Is it still possible to start farming from scratch? “If scratch means no farm assets and a good work ethic with a passion for agriculture, yes it can be done,” says Elaine Froese, farm succession coach from Boissevain, Man.
But how? Especially when the capital assets needed to be competitive have become so huge?
Today, new farmers are finding more and more creative solutions. Some use the traditional small start, which means they rent equipment and land. Others try their hands at direct or niche marketing. Or in some sectors they use new entrant programs, like those offered by the supply-managed boards.
They also excel at creating partnerships, swapping sweat equity for access to assets, and using creative financing.
It turns out their passion is so deep, they’ll beg, barter and borrow their way into farming.
Yet succession to non-family members remains rare.
Outside the family
Even so, non-family succession actually is happening, mostly it seems in Eastern Canada where a cluster of enthusiastic young starters and a number of retiring farmers are working together to find ways to make it work.
Usually these are smaller operations where the older farmer has no children wanting to take over and “adopts” a young ambitious couple instead. Usually too, the young couple also has off-farm income.
Jolene and Lauchie MacEachern are one such couple, and together they now own Folly River Farms Ltd. a 90 kg, 300-acre dairy farm near Truro, N.S.
Their road to farming certainly wasn’t straight. Nor was it remotely easy, or predetermined by family. It was long and winding, but luckily they took the right fork in the road early when they met a farmer who wanted to keep his dairy farm intact when he retired.
It took patience, hard work, respect and openness. Both the seller and the buyers needed strong, unwavering vision — and it helped to have some good outside advice and happy timing.
The message is, trustworthy people with good intent and the ability to work hard can still create success.
Here are the lessons the MacEacherns learned along the bumpy trail to non-family succession.
1. Work hard and keep options open
The story starts in an ordinary way. Lauchie and Jolene met as students earning their agricultural degrees at Nova Scotia Agricultural College in Truro. While Jolene finished up her final year and started her career, Lauchie got a job working for a nearby dairy farmer, Henry Eisses.
A few years later the couple decided to go out west to try their fortune. However, it was 2004. Grain prices were weak and BSE flared, so instead of finding good-paying careers in Alberta, they ran into a hiring freeze. After eight months of Lauchie working in a welding shop and both of them missing home, they headed back to the Maritimes with no plans for the future.
On the drive home, though, Jolene had an interview and she got the job at Dalhousie Agricultural Campus, where she still works while completing her MBA.
Soon after, Lauchie’s former employer called. His original plan of succeeding the farm to his sons hadn’t worked out and he needed some help. He and Lauchie had worked well together and had mutual respect.
2. Strong vision
Henry Eisses had an idea. Would the MacEacherns be interested in working on a non-family farm succession while Lauchie worked for him?
He also had a clear vision, and an opportunity in mind for the young couple. “Henry knew exactly when he wanted to retire and how much he wanted for the farm,” says Jolene. “He’s a standup person. He never deviated once from his goals and neither did we, and that helped so much.”
That set end point gave them all something to hold onto during the long process of planning and transferring. The proposal was that Lauchie would be paid with shares as well as wages so he could slowly build equity. It would also give them time to work out all the details of the final sale and for Henry to do some tax planning so he would be ready to retire at 62 years old.
It was a long transition that would see Lauchie working for Henry for seven and a half years, so it took a leap of faith for the young ambitious couple. “I was pregnant with my first child and it took some trust to enter into this agreement,” says Jolene. “At first there was nothing on paper.”
Instead of immediately meeting with a lawyer, they got together and discussed what they each wanted out of their arrangement. They found that neither party wanted to start out with an agreement that was legally binding. They all wanted the ability to walk away.
So they simply agreed on wages and that the Lauchie would be granted preferred shares on a yearly basis. This meant the MacEacherns could sell them back to Henry at any time and not be out for their work, or Henry could simply buy back the shares if it wasn’t working out.
Having a corporation allows some flexibility in how ownership transitions happen. First, shares can be incrementally gifted as the management is transferred to the next generation, and then the ownership. Another benefit is that shareholders can match dividends to their own personal income needs and maximize personal tax credits.
Lauchie and Henry had a good working relationship and over the seven years neither veered from the original goal. Lauchie slowly took over decision-making roles and had an ownership stake in the farm while Henry mentored him and still owned the farm.
The MacEacherns also went to workshops and conferences, and they read anything about succession they could get their hands on. It helped that Jolene took a keen interest in studying farm succession and dispute resolution in university.
They found there wasn’t a lot of good information available about non-family succession and that theirs’ was not a typical acquisition.
So once again they simply met with Henry and his wife Janet and went through a checklist from a succession factsheet downloaded from the Canadian Association of farm Advisors website. It guided them through some tough decisions. For example, it included risk management planning which brought up questions like what would they do if the house burned down or if one of their marriages broke up. Everyone’s opinion counted, including the wives.
They also learned they needed contingency plans for death, divorce, disability and disagreement, four topics that are very difficult to talk about, let alone to come to an agreement over.
At the end of that fact sheet is a roster of farm business advisers and other resources. For most farm business owners and new-generation farmers, obtaining outside advice during the succession process is crucial. Some farm financial advisers are particularly good in seeing ways to deal with tax implications of transition, which is imperative for the retiring generation. They can really help coordinate the succession plan with personal tax planning for retirement and the distribution of your estate.
The advisers that the MacEacherns and Eisses tried working with strongly argued for a written legal agreement. However, the couples trusted each other deeply and felt they could better build their relationship by not drawing legal lines along the way. Instead they forged ahead together with outside help for specific jobs.
Every six months the farm would review the financials with their banker, who proved to be one of their best advisers. He really understood their plan, knew their situation intimately and could identify the possible pitfalls and risks.
To come up with the valuations, they got an external third-party appraisal, which really helped build a layer of trust. They also had a financial adviser crunch worst- and best-case scenarios for them. These outside voices were something they all could trust.
In the end, the sale agreement — which of course was legally drawn — saw the MacEacherns purchase the shares of the company for a value not equal to the total market value of the individual assets, but a value that could be financed and carried by the farm going forward. The preferred shares were valued in their personal net worth but were not a major contributor to the purchase of the farm.
To finance the debt, the Eisseses were willing to leave some money in the farm for a negotiated, written payback agreement. “We decided to use the transition loan product from FCC in order to take advantage of a sustainable debt structure without Henry taking the risk,” says Jolene.
4. Trust replaces fear
Most of the major decisions to be made are personal, and the process used depends on the issues involved and the personalities at the table. No single approach will work for all business owners. “If you go in protecting yourself and not caring about the other person, it’s not going to work,” Jolene says.
For something like this to work, the MacEacherns say it helped that the spouses were committed to farming.
“We learned that you should treat succession relationships like a marriage,” says Jolene. This means being honest and open about your own feelings, but sensitive to everyone else’s too.
Fear can also result in being too focused on trying to protect your own family. For the older generation there’s also the fear of retirement, and the business succession process will probably have to deal with the owner moving from a long-time family home, as well as a possible retirement identity crisis.
To his credit Henry let go of the management and is enjoying retirement time in Florida in the winter, and it helped that at first he had a little break from coming to the farm at all. “We joked around about transition a few years before it happened so it wasn’t such a shock,” says Lauchie.
In one of their first attempts to hash out a buy-sell agreement, they included a 10-year clause saying the Henry had the first right to buy back the farm. However, by the end of seven years, their commitment was obvious and Henry had come to terms with the transition and didn’t want to look back.
The MacEacherns have quantified and examined all the risks and threats. So why go into an intensive capital sector like dairy farming, with all the political risk tied to quota? There really weren’t many viable alternatives in the Maritimes at the time, says Lauchie. Besides, he liked working with the cows and Jolene grew up on a dairy farm in Cape Breton.
Moreover, the banks like the guaranteed income that quota provides, and dairy farming is a good cash-flow business.
Also, the farm was close enough to the university at Truro to allow Jolene to have a good job off-farm. Their growing family could live off that wage while Lauchie was trading sweat equity for shares. Now that they own the farm, it’s even more important to have that off-farm income, especially during the first three years when they were investing in improvements.
5. Communicate, a lot
If you aren’t willing to have the tough conversations, you should do a straight-up buy and sell, says Jolene. In this case that would have meant that the Eisseses would have had to piecemeal the farm and lose the efficiencies gathered in the whole operation. Besides, in his heart, Henry wanted to keep it as a dairy farm.
So they met, and talked and talked and talked.
They worked through their checklist and came up with agreements on contentious issues. In the process they learned details about each other and the farm business. “The conversations were worth more than the agreement,” says Jolene.
Everybody has to be included. The wives attended the meetings and shared their wants. “If I was a wife nattering in Lauchie’s ear, it wouldn’t have worked,” says Jolene.
Jolene credits how the men dealt with these meetings. She’d drop in, they’d have these emotion-heavy conversations and the next morning the men had to work together. She could go back to her job, but they’d have to get up and work together the next day.
It also depends a lot on personalities and both men liked and respected each other before embarking on the heavy lifting involved in succession planning. “Keep it light and real,” says Lauchie. “Don’t dwell on what you can’t change and leave the conversation out of the day-to-day work.”
At the end of the seven years, on January 1, 2013, the MacEacherns bought the remaining shares and Henry retired, although he still holds some of their mortgage and helps occasionally when he wants. They now had an official document — a purchase and sale agreement and financing.
A few years prior to the sale, they had worked out all the hard stuff and had a better idea of cash flow, including a more accurate number for interest rates. The market value they first agreed on stood, although land had gone up and quota had gone down in value. “We were lucky that we hadn’t seen a massive increase in values. That might have made it more difficult,” says Jolene.
Also interest rates decreased. They had done projections with six per cent interest; they ended up booking terms for about half of that rate.
Several years before the final transition, Lauchie took a course on a farm bookkeeping software and took over doing the books. He got a deep understanding of the expenses and cash flow of the farm before actually buying it. He started keeping detailed records so they had five years of numbers to use in their business plan and financing.
Having seven years helped Henry do some tax planning and let him emotionally prepare for retirement.
In retrospect, when they first started their arrangement they should have examined the option of an estate freeze. An estate freeze is a way for the older generation to retain ownership in the corporation as preferred shareholders, but allows the new generation to participate in growth. The value of the older generations’ shares in the corporation are set at a fixed, predetermined amount. The common (also called growth) shares are re-issued and the successors come in as new common shareholders, entitling them to any future increase in the value of the corporation’s shares and assets. These “frozen” shares can still pay a dividend, yet the tax liability associated with the value is set, and they can be voting shares or not.
That share-freezing process would have made reinvestment more attractive during this transition. Although Henry kept farming with best management practices, maintaining fertility and equipment, he didn’t want to make big capital investments and the MacEacherns didn’t own the farm so couldn’t make costly changes.
Succession fatigue also set in. They could see why a less committed couple could have given up halfway through. The end can seems far away at times, and the tough conversations can be wearing.
But it takes time to thoughtfully address issues, says Froese. Planning for your succession is a process rather than an event.
“Agriculture is constantly offering new opportunities,” says Froese. “The next generation can bring a strong work ethic, plus technology skills to manage data for great decision-making. The founding generation has the wisdom of experience, ability to live through cycles, and usually the luxury of debt-servicing capability.”
Froese has seen a dairy farmer create opportunity for a young employee with a 10-year contract, a place to build a home and a way to profit share with the business over time. A young town kid from her area linked up with a local farmer as a teenager and proved he could work and learn on the job. He’s being given the opportunity to rent land with the “access first, ownership maybe later” concept. In a way, he has been adopted into the farm partnership for all parties to benefit.
“Those young people wishing to start from scratch in today’s business culture would be wise to get a good ag education foundation, work long hours to prove their passion, and communicate clear expectations. That’s the triple crown of success that founders would be willing to bet on,” says Froese.
But then, family successors also need to be very grateful when they get a leg up, says Froese. “Entitlement is a problem.”