Your transition team: who you need on your side to develop a succession plan

Carolyn King
June 12, 2017
By Carolyn King
Your transition team: who you need on your side to develop a succession plan
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Who should be involved in planning your family farm’s transition of labour, responsibilities, management and ownership from one generation to the next? When should the different players be brought into the process? And what should their roles be in the process?

Farm transition planning advisors Elaine Froese, Larry Morin and John Fast agree that the most effective transition planning teams include all members of the family plus a good group of advisors. The farming family members are key, but the non-farming members also need to be kept in the loop and have an opportunity for input. Advisors such as family coaches, financial planners, accountants and lawyers can help pave the way to a successful transition.

Let’s walk through the farm transition planning process with Fast, Froese and Morin to look at when the different players would come into the process and why.

Bringing the family to the table
Often the process begins when one member of the family decides to champion transition planning, inspires other family members to become interested and gets the family to the table to start work on the process. Bringing in a family coach or facilitator with expertise in interpersonal communication and transition planning right from this early stage can really help the whole process.

“The family is usually best served by having a third party come in to quarterback the process, someone who is able to foster really good communication among the family members,” notes Fast, a family business coach. “The emotional nature of a lot of the challenges involved in succession is sometimes very difficult for a family to put on the table, process and talk about.”

“Some families try to do this on their own not very successfully because they need someone to document the vision, values, core intent and expectations [of each family member], and they need someone to ask some really tough questions with a fresh perspective,” says Froese, a farm family coach. “You really need to get good communication happening first. And that is what most families come to me for: untangling – figuring out what everybody wants and why they want it and when.”

Fast says, “As a third party, I try to listen to everyone and see what is really going on in their hearts and in their minds. You don’t want to start on a path that isn’t going to even work because of resistance or fear or conflict. You’ve got to deal with those things. It’s almost like you've got to clear the underbrush before you build a highway.”

Getting the conversation started
Coaches may use various tools to help family members improve their ability to work together on difficult issues. For example, personal communication style assessment tools can help family members better communicate with each other. Conflict dynamics assessments can increase family members’ understanding of how they respond to conflict, what triggers can escalate family conflict and how to manage conflict more effectively.

At the beginning of the planning process, Froese brings in all the family members, including the non-farming members, so everyone knows what she is doing. She gives each person two self-assessment sheets. One is the personal farm family profile to identify each family member’s desire for coaching, life and farm goals, and feelings about inheritance and risk. The other is the key challenges audit sheet which lets each person identify the key issues they need to talk about with the family team.

She notes that non-farming family members can make important contributions to the process: “Quite often I learn things from the non-farming members as to how they perceive the family dynamics on the farm and what is keeping it stalled and blocked. Sometimes those people come into our family facilitation by Skype or they are present, or at least they choose whether they want to come to the meetings because they have been kept in the loop. And they really appreciate the fact that their opinion has been respected.”

Understanding each generation’s needs and goals
When Morin works with a family on transition planning, he first meets with the senior generation. “Primarily it is their assets that the family is dealing with at the time. Also, the senior generation, depending on how old they are, may have the impression that the succession plan is dealing with their estate, but estate planning is a little different than succession planning. So I want to make sure that is clear,” he explains.

“As well, often the senior generation have been working hard their entire lives and have accumulated a fairly healthy net worth, but sometimes they don’t really know what they have financially. Their lifestyle has been fairly meagre with any additional profitability from the farm usually reinvested back into the farm. So I want to make sure they understand exactly what they have. And sometimes a family group will have a dominant individual and it’s not necessarily someone in that senior generation. In that situation, it’s easier for the senior generation to express their vision for what they want to do going forward without having the next generation there.”

Froese emphasizes the importance of getting clarity on the goals of the senior generation. “From my perspective, the founder generation basically needs to know what their income streams are going to be, how they are going to treat their non-business heirs, what they want their roles and responsibilities to be as they age, and where they are going to live. I call it an ‘unfolding,’ where once the founders figure those things out, everything else falls into place.”

After Morin meets with senior generation, he meets with the next generation, both the farming and non-farming members, so everyone has an opportunity to express their ideas and concerns regarding the transition process.

As the family gets clarity on the goals, values and timelines of each family member, they can begin working on the framework of how they envision the transfer of ownership, management, responsibilities and so on would take place.

Preparing successors to take the reins
Discussions on the transfer of responsibilities can point to areas where the next generation might need some additional training or more experience. “In the individual interviews with the senior generation, I ask: do you think the next generation has the competencies to be able to manage this business? A lot of times Mom and Dad will say, ‘Yes, they have been working with me, and I think they make good decisions,’ ” Morin says. “Then I’ll have that same conversation with the junior generation, and things will come out like, ‘Well, we’re not very good bookkeepers so we think we should learn a little more or make sure we have someone in place who can do the bookkeeping for us.’ ” If there are training needs, those might influence some of the steps and timelines in the transition process.

Sometimes as the family develops the draft management transition plan, it becomes clear that the goals and values of certain family members cannot be aligned with each other. Morin says, “[For example,] we’ve had situations where two children both want to be part of the future farm operations, but you realize fairly quickly that there is no way the two of them can work together. When we get into the discussions around future management responsibilities about who will be responsible for the financial side, for the crop production side, for the cattle production side, etcetera, then those issues rise to the surface. In some cases it is matter of acknowledging that the two of them will not be able to work together and then going over the financial plan to see, for example, is there an opportunity where we can have two separate farm operations where [they] are independent of each other and still able to achieve Mom and Dad’s goal of having everybody involved in the farm in some way?”

Crunching the key numbers
Once the family has an understanding of the steps and timelines in their transition process, Morin recommends bringing in a financial planner to do financial projections to ensure the draft plan is viable and workable from a financial perspective.

“A rule of thumb is that it takes about $30,000 a year just to live – that’s food, clothing, utilities, insurance on vehicles, etcetera – although that amount could differ depending on your health costs,” he explains. “Spending above that basic amount is what I term ‘lifestyle spending.’ Lifestyle spending can be quite variable for each individual. If Mom and Dad want to buy a condo in Vancouver and another one in Hawaii and they want to be able to travel there, then that would take a different financial commitment than if they’re going to stay in the old farm house, help out on the farm and go to the lake for a couple of weeks each summer.”

For many farm families, most of the senior generation’s net worth is invested in farmland, livestock and/or equipment. A financial planner would run different possible scenarios and provide recommendations so the senior generation will have the income streams they need to meet their lifestyle goals. Morin says, “For instance, do the kids pay the parents $5,000 every month, which goes towards purchasing the farm? Do the kids borrow half a million dollars from the bank and give Mom and Dad half a million dollars in cash?”

When the draft financial plan is set up, Morin advises involving an accountant with experience in tax planning to look at the plan’s tax implications. “Once the accountant makes recommendations on things like proposed transactions, the future business structure, an equity withdrawal strategy, and so on, then the financial planner incorporates the accountant’s comments and finalizes the financial plan.”

Sharing the plan with the family
When the overall draft farm transition plan is ready, Morin makes sure the non-farming family members have a chance to review it and make comments. “We would usually sit down with the whole family and put that plan in front of everybody and let everybody have some input. And Mom and Dad can also have the opportunity to defend what they have set up as their particular plan.”

Once everybody is onside with the plan, then the family brings in a lawyer to draw up any necessary legal documents, such as a partnership agreement, shareholders’ agreement, sale agreement, vendor financing agreement, or handle the updating of wills.

Every farm transition process is unique, involving a unique set of people and a unique farm business. Developing an effective, successful farm transition plan depends on clear, open, honest communication about goals, intents, values and concerns by the senior generation, the next farming generation and the non-farming family members. Family dynamics can make the process challenging, but there are many resources you can tap into – advisors, publications, workshops, webinars and other tools – to help you learn more about the process, get started on developing your transition plan, overcome barriers to your family’s progress, and produce a plan that works for everyone.

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