yourself to get ready so that the amount of time under billable is hours is decreased. If you're having a fight at the accountant's office, between the founder and the successor, that's an expensive distraction.

Check out all the free resources that you can. Look at what the Canadian Agricultural Partnership (CAP) plan is for the province you live in. There is government money available through the new CAP. Thirdly, start having family meetings. The work I do around communication and conflict is to build the foundation of people want, to clarify expectations, to gain certainty in timelines and a commitment to action. That work is all pre-work that doesn't cost a lot of money; it costs the intentional blocking off of the time to have the family meetings.

I've had people leave meetings after spending time with me and say, “Elaine, the lawyer was amazed at how much we knew.” And I responded with, “Of course, because you're not going into the billable hour profession without a fairly clear idea of what you want to have happen. That makes it more efficient for everybody.”

“Why all the tax implications to pass on a farm? The government has too much involvement.”

Froese: Taxes are never going to be avoided entirely, but a transition plan should not be driven by tax. A succession plan should be driven by what each member on the family team needs and wants and feels should happen.

People will say, “I'm not going to do that,” or “I'm going to avoid probate fees,” and what they don't understand is that they're being penny wise and pound foolish. They are making assumptions about the cost. What they need to do is get their basic plan in place and then use an accountant and a tax specialist, to see what the best-case and worst-case scenarios are.

“Canada needs to figure out how to better support our young and upcoming farmers. This needs to be done before we are bought by corporations and multinationals. It is very hard for someone to start farming, as startup costs are unreachable for many.”

Froese: You have to create new business models. One of them is joint ventures. For example, out here in the west, we have young farmers who become adopted by non-family business members. [Through non-traditional farming arrangements, people passionate in farming are given opportunities by owners whose next generation is not interested in taking over.]

Another element would be that the owning generation creates a personal wealth bubble that is separate from the farm. If you don’t need the retirement funds, or living funds, from your business, then there’s more likelihood that some parts of that business can be gifted to the next generation. Our son can’t buy our farm, there’s no way. So we have a personal wealth bubble that we will draw income from, and then we’ll draw a certain amount of income from the business that we just transferred to him over the next three years. But you can’t do those kinds of planning if you have always reinvested everything back into the farm and are dependent on the sale of farm assets to fund your retirement. So you have a lot of farmers who are trapped because they don’t have any flexibility in finances beyond the farm assets.

Young farmers who want to farm may have to find a different location. I see this happening in the Fraser Valley region in B.C. People are packing up and selling their farms for $80,000 per acre and moving to Alberta or Saskatchewan. And that’s not what you want, if what you want is to keep people and community and keep farms where they’re established farms. Every time I go back to Ontario, I notice [new suburbs] and think, “There used to be a corn field there.” That’s the reality of what’s going on with urban encroachment.

Editor’s question: Our survey results showed that regardless of ownership, 52 per cent of farmers said it was “very important” that their land continue to be farming land. And for 26 per cent of survey respondents, it was “essential.” It seems as if there are competing interests here – young farmers wanting to remain on the farmland and also being unable to buy it?

Froese: Exactly – and there’s a lot of pressure. There is the deep emotion of legacy and the culture of agriculture. I’ve worked in Pennsylvania with a 10th generation fruit and vegetable farm and saw how there’s a lot of pressure to continue the legacy of the previous generation, but that may or may not be workable in today’s economy.

When it comes to having discussions about the feasibility of selling versus continuing to farm, people have to come to agreements on that. Ultimately, it’s the decision of whoever owns it. I’ve also seen it skip a generation, so I’ve seen a grandfather hang on to something for a grandson.

And that brings up another question: where is it written that you have to own land to farm it? On the Prairies, we have a lot of young farmers who don’t own a lot of land, but they have access to a lot.

A lot of people like to own land because it’s an equity growth position that we’ve experienced in agriculture over the last 20 to 30 years. It’s just not an attainable situation for young farmers to expect that they can afford to buy $10 million worth of land. Instead, have well-written lease agreements and keep a good relationship with your landlord, so [the landlord] understands how you’re stewarding the land and how you’re taking care of it, and that you both have the same vision for that land to remain in agriculture. [If someone] inherits that land and sells it because they want to cash out, the land will be gobbled up by the highest bidder, unless there’s been a conversation around the [future] intent of the land.

Any final words?

Froese: One of my goals in life is to be rich in relationships. The way I work with families and the work I do is always undergirded by that goal. People are more important than things, and we're not going to take [anything] with us when we die. Live intentional lives here with strong mental and emotional health as you make plans for your business.



Elaine Froese previously responded to questions and comments regarding family dynamics, generational concerns and emotional barriers that come up during the farm transition process. Read her perspective on dealing with dynamics here

Editor’s note: The responses have been edited and condensed for clarity.

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