Many family business owners look fondly toward a future in which they will pass their business on to their son or daughter, certain that it will continue to thrive due to the wise guidance the owner has provided. But, all too often, this doesn’t happen.
Understanding why is often the first step for those who successfully transition leadership.
Succession in any family business is a process rather than an event. The sooner the process begins, the better.
In many cases, business owners give thought to a succession plan, but they put off
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implementation. This can cause serious problems if there is a premature forced exit of the business owner due to death or illness, leaving the successor to make his or her first key business decisions during a difficult time, with the result that the health of the business could suffer.
For family farm owners, the situation can be further complicated by the fact that the family home is often on the farm and farmers tend to have a higher concentration of wealth allocated to business assets when compared with other business people.
ANATOMY OF THE SUCCESSION PROCESS
In broad terms, the business succession process usually involves the following stages:
1. Determine whether succession within the family is a viable alternative, or whether the business should be sold to third parties
2. Develop the succession plan
3. Monitor the implementation of the plan, making changes as necessary
4. Co-ordinate the succession plan with personal tax planning for retirement and the distribution of the current owner’s estate
The success of the business succession process will depend on a number of factors, including: a desire to make it work, healthy family relationships, and trust, honesty and openness among family members.
That means your first task will be to develop a process for open dialogue within your family, and then to have an honest discussion, in broad terms, about what you want for the future.
DEVELOPING THE SUCCESSION PLAN
There is no “one size fits all” answer to succession planning. Instead, the succession plan should be tailored around the unique characteristics of both the family and the farm.
That said, there are key issues that should be dealt with in any succession plan.
Issue#1: Transition of leadership and ownership
At the heart of the succession plan is the need to set up a process under which the leadership of the business will be transferred to the new owner(s). Key areas that need to be dealt with are the identification of the new leader(s), setting a process to groom the intended successor to take over, plus a clear timetable as to when key events will happen.
Ownership of the business may be transferred along with management leadership or it may follow later.
Issue#2: Estate planning for the current owner
For owners of a farm, there are estate planning advantages that are not available to other business owners. In addition to the $750,000 lifetime capital gains exemption, it may be possible to transfer the farm business to the current owner’s children without triggering a gain. This intergenerational transfer applies for transfers during the parent’s lifetime or after death. That said, if the children buy the business, a gain will arise if the amount they pay exceeds the parents’ cost. In addition to transferring the entire business, another estate planning tool is an estate freeze. Under an estate freeze, the farm assets are transferred into a corporation by the current owner in exchange for fixed value preferred shares. The children (and the current owner, if desired) can then purchase common shares for a nominal price. Where a family farm corporation has already been set up, the existing shares can be reorganized in a similar fashion.
This allows children to participate in future growth while parent(s) retain the current value of the business.
Issue#3: Retirement planning for the current owner
Another key plan that is needed in all situations is a retirement plan for the current owner. There are two basic approaches to retirement planning. First, one can take the approach that they can tap into the value of the business to fund their retirement. Under this plan, for example, if you use a family farm corporation, you can receive dividends or have your ownership in the corporation liquidated over time. However, concentrating your wealth in the farm has drawbacks as it puts all your eggs in one basket. For example, if a quota currently has a high value, there is no guarantee it will hold that value into retirement. Another issue is whether the farm can support two families during the parent’s retirement. The more money you can segregate, the more flexibility you will have in succession and estate planning.
Issue#4: Crisis planning
Although all business owners (no matter how old) should have a crisis plan, the need for such a plan becomes more critical as a business owner ages. A crisis plan deals with the question that no one wants to think about — what will happen to the business tomorrow if I die unexpectedly or become disabled and can no longer run the business? Planning here will be focused on collecting the critical information needed to run the business, identifying who should take over and determining if there will be cash flow issues requiring disability or life insurance.
We’ve discussed several considerations and have really just touched on the surface of the issues a family will need to deal with when transitioning their farm business. The key is to remember that you can’t resolve all of the issues overnight. But you can reach your goals by remaining proactive and dealing with the issues in an organized manner. CG
