Succession and estate planning in any business is a complex process that requires good communication, planning and ideally a long lead in time to maximise the chance of a successful transition.
A family farming business adds to this complexity due to the following reasons:
- The emotional nature of family connections and the associated difficulty in having conversations about these difficult subjects;
- often only some of the next generation will be involved in the future running of the business and others children are not. These individual family members are generally at different ages and life stages;
- the older generation will often still be involved in the operations of the business. There are varying needs and wants of the “retiring” generation as compared to the new farmer(s) and their partners;
- there is often long multi-generational family history of the land and business in question. Maintaining a viable farm in the family is often a key objective and can conflict with other objectives; and
- the farm is a large tangible asset with a value that is independent of the operational return of the business. The business return on the asset value is generally low and variable (relative to other investments). A large asset is therefore required to have a viable farming unit. The farm usually makes up the majority of the family wealth. The combination of all of these factors makes it very difficult to “pass on” a viable farming business and have an equal or even fair distribution of the family assets.
Changes in succession and estate planning culture
Over the last century or so there has been a marked change in society’s perception of a fair process of succession and estate transfer. In the past the stereotypical farm succession process was:
The oldest (or strongest) son took over the family farm or family estate;
if possible other sons who wished to farm were helped to get established in other farming regions being “opened up”; and
daughters where left smaller “tokens” of the family wealth.
Today there is more often an expectation that family assets are divided equally, males and females have equal opportunity, and all this is backed up by law where the courts can override wills.
While no one can deny there is a good case for equality of entitlement, the process in my opinion is speeding up the decline in the number of family farm operations.
For a given enterprise type the size of farm required for a viable operation is much larger than it was 10, 20 and 30 years ago. As such there are two competing factors at play:
- Modern estate planning is leading to smaller farms, or farms with heavy debt burdens, via division of assets or sale of the farm because “fair” division is not possible; and
- the scale required for a viable operation is increasing.
Data shows the number of broad acre farms halved from 1977-78 to 2006-07 (Sheng et al 2011), and the most recent data (Australian Bureau of Statistics data) shows there has been a 13% drop in the total number of farms in the five years to 2011.This is not saying that either past or the present are right or wrong, rather it is the environment in which businesses operate. As such, a family who want to succeed a viable farm to the next generation, together with a fair distribution to other siblings, needs to have a long and careful planning and implementation process to increase the likelihood of success.
Communication on succession and estate planning
Research indicates that the level of communication on succession and estate planning within small businesses is pretty poor. While the research statistics on succession in farming business is now pretty old and therefore its relevance could be questioned, it does, however, give some historical perspective and some guidance to what professionals, active in providing successional advice, see.
The data on the level of succession communication that occurs in the farming community is quite damming:
- For the main farmer (usually male)
- 30% – 42% have not discussed succession with spouse;
- 50% – 63% have not spoken to farm based children;
- 82% have not spoken to daughter-in-law. (1 study); and
- 60% of second generation have not spoken to their spouse (1 study).
Sources: Gamble et al (1995), Crosby (1998), Barclay et.al. (2007).
Is this the same today? Experience suggest that there has been some improvement as there has been significant exposure of the issue, many seminar sessions and opportunities to build awareness of the need to tackle the issue. However, the improvement has been low and lack of succession communication before an “issue” has arisen is still a major barrier to successful successional outcomes.
A key message: Don’t be one of these statistics.