Many of you have been following our journey with the Hunter family. To recap, the Hunters are a fourth-generation farm family with a mixed crop and dairy farm in southwestern Ontario. Mary’s husband Jack passed away two years ago. She is 80 now and continues to live on the farm. Her only child, Bruce, works on the farm and has partial ownership of land purchased over the years, but not of the farm itself. Bruce is looking for a pathway to ownership and it was his wife Susan who contacted us about succession planning. She also wants the plan to set a course for their adult children: Mark, 26, who currently farms with Bruce; Maggie, 28, who is eager to return home to the family farm; and Matthew, who works off the farm.
In my last article, we explored how the family aligned their vision. They all want the farm to stay in the family and they want to maintain family relationships. They are also agreeable to a multi-generational approach that includes considerations for all current and future Hunter grandchildren.
Now it’s time for our team to begin supplying the financial perspective.
Mary Hunter, 80 years old
Mary has maintained a modest lifestyle her entire life and she balances her personal chequebooks each month, making it easier for us to assess what is required. “I don’t want to move out of this house, and I don’t want to stop treating myself every once in awhile.” I smile because to Mary, this means purchasing “the good stuff” in the yarn store for her sweater making. She is also aware that the income she receives from the farm affects her OAS payments and she is saving money and has been for several years. When we provide clarity on the difference between taking income from the business (and paying tax on it as well as tax on the income on her investments) versus drawing from her savings and qualifying for her OAS again, she is willing to move forward.
Bruce Hunter, 55 years old
Bruce has a realistic approach in this phase. He understands his personal net worth and the farm’s overall financial stability. It is a big part of why he is concerned about having two of his three children work on the farm. Are there enough dollars to go around? I ease his concerns by outlining an exercise to help him and his wife identify their financial needs. “Okay, so it’s not as bad as I thought,” he chuckles. Bruce had never really looked at the current and overall value in the entire farm operation. He feels asset rich and cash poor, which is normal. “How can we afford to have them both here?” he repeats. I remind him they are paying for help now: one full-time employee who is ready to retire in the next year, along with part-time help that is hard to find and keep.
We review his recent cash flow, and he agrees most of his land debt was gone this past year, and his cash flow has never been better. They are in a very good position to accommodate Maggie, and we agree that once the full-time employee retires later this year, it will leave a gap in labour along with the funds to pay Maggie.
Susan Hunter, 54 years old
It is my conversation with Susan that is the quietest. She feels she has said enough and said it before; Bruce deserves ownership now and she wants both her children to work together on the farm. “I know you will figure that part out for us, but what are we doing about Matthew? I cannot have him and his family excluded from the financial side of this.” Matthew is her non-farming son, who is happily married, successful and is the father to Susan’s only current grandchildren. “What do we have to sell to give him some money too? Bruce said you two feel good about our lifestyle needs and his mother’s, I need that clarity for Matthew (my son) too.”
Matthew Hunter, 30 years old
Matthew is realistic. His main goal is that his mom and dad are financially secure and enjoy their life outside of the farm. He thinks it’s great that his brother and sister could help grow the business and possibly own it together one day. Matthew’s passion was never on the farm and he has found a future in his career and feels very settled about his own family’s future. I ask what he would see as fair. “I know land values are crazy,” he says. “But there is no way anyone can afford to capitalize on them, or it wouldn’t be sustainable.” After the last meeting, it became clear that for Matthew, this is about providing a lifestyle for multiple generations if they choose to participate in the work. There is nothing easy about what they do everyday. “I don’t need anything, but if there was ever something they could do, it would be for my kids and ensuring they can farm one day if they want to.”
Maggie Hunter, 28 years old
Maggie receives a steady paycheque from the dairy operation she is currently employed at, where she has implemented impressive new barn technology. “I know this can change our own revenue stream,” she says of the technology. “I’ve seen it happen.” Her expenses have been slim during this period of her life. With no children or boyfriend in the picture, she has accrued a sizeable savings account, and she is ready to put some money into her family’s operation. We talk about what dollar commitment she is ready to put into the farm and look at her own financial plan. She isn’t phased about taking this risk and rejoining the family farm. “I know we can do it and make it successful.” Maggie has spoken to her parents about moving back into her old room in the farmhouse and not drawing salary for the first 12 months. “I’ve given this a lot of thought, and I am ready for it all.”
Mark Hunter, 26 years old
Mark draws a salary from the family farm. It’s not a large wage, but he is paid monthly. He was also told he would run the farm and its operations one day. He’s been surprisingly open to having Maggie join him on the farm, recognizing her skillset is in sharp contrast to his. He’s just clear he doesn’t want her to have equal ownership to him at this time and doesn’t think the farm can afford to pay her a regular salary as well. I talk to him about what he thinks the value of his sweat equity should be. “A larger part of ownership,” he says. I don’t tell him, but I agree about having his years of hard work monetized in this process.
Grace Hunter, 25 years old
“This baby is coming, Darrell, whether we are ready for it or not,” Grace says as she laughs. She is now approaching her third trimester and continues to be anxious about her family’s finances. “Mark is committed to staying here and making the farm work with his father and his sister. But he needs a raise and some clarity.” Grace is appreciative of having me involved in this process. She doesn’t like muddy waters and is looking for clearly defined roles and compensation when Maggie comes on board. She’s planning for the arrival for her first child and ready for the financial planning portion of her life to be clearer as well.
The financial planning part of our process with the Hunter family is about providing clarity. We know what everyone’s financial needs are, and we provide a simple picture of how to afford this for each family unit in a tax efficient manner.
The farm business needs a clear strategy for long-term success. We discuss a strategy and agree how much should be reinvested to provide for the growth needed in the business to sustain three families. It would involve minor restructuring of the current debt, but it aligns with the vision. We don’t need to pay down the debt in five years; there is another generation wanting to share in the growth and the risk.
Now that they know their numbers for lifestyle and business needs, it’s easier to discuss possible scenarios for succession.
Let’s start with Mary. Once she saw she doesn’t need the milk cheque for lifestyle income, it was easier for her to make better decisions. We quantified the difference in potential tax on the transfer now versus at the estate level and Mary was more willing to move her portion of ownership of the farm assets. She feels confident in making this decision knowing it will ultimately benefit the farm and the family. She may have also been motivated by the ability to transfer her portion of farm assets tax-free under the current rollover rules.
Bruce feels educated now on the asset value of the farm. He’s comfortable with his personal net worth and that of the farm. He’s still concerned about what revenue there will be to pay Maggie when she starts taking a draw, but is proud of his daughter’s willingness to move back home with him and his wife and to invest in the farm with her savings.
His wife Susan has a clearer understanding of equalization options for Matthew, her non-farming son. Our exercise with her during this phase included a look at options for generating money for him in the future, as he is not interested in cash at this time. Our team provided options to save for it, sell something, borrow for it or insure it.
Maggie has the willingness to grow into her ideal role. She recognizes her brother has considerable knowledge and experience that needs to be valued. She has modest expectations that I feel are reasonable to building a pathway from employee to owner.
The impending arrival of his first son has had Mark more interested in finances than he ever has been, at least according to his parents. He’s expressed gratitude for helping to quantify his sweat equity value and for finding a financially feasible way to bring Maggie into the operation without affecting his current draw. Mark is excited to see what the transfer of ownership and shares look like for his family and is feeling confident they made the right decision to invest in his family’s operation and not explore Grace and her family’s offer.
Its fair to say Grace is still anxious at this stage, first baby on the way and a shift in how her future on this farm looks with Maggie reappearing. She was looking for a change in her day-to-day finances, which won’t be happening quite yet. There is no raise for Mark coming anytime soon. But she is expressing confidence in the ownership pathway being proposed.
The Hunter family has made it through the financial phase with greater clarity and education about their farm and their families’ future. Each has a financial plan while Mary has a clear financial income plan. The Hunters agreed to consider options for utilizing the farm’s cash flow to create some off-farm investments that would benefit the non-farming family. There appears to be a sense of calmness about the financial direction the succession plan is taking, and all members are encouraged about how this will translate into the transitions and agreements phase.
Next article we’ll look at transition and estate, and develop agreements on the Hunter succession plan.