An article written by QFF Corporate Partner BDO
For any farming family, the decision about what happens to the business and assets when the current generation retires is one of the biggest issues they face. However, it is also one of the issues most avoided – often through a desire to avoid conflict.
It can take a major health scare or push from the next generation to initiate succession discussions – at which point pressure, emotions and long-held assumptions can lead to the very conflict the family has been trying to avoid.
One such assumption is that the properties and business must be divided in order to provide for all family members – including funding the retirement of the current generation, transferring properties and the business to the next generation who are working in the business, while providing for the next generation who are off farm.
While this may be the right solution for some families, it may not result in the best outcome for all families. There is another option to consider, which is to keep the properties and the business together and operate as a family in business.
In this article, we discuss why communication is vital when planning for the next generation in agribusiness, explore the pros and cons of both options and how families can make the best decision for their unique circumstances.
Option one: Dividing properties and the business
Splitting up properties and business is the most common approach farming families take when it comes time for the current generation to handover to the next. This can be partly attributed to sticking with the ‘status quo’ – how things have historically been done and/or a lack of knowledge about alternative options.
When succession discussions are avoided for a long period of time, it can result in a lack of adequate planning, and the potential for pressure and resentment to build under the surface. Often, it takes a ‘trigger’ for the issue to be addressed – whether that is the next generation seeking security through ownership, a health scare or differences in opinion over the strategic or operational direction of the business.
Decisions made quickly under pressure are rarely made well or fully considered. They can also result in selecting a ‘default’ option, which is often to split the properties and business. The key considerations for families taking this path are how the split will take place, whether there are enough assets to result in a ‘fair’ outcome (there often isn’t) and ensuring a retirement living for the current generation.
- The next generation is in control of their own individual assets and wealth, including operational decisions and strategic direction
- If communication has been clear and all parties have felt heard in the process, then this option can result in an outcome that is satisfactory to all parties.
- Splitting the family business can limit the equity available for the next generation to leverage and grow
- If the split is considered unfair by one or more parties, or they feel unheard in the process, animosity can remain long after the decision is made – and may permanently damage family relationships.
Option two: Keeping the family business together
While many of the key considerations remain the same – such as assets, funding retirement and the needs of the next generation – this option doesn’t result in the splitting of properties and the business. Rather, these are kept together and operated by the family in business together.
As with option one, this won’t be the right solution for all families. However, it does provide an alternative approach to succession when there is often thought to be none.
The decision to operate as a family in business is not done under pressure or at the last minute – it requires clear communication between family members over time to safely discuss their options, with all voices heard in the process.
Discussions should include which family members want to be involved or not, operating mechanisms, roles and responsibilities, remuneration arrangements, any necessary business structure changes, and future plans.
- Decision making processes, remuneration and the role of each family member are clearly defined – providing accountability with some room still for individual preferences and input
- May allow for the entry and exit of family members to and from the business
- Keeping wealth and assets together provides greater leverage for growth and increased financial security for all family members
- The family business continues to build a legacy for generations to come.
- Success is heavily reliant on continued open and clear communication between family members as they work together long-term
- Wealth is held for the family as a whole, as opposed to being distributed to individuals
- Less autonomy for individual family members to take their own direction.
Of course, there is no rule to say that either of these options alone will be the right one. Every family is different – it may be that the right solution for an individual family’s circumstances is some combination of the two.
Governance is the key to a successful succession of the farming business. Governance sets out the actions, rules and policies that guide a business in the right direction. Documenting the outcome of the family discussions, along with obtaining the approval of all parties involved, provides a clear path for the business and the family.
Good governance centres around documentation and clear communication. For instance, using a family charter to set the rules for the family business allows all family members, whether involved in the business or not, to understand the strategy and operations of the business along with the family assets.
Rules and policies set by the family in the charter will assist the family to hold family meetings and achieve the goals of the business and family. These meetings will become a safe space for the family to discuss issues that arise. It allows the family to maintain open communications and transparency. Like business and strategic plans, the governance of the business and the family must be reviewed at constant intervals to remain current.
Whichever path the family chooses to follow, the critical element is communication. By knowing and understanding the available options and making a collective decision through open and clear discussion in a safe environment, it is possible for families to arrive at the right solution without conflict – and continue the family legacy into the next generation, and beyond.
BDO can help you understand your options
We take a holistic approach to understanding the unique situations of families in agribusiness – combining technical expertise with a deep understanding of family dynamics. Contact your local family business specialist for tailored assistance with navigating continuity and succession planning for your family agribusiness.