This is part of a continuing series by Matt McIntosh looking at succession issues.
Discussing farm finances and the financial aspect of succession can be tough. This is particularly true when succession plans must account for family members who do not intend to farm, or those uncomfortable with money-related conversation.
But discussing the dollars is necessary.
Why it matters: Families that have successfully executed succession strategies say being open about financial realities, and carefully developing plans that can be accepted by everyone are critical.
Identifying who wants to be involved
For Brett Meinert, a semi-retired farmer from Shaunavon, Sask., transitioning his family’s grain farm from his father to himself served as a lesson for succession planning with his son.
The key factor that made the initial farm transition largely successful, he says, was built on the understanding that none of Meinert’s four siblings wanted to farm. Meinert had been investing in the farm for a number of years, so discussing succession with family members was part of verbally formalizing an already-ongoing process.
“We were very, very careful,” says Meinert. “It came down to looking them in the face and asking, ‘do you have any interest in owning this land?’ and that’s the final word. If they truly thought owning land was a good business, we could accommodate that.”
As the party who took over the farm, Meinert also believes approaching the financial aspect of succession from a business rather than emotional point of view was just as important. Doing so helps identify to everyone what the farm is as a viable business, and thus prevent the possibility of family members changing their minds and trying to garner stakes in the farm years down the road. It also provides opportunity to outline the financial needs of the retiring party.
When it came to the actual numbers, Meinhert says they developed an “exhaustive” estimate of his farm’s after-tax value. They then tried to determine whether equal is in fact equitable if the business was equally divided between his siblings and himself.
For Meinert, the question of fairness is clear. Giving a non-farming child opportunity to develop a professional career after post-secondary education, he says, requires a much lower investment than that needed to give a farm child an equivalent opportunity. He believes this has to be communicated to all involved parties.
“Determining where money should go really is more art than science. Once you have the goal in mind, then you have to make sure everybody else is on board. If they’re not, the plan obviously has to change.”
With all of this in mind, he says the succession involving his son was executed in much the same way — albeit with some minor tweaks. Specifically, that meant also discussing who has authority on business decisions post-transition. In the case of his father, who “was unable to give up control in a way that made sense for the business,” Meinert says this was never discussed enough.
Fair doesn’t always mean equal
The idea that fairness does not inherently mean an equal division of farm value might seem counterintuitive, but it’s a reality necessary for many farms to remain viable as businesses, says Cherylynn Bos of Rockridge Dairy Ltd., a dairy goat farm with a milk and cheese processing facility in Ponoka, Alta.
Originally a beef and grain farm — one determined to be not profitable enough to support both her family as well as her in-laws in retirement — Bos says she and her husband, Patrick, converted the farm to a goat dairy before buying it in segments over time, and at a price considered fair by themselves and her in-laws. This investment was made easier because Patrick was the only one of six siblings to express interest in farming as a career, and because the farm could be fully transferred before the death of either of his parents.
This latter factor, she says, gives them peace-of-mind that the farm’s business viability is more insulated from potentially irrational or emotional decisions from other family parties in the aftermath of a death, a not unknown occurrence in succession stories.
As the ones transitioning out, Bos says her in-laws approached the change with a perspective that understood fair doesn’t always mean equal.
“They planned the tangible assets of their estate (would) provide an inheritance to their other children while allowing the farm to be purchased by the child wanting to farm without (forcing) them to provide a payout, at fair market value, to the other siblings,” she says.
“An asset is only realized if it is sold lock, stock and barrel. While some may feel they do not get an equal portion when they do get an inheritance, their portion is fluid and they can do anything with it. Our portion may be a bit larger but it’s very locked in.”
Clearly communicating farm values to family members can even be an issue in situations not involving an extensive succession process.
Gary Baars, a dairy farmer from Chilliwack, British Columbia, started in agriculture business by buying and selling cattle and hay. Success there gave him and Marie Baars, his spouse and business partner, an opportunity to acquire financing for dairy quota for 13 cows in 2011. Two years later, they had the chance to buy more quota from Marie’s grandmother. At that time the couple had already been running the grandmothers’ farm for a year.
The grandmother’s quota was directly purchased after more financing was secured. But challenges to their purchase still arose from other members of the family, says Baars.
For him, these challenges stemmed from an apparent cultural difference in how people discuss money. Baars says many of the grandmother’s family members had little conception of the investment required to run and build a farm because the subject was never openly discussed. The significant family history with the farm itself also contributed to questioning the ownership change.
“The younger generation needs to really respect the struggle the older generation went through to get to where they are,” says Baars. “Openness is crucial. Having that discussion is very challenging.”
He also thinks tough money conversations need to be initiated from the top.
“The leader of the business or family needs to instigate it … It’s tough. If a kid broached the subject and is shot down, is that fair? Is he going to risk his relationship again? I think there’s a way to do it fair and the leader of the family needs to take that role, even though its awkward for them.”
Baars adds having a neutral person involved, even if that person costs a lot of money, is beneficial because they’ll know what questions to ask, and be able to analyze or respond to the situation without emotional pitfalls.