Succession planning is one of the most important yet most overlooked tasks for family-owned businesses. It has become a taboo subject on family farms, with conversations around it being continuously postponed due to fears of causing friction among the family unit. However, the core of any successful plan is the inclusion of all family members, whose participation helps ensure that all relevant perspectives are heard.
Farm families often operate under misconceptions about the equalization expectations of nonfarm siblings. Many parents in farm families can go round in circles trying to find a balance between fairness, equality and what value to place on equalization for their children. This is a frustrating cycle to get stuck in and often leads to the feeling of being overwhelmed, which hampers the progress of the overall succession plan for all involved. There are many ways in which we as dairy farmers can approach equalization for our nonfarm children, and the key is to identify which resources best fit and when the correct time to utilize those resources may be.
In our work with farm families across Canada, we see a huge disconnect between the assumptions of parents and the expectations or beliefs of nonfarm children. Many parents believe they know what their children want and need, but in truth, there are often many underlying components of our children’s lives that we are not fully aware of. This is where the importance of including nonfarming children in the succession process becomes so relevant.
An example of this misconception can be seen in a family we recently worked with in southern Ontario. They have five children. Of these children, two currently work in the dairy operation, while the other three have established their own path away from the family farm.
This farm has accumulated a significant asset base in the farming operation over its three decades of existence. The farming assets combine for well over $10,000,000 of equity, causing a headache for mom and dad when trying to equalize their nonfarming children. However, as with most farms, the debt levels, overhead costs and rising cost of inputs do not translate to having significant cash resources on hand despite the significant asset value.
When we first met this family, their current plan was to transition the dairy assets to the farming children along with the home farm and split the remaining farm properties (three parcels) between their nonfarming children. Understandably, this plan was met with a high level of scrutiny from the farming children.
Despite believing they found a solution that tried to be as equal as possible for all children, mom and dad were overlooking the impacts this approach may have on their children's relationships.
First, let's look at some positives. This approach would require little capital injection from either parents or the farm operation. This makes it an appealing solution for many farm families. The low-cost, minimal immediate impact makes for a smooth estate plan for mom and dad. It gives equity to nonfarming children and does not place immediate financial strain on the children continuing the business.
However, when we start to measure the long-term impacts of this approach, we can see how it begins to have an opposite effect on mom and dad’s main priority: maintaining family harmony.
The first objection or barrier we face in these asset division scenarios stems from the governance of the assets. Typically, asset splits come with an agreement that the farming operation can continue to use the land as part of its operations. This can be achieved through some form of rental or usage agreement. As a result of these agreements, the sibling dynamic now changes from family members to business partners. Who dictates the rental rate? Who sets the duration of the agreement? What if both parties don’t agree? Typically, siblings who wish to be in business together do so voluntarily, and when these business arrangements are forced upon our children, it often ends with feelings of discontent or friction in the family unit when the two sides cannot agree.
Furthermore, for this family, the nonfarming children saw little benefit in owning the land. The value of the land, though significant, often comes with handcuffs that provide little impact on their daily lives. As part of the family discovery phase of the succession planning process, our interviews with each of the nonfarming siblings revealed that their needs were more immediate as opposed to long-term. Their main concerns were home ownership, savings and education funds for their own children, and access to capital that would allow them to pursue opportunities with their growing families. Owning an asset they cannot sell only adds new complexities to their lives. The nonfarming children also didn’t want to become a barrier for the growth of the farm. Despite not being actively involved, they did not want to limit the future success of the farm and believed that taking assets away from the farm operation would lessen their parents' farming legacy as a whole.
From the perspective of the farming children in this family, they also did not wish to see nonfarming siblings owning farmland. These children understood how they can leverage their equity in the farm for future capital expenditures like new farm purchases, infrastructure improvements, etc. Losing a significant portion of their asset base would decrease their borrowing power from lenders, limiting their future opportunities on the farm. From a business-ownership viewpoint, these brothers also wanted to have more stability for their planning efforts. Having ownership of the land would give them control and the security of knowing that the farmland could not be sold from underneath them after making business decisions dependent on revenue from the farmland in question.
After some in-depth conversations with all family members involved, it was evident that mom and dad had been stuck trying to solve a problem that didn’t exist. The children were more aligned with their intentions than mom and dad ever considered. The nonfarming children had no expectations for equality, only for fairness. In their eyes, a gift of much smaller value with better timing would have a more significant impact on their lives than a gift of farmland. From here, the family was able to have specific, measurable discussions about how the farm's resources could best provide opportunity for all involved. Working together, the family was able to have discussions about how the farm could utilize its cash flow to find a combination of saving, borrowing, insuring and gifting assets to nonfarming children at the optimal times to have maximum impact on their lives while also having a minimal impact on farm operations.
