Succession planning: What you need to know from a finance expert
There’s much more to succession planning than paving the way to financial security, as Lance Stockbrugger, chartered accountant and farmer, knows from working with farming clients over the years.
But as he explains in our Q+A, setting up your farm for succession success sometimes means paying a little more in the short term so you can realize long-term goals for both your family and your farm.
Q) Can you offer a bit of background about yourself and your experiences counseling farmers on succession planning?
A) I am a chartered accountant by trade and a farmer by heart. I always knew I wanted to farm, but a motor vehicle accident killed my father when I was 11 years old, so the traditional opportunity to take over the farm was gone. I never gave up hope of someday owning and operating the family farm. My mother insisted that all of us children further our education beyond high school, so I went to the University of Regina and got a business administration degree, and went on to obtain my chartered accountant designation, followed by an in-depth tax specialist designation. I soon realized that if I was going to deal with farmers in my career, I needed to be a tax expert, because farmers don’t want to have anything to do with income taxes.
I built a sizable practice as a chartered accountant working for PricewaterhouseCoopers in Humboldt [in Saskatchewan] for 15 years, while building a farm from 160 acres to its current size of 4,000 acres. In 2012, I was finally able to realize my dream and I retired from active practice as a certified accountant and focused the majority of my time on the farm.
Along the way I started doing public speaking for Farm Credit Canada initially, and now for several groups throughout the winter months. It is something I truly love to do. I did 40 presentations across Canada this past winter on various tax and management issues facing farmers. Dealing with my clients, I started working with them on the softer issues of succession (which is out of my comfort zone), but realized people just needed a push or some direction to get them started. When I see a successful transition of a farm, it is very rewarding because I truly love our industry and want to see as many people succeed at it as possible.
Q) If someone is just starting to think about succession, what information do they need to consider about their business’ financial situation, their own situation and the possible successor’s situation when formulating their plan? What factors do farm owners often forget?
A) As soon as someone enters into business they need to start planning how they are going to exit. Set yourself up with the most flexible system possible. This might be a more expensive option, but it will pay dividends in the long run. Succession is not an event; it is a process, something that evolves over the life of the business.
I try to appeal to the younger generation because they have the time to put processes and structures in place that will benefit them the most. They need to make sure that the business can sustain all those people involved. The farm may have to grow if additional family members are joining because it might only be able to sustain the current family’s needs. Maybe they need to look to other ventures to help sustain it during the transition. Make sure that the generations talk about risk and how much each will take on. Typically, the older generation wants less risk, debt, etcetera, while the younger generation is risk-averse. This can often be a source of conflict.
Q) For someone who is implementing their plan and/or in the midst of a transition, what should they be monitoring to determine whether things are moving according to plan, and why?
A) Again, this is a process, so to make sure you are going to be successful, the older generation needs to train and give opportunity to learn to the younger ones. Training in bits and pieces and handing over responsibilities in chunks works far better than doing everything at once.
I like to see the younger generation start their own operations small and alongside parents to learn all the aspects of the farm. They have the risks and rewards of ownership and learn what the whole business is about. This might cost a bit more, and not be quite as simple, but again, from my experience, it has a better chance of success.
Let the younger generation make decisions – small ones at the start and larger ones as they grow. Don't overwhelm them, but ask them to make decisions and make [this process] part of the farm. Mistakes will get made, but hopefully little ones, so they can learn.
Q) For the farm owner who has already completed, or is about to complete a transition, what steps should be taken to start securing their financial future?
A) I always tell people don’t sell your assets too soon. Keep ownership until you are confident you will not need them or rely on the proceeds from them. You likely built a business from scratch or struggled, so don’t think you have to give everything to the younger generation to make a go of it. I like to keep land ownership in the older generation until the end, as it gives a lot of security both financially and emotionally to the farm.
Q) What are common financial challenges farm owners and/or successors face during succession planning?
A) They fear losing their wealth and not being able to retire the way they want or feel that the business has to succeed in order to provide for their retirement. This can often mean that they don’t do anything with the transition and end up running the business and owning everything way too long. They need to start paying themselves from the business early. That’s why this needs to start with the younger generation now, and set up a structure that will allow them to save tax money effectively. If they have a nest egg, maybe in financial instruments or even land, then they will feel more secure and the transition will be easier.
Q) What is a common challenge farm owners and/or successors face during the transition period? What is a practical solution?
A) Tax is often a challenge for farmers as they don’t want to pay any, and this will end up hurting them further on when it comes time to secure their future and maybe sell their assets either outright or to the next generation. Pay as you go and the pain and amount will be a lot less.
Q) In your experience, are Canadian farmers aware of these issues and prepared to face them?
A) They are aware of them, but fear keeps them from acting in the right way to make sure that the transition occurs. They [are shortsighted] in making all decisions, rather than looking to the long term, and it ends up costing them far more in the long run than if they had maybe paid a little more as they went.
Editor’s note: This article has been edited and condensed.