Succession depression

This issue of farm succession has been a problem for a while, and it is sad that it has taken a tragic murder to highlight the challenges that farmers face in dealing with it. High prices for farm land, characterised by the value being out of kilter with its productivity, and farm debt that is often too high to deal with the volatility of the markets and the weather, are commonly linked  to farm succession issues.

The main theme in this article in the Waikato Times is clear communication is needed between all parties and a long term plan implemented for any chance of success.

Is the future of the family farm at risk from succession issues raised in this article, or are there better capital structures that should be put in place early to protect the asset and prevent potential conflicts arising? Share with us your views and experiences.

Farm succession can be one of the most stressful things a farmer ever does. It's one of the big contributors to depression and anxiety in the farming industry and when something goes wrong, the results can be tragic. "That has really shown out with the Macdonald-Guy case," says Matamata counsellor and former dairy farmer Allan Baker. "It's quite obvious there were issues there a long time ago. There were lots of warning signs where an intervention could have happened and it wouldn't have got to where it did."

The act of passing what can be a hugely valuable asset from one generation to the next, while keeping that asset growing, allowing the farm owners to retire in comfort, catering to the often conflicting needs and desires of children, their spouses and their own growing families is a complex area fraught with potential pitfalls. There may be equity partners (investors) to factor in, blended families, in-laws and seemingly no end of other considerations when it comes time for a farmer to look to the future.

An ANZ business survey last month – which included a dedicated agribusiness section – found successfully passing on the farm to the next generation without creating a "hell of a nightmare" is one of the most pressing long-term issues farmers face. "How to keep the farm in family hands but in a way that is fair and ensures the future viability of the business. The stories of contested wills and family estrangements are all too common in the rural industry."

Morrinsville accountant Nigel McWilliam – who runs farm succession seminars – agrees strong relationships are vital for successful farm succession and all parties need to be involved from the outset."I often recommend discussions need  to start about Christmas, get thinking about it."Often everyone's around, off-farm family are coming, all the parties are there – it's a good time to do it. You can have a really good discussion over a few days."

"It's a process around how much we need to retire, how much we can borrow, how we structure it. Parents need a retirement income, kids need to be treated fairly." And, he points out, "fair does not necessarily mean equal for every kid". "One [child] may be successful off-farm and done well and be quite well off. Another may have stayed on the farm, working for minimum or low wage and building the asset. The off-farm one shouldn't expect an even split."

One of the key things, which some farmers overlook, is the need for the business to be making money and the owners to have built up equity."It could be worth $2 million, but they may have no equity. The expectations of Mum and Dad, if there's a lot of debt, may not be achievable. So get the farm operation in shape first, look at the cash and equity, then look at the expectations of all parties." A heads of agreement document should clearly spell out what's going to happen and when and there has to be a clear pathway for everyone.

McWilliam says there are countless options of how to structure the business side of the process, including forming a company with shares split between parties, holding the farm in trust, leasing it to a third party or borrowing against the farm to give children a head start on their inheritance. It's unlikely, given the value of farms these days, that children would be in a position to raise the capital required to buy out their parents and it's possible the process of farm ownership for them may take more than one generation to complete. "The outlay to get into property is high and the return on capital can be quite low," McWilliam says,

It's an easier process in dairy than sheep and beef, he says. "It takes longer in sheep and beef. It can take 15 years – dairy can take one year. There's also a clearer pathway through the dairy industry, from labourer to sharemilker, buying some cows and eventually farm ownership.