Archive for the year 2009

CBC Commentary: How Big a Deal is Succession Planning

Posted on: July 8th, 2009 by Richard Cressman

Everyone agrees that it’s important to make the basic arrangements for passing on the farm to the next generation. But many farm families don’t treat succession planning as that big a deal — after all, farmers have been handing down their farms to their kids since agriculture began.

But times have changed a lot. There probably isn’t any other business today where so much capital is invested per meal ticket.

A carpenter may have to buy a van full of tools and a trucker, a rig worth $150,000. But on the average farm in Ontario today, one income is going to require capitalization of anywhere from $500,000 to $2 million.

And when you go into a farm partnership with a family member, it’s not for a season or two. You’re going to look at a 25-year plan.

This is true even if only one of the children is going to be actively farming. Farms are so highly capitalized that very few parents will have enough assets outside the farm business to give their other children even a semblance of an inheritance. In other words, even if only one child farms, his or her siblings are almost certainly going to end up as partners.

Setting up that partnership so that everyone is happy isn’t easy. Creating a partnership that will endure is even harder.

For example, say you have two brothers who undertake a major expansion and it works out great. A few years later, one brother is all set to expand again, but his sibling shocks him by saying that he wants out. It turns out the other brother nearly got an ulcer worrying about the first expansion and it put his marriage under a lot of stress. The second expansion is a great idea, he says, but there’s no way he’s going through that again.

Or maybe the farm’s not going well and the off-farm sibling is so concerned about his brother’s well being that he starts pushing to sell the farm. Then there’s all the disagreements that start over whether to buy a new tractor, or add a new crop to the rotation, or who gets to build a new home and who stays in the old place.

That’s why I believe that succession planning should begin when the kids reach school age. As parents, you have to teach your children how to get along and how to keep getting along when something changes. Because changes will come, and keep on coming.

The way they farm will certainly change greatly over the coming decades. The financial situation will probably go full circle a couple of times. And your children will change their views, their priorities, and the way they relate to each other won’t stay the same forever.

There are three elements in succession planning and these are what they are:

The first one is communication, the second one is communication, and the third one is also communication.

So start the conversation as soon as you can by asking the most fundamental questions. Why do you want to farm? What do you expect to get out of it? What are you prepared to put in?

And teach them to keep asking those questions of themselves and their family partners because, as the years go on, the answers will keep changing.

Dad Won’t Talk

Posted on: May 2nd, 2009 by Richard Cressman

My question for Richard

After finishing college seven years ago, I came home to work on the farm with my father and mother. Two years ago my younger brother joined the business. Both of us have been given shares in the company. My brother and I get along okay. We get the work done without a lot of talking, but the problem is that our father does not want to sit down and talk about day-to-day decisions or even long-term planning. We have tried meetings but dad gets frustrated and says it is a waste of time. Both my brother and I feel we need to do this. We have talked to our mother about this and she is as frustrated with him as we are.

 

Richard’s Reply

Why some individuals resist talking about business is complex. It sounds like you and your father were able to communicate reasonably well in the early days of you returning to the farm. It could be that your father sees you and your brother getting along quite well and has decided to step back from the decision-making. There is also the possibility that he does not want to see his role diminished so he wants to avoid any discussions that could see you and your brother taking on more control and more decision-making. Your father sounds like a person who prefers to just “get the work done” versus “talking about it”. Try and appreciate that point of view if you can for a moment. The big question is, what can you do to get father to just sit down. Coffee time for some families has been the vehicle to do this. This does not sound like something your family does.

I will share what one family has done successfully. This was a situation much like what you are experiencing where the brothers were getting along quite well, but there was a significant rift between dad and the one of sons. They tried meetings but it did not work well at all. In this case the father took the initiative and each Monday morning he went into town and purchased three take-out breakfasts and brought them back to the barn office. He invited both of sons to sit down for breakfast. There was no agenda — he just wanted to buy the guys breakfast. After a couple of weeks of sitting there eating breakfast and just shooting the breeze they slowly started to talk about issues concerning the farm.

Now the Monday morning breakfast meeting has become something that they will not miss. It took about six months to get it entrenched as a habit and now even when they get into busy planting or harvesting seasons they still take time to eat breakfast together on Monday morning. They also conveniently have a whiteboard on the office wall where they will list out some of the things that need to be done over the next week.

See if you can get your father to sit down with you and your brother over some take-out food, whether in the barn office or your parent’s kitchen or you and your brother may want to take him out for lunch some place. Step two is to not rush the process. Even though he is your father and business partner, you will need to develop a trusting environment where your father is willing to talk about the things that you would like to talk about. This can take time and effort. Be gentle and patient.

Not Yet an Owner

Posted on: March 19th, 2009 by Richard Cressman

My question for Richard

My husband has been working for his parents since high school. We live in a house on the second farm. His parents own everything. My husband is 44. His dad is 65 and has no desire to slow down. They milk 48 cows and his father keeps telling him that both of the farms, cows, and machinery will be his someday. My husband has an older sister and a younger brother who have nothing to do with the farm. His mother does the bookkeeping. My husband has never stood up to his father but complains to me all the time. Nothing seems to be happening about us becoming owners. Years ago I was told to keep my nose out of the farm business so I have had a job working off the farm for the past 11 years. Our son is now graduating from high school and wants to do a two-year program in college and then come back to farm. I am very reluctant to encourage him to come home to farm until this ownership thing is sorted out. How do I go about getting my husband to talk to his parents?

 

Richard’s Reply

A quick answer to your question is to get outside help and confront your husband’s parents about the future of the farm. Before proceeding, please consider the following. To avoid a nasty confrontation it is imperative that you try and understand some of the reasons why your in-laws have not wanted to take your husband into the business as a partner. The first question to ask is, does your father-in-law have confidence in your husband that he will be able to make the tough management decisions to keep the farm running successfully when your father-in-law steps aside? It is possible that your father-in-law feels your husband is a great worker and gets the work done, but may not have what it takes to manage the business. A second possibility is that mother and father are trying to avoid the decision as to how to treat their other two children regarding inheritances. Most parents feel they need to give some type of inheritance to each of their children. When parents don’t know what to do they often do nothing.

A third possibility could be that your father-in-law is struggling to accept the reality that he is not going to live forever. He keeps working hard and won’t slow down. This allows him to deny the fact he is closer to the end of his working career than he is to the beginning. If this is the case, future discussions must be gentle and sensitive. Denial is a tough thing to confront when you are the person in denial. It can be a very explosive topic to talk about. Go easy here.

Keeping your “nose out of the farm business” has no doubt been difficult. Your son’s interest in a farming career is your opportunity to step forward and help your husband find enough stamina to ask his parents what the bottom line really is and who is going to own the farm and when. Discouraging your son to think of farming if there is no possibility of ownership for him is one thing, but to discourage him at this stage when the possibility may be there in a couple of years would be a travesty.

If your husband will not bring up the topic with his parents, suggest that the two of you go to the accountant responsible for the farm books. Ask for suggestions. Failing that, is there a lawyer who your in-laws have used in the past who could possibly give you suggestions about how to address the farm ownership issue? You can also search out a neutral third-party adviser. If your in-laws are receptive to talking about succession, this could be an excellent venue to keep the ball rolling forward. It may feel like you are walking on egg shells, but please keep moving forward – if only for the sake of your son.

To incorporate or not to incorporate

Posted on: January 21st, 2009 by Richard Cressman

My question for Richard

We have been talking with our accountant about incorporating the farm. My parents own everything. I work for wages and my brother who still has one year of school left plans on coming home when he is finished. I have been married for two years and my wife has a job off the farm but would like to be more involved in the day-to-day operation. We have also talked about a partnership. That is what my father had with my grandfather.

 

Richard’s Reply

There is no correct answer to this question. There are advantages to incorporating and there are going to be disadvantages as well. Sit down with both your accountant and your lawyer and have them discuss both the advantages and disadvantages with you, your wife, your parents and your brother. Literally sit there and write down all the points talked about. Also, it might be advantageous to search out other farmers who are incorporated and others who are not and get their opinions; particularly individuals who have been operating as a corporation or partnership for more than 15 years. Consider all of these opinions. Consider where you and your brother see the business in 10 or 20 years; how you intend to grow the business. All of these considerations and advice will lead you to a well researched and sound business decision. But farming is more than a business so there is another side to incorporating or operating as a partnership that does not have direct legal and financial implications. It is a side of the incorporation decision that often goes unacknowledged until we are looking back, when it is too late. It is the emotional side of ownership that can cause much angst within the business and the family, years after the decision to incorporate or operate as a partnership was made.

The first question to ask is where will each of the business partners live? I would recommend if at all possible that each partner in the business attempt to own the house or farm where they each live. I will repeat that last statement, “I would recommend if at all possible that each partner in the business attempt to own the house or farm where they each live.” I cannot emphasize this enough. You mentioned that your wife works off farm and I am assuming that her income helps to support both of you. It probably allows you to take out a smaller draw or reinvest what you do take as salary or wages back into the farm. Or it may just allow you and your wife some luxuries that are not available to your parents or your brother.

Let’s consider a story of two brothers who had been working together for approximately 20 years. They had started out working with their father right out of high school. Everything – four farms, machinery, quota, and vehicles – was owned inside one corporation (it could just have easily been a partnership). They eventually bought out their father. Each of them with their respective wives controlled 50% of the shares in the corporation. The structure that their accountant had put together for them years earlier was textbook perfect.

However, the working relationship was far from perfect and they were on the brink of breaking up the business. I was sitting at the kitchen table with the one of the brothers and his wife. She said that she was very tired of living in a house where all she owned were the clothes in the closets and the dishes in the cupboard. She said everything else including the car was owned by the company. In her mind what she actually owned did not seem like very much. She felt that she had very little control over her life. Simple decisions like redecorating a room had to be approved by all members of the corporation as the corporation owned the house. Years earlier she had wanted new cupboards for the kitchen but the decision at that time was to not spend money on houses, rather it was better spent on milk quota and buying yet another farm. This decision although financially profitable was emotionally damaging. This was only one example of how lack of ownership caused deeper and deeper rifts between the brothers’ families. If each family had owned their own home, allowing the women to feel more control and independence of their own domains the likelihood of keeping this business alive would have been much greater.

Ownership is not just about dollars and cents. Ownership can be a very emotional issue. There is a particular attachment to the home that you will share with your wife and raise your family in. Don’t underestimate this attachment especially for your wife who is striving to build a new family with you while you are striving to also manage changing business and family dynamics with your family of origin. It all really comes down to respecting the financial need to work together and the emotional need to be independent.

Your brother is still single, but there could come a day when he will want to get married and there will be another young woman entering into this family. Taking the time now to plan how you are going to handle the ownership of your home/farm and where your brother and his future wife may want to live can save you a tremendous amount of angst down the road. Oftentimes frustration similar to what I have mentioned in the story above does not show up early on. It may go unnoticed until an unavoidable explosion occurs causing irreparable damage to the business and your extended family. Sometimes the stress can build for 10 to 20 years before it comes to a head.

Regardless of which type of ownership you choose — corporate or partnership, do not under estimate the emotional and psychological aspects of what each person feels they have ownership control over. When considering how to structure your business relationship think about situations like: If the home needs renovations who is going to decide how much money gets put into renovations? (kitchens are the emotional hotspots and commonly on the renovation wish list for farm wives). Or what happens if the spouse of one partner has a very high paying off farm job and wants to upgrade their home? If this is owned inside a corporation how do you go about providing that person ownership that equals their investment?

Here is another thought. What happens if you and your wife are content today to live in the house that you have, but down the road your brother gets married and a farm comes up for sale close by that has an extremely nice house on it in comparison to where you are living? Your wife who has been part of the family for more years than this new bride will find herself living in a house that does not have near the upgrades of this new purchase. How are you going to handle that potential situation?

After you have addressed some of the questions mentioned above please seek the advice of an account and lawyer as how to setup your ownership structure.