To grow the farming business you have today, you’ve invested years of your life and the bulk of your financial assets. But sooner or later, it’s inevitable that someone other than you will own and run your farm. Perhaps you’ll transfer your operation to family members or maybe you’ll sell to a promising employee. Whatever the case, preparing for that day is critical.
“Succession planning is really about developing a continuity plan and figuring out the process of transitioning a business, whether that transition is an outside sale or passing the business down to the next generation,” says Bob Tosh, a Senior Manager with MNP’s Agriculture Services team.
According to Tosh, a succession plan is often the biggest single financial and personal change an individual will experience. Through this process, the accumulated wealth and business opportunities of previous generations is moved to the next one.
“This is absolutely necessary if the business is to go forward and grow, but needs to be done in a way that gives the greatest chance of success. You need to remember that without a succession plan, a business dies,” says Tosh.
Succession planning is not a one size fits all process, explains Tosh; each business and family will have different and unique issues and opportunities that need to be addressed. The time spent at the beginning of the planning process to understand the issues and explore the opportunities for the business and its people will pay huge dividends in the future.
“It is always harder to fix things that have gone wrong than it is to do them right the first time. In our experience, having motivated skilled people with a clear vision of where they want to go is the single most important factor in developing a successful succession plan,” emphasizes Tosh.
He says it’s important to start the process earlier rather than later and suggests a minimum lead time of five years. “This may seem like a long time, but, in order to be able to do it right from a business, tax and family point of view, an extended time frame is required.”
There are several factors that make succession planning a timely issue. The first is the rising average age of farmers and the increasing number of those nearing or at retirement. In addition, the recent run-up in grain prices means there is a better market for many farm assets now than there has been in the past. Tosh says his team is also seeing more children wanting to return to the farm after being away, now wanting to raise their children in a rural environment.
MNP’s advisors incorporate succession planning into the overall business planning process, the goal of which is to maximize the value of the business to the owners.
“If the intention is to sell the farm assets, then we want to have the farm be as profitable as possible at the time of the sale. The right business structure will preserve as much of the value as possible,” says Tosh. “If the farm is to transfer to the next generation, then we need to ensure that we have a business structure that works well for the operation of the business now and in the future. It also needs to work well for the succession of the business and the sale of the business while fitting with the estate planning needs of the present owners.”
Tosh adds that it is also important to discuss the three structures of ownership that are available—proprietorship, partnership and corporation—since they all have different tax implications.
At MNP, the succession planning process begins with a one-day planning session that allows the advisor to understand where the farm is regarding its assets and profitability.
“During this planning session, we look at where the client would like to go with the business and the succession. We then work with them to develop a plan to get them where they want to go,” says Tosh.
During the planning session, MNP will review a number of topics, such as the personal and business goals of both the current owners and the successors, the retirement plan for those leaving the business, a training and development plan for the successor, as well as a farm business plan, an operating plan and a management, control and labour transfer plan.
“We also want to make sure we discuss other specifics, including the ownership transfer plan, implementation timetable and a contingency plan,” says Tosh. “With each topic there are a number of items to address and our goal is to discuss each in detail.”
In developing the plan, MNP ensures that they aware of both the hard and soft issues for the farm and the farm family.
“The hard issues are those that can be measured in numbers, such as net worth and profitability, and can be dealt with in a technical manner. The soft issues are the human side of the equation where we must have an understanding of the people that are involved. The more people involved, the more complex the solutions may become,” says Tosh.
Tosh believes seeking professional guidance from the beginning will help ensure your succession plan is successful. “Working with you one-on-one, the MNP team can help put a process in place for an effective succession plan that guides you through development and implementation so you can achieve your goals, whatever they may be.”
Bob Tosh, BSc, PAg, is a Partner with MNP’s Agricultural Services team. MNP is the 7th largest chartered accounting and business consulting firm in Canada and has a dedicated agriculture team proudly helping farmers and processors remain competitive and profitable since 1945. Their team of business advisors, financial specialists and professional agrologists are familiar with all aspects of the agriculture industry, and many have roots in family farms themselves.