Succession Planning

A succession plan is an ongoing process to ensure management, skills, processes, knowledge, ownership and control of a farm transition properly from one generation to the next. The key is to develop a comprehensive transition plan that addresses the diverse needs of the family on an ongoing basis.

Passing on the Farm

Succession plans can be as unique and varied as the farm families who create them. They can guide the transfer of labour, capital and wealth, and groom successors. The only mandatory objective is to avoid uncertainty. In the event of a challenge or crisis, a clear plan of action must be in place so the farm will continue to function.

A succession plan should be in place to ensure the ongoing operation of the farm business as well as the economic prosperity of all generations involved in the business.

The business and personal goals and expectations of the founder (retiring) and the successor (next) generations in both the short and long term are identified. Strategies for how the business will meet these goals are laid out in the assessment.

If you are selling your farm, do you have a plan to deal with the tax issues relating to disposal of your farm assets? Have you discussed succession with tax advisors?

Start Planning Early

Does your farm business have a succession plan in place? Could succession become an issue in the next 5 to 15 years? It’s never too early to start planning for the future.

In the case of older farms the need for appropriate succession planning demands immediate attention. If you are starting up a new farm, or have young children at the moment, succession understandably will not be one of your top priorities. However, you should still prepare for the likelihood that your growing operation will need to be managed eventually by future generations.

Business and financial documents (e.g. mortgages, wills and financial statements) are necessary for a complete and comprehensive picture of the farm business. These should be updated every five years.

Communication Plans

Communication is critical during succession, so develop a communication plan. Whether discussing profitability and business options or figuring out what is important to everyone, be clear and honest. The goal is two-way, quality communication and understanding each other’s issues, concerns and needs.

Contingency Plans

Are there plans to deal with unexpected issues such as death, divorce, disability, disagreement and disaster? Has your family budgeted for the costs associated with developing contingency plans, including legal documentation?

Retirement Contingency Plans

The retirement component concerns two issues — financial and lifestyle. It outlines the retiring farmer’s level of involvement, desired activities, living arrangements, and how the transition will be financed.

Financial details include where the retirement money will come from; an explanation of any retirement income strategies (e.g., RRSPs); and how the money will be spent. Living and lifestyle costs are serious considerations at this point.

Other parts of a retirement contingency plan include:

  • An explanation of financing required, various sources available, and preferred financing options
  • An inventory and valuation of assets and liabilities
  • An explanation of the tax implications of the proposed transfer process, along with a description of how these items will be addressed
  • A discussion regarding the treatment of non-farming children
  • An outline of insurance requirements related to life, disability, disaster and related insurance policies and coverage
  • A description of legal agreements (e.g., employment contracts, partnership agreements, shareholder agreements, buy-sell agreements)

Copies of legal agreements can be attached as appendices for reference purposes. Ensure that all legal agreements include dispute-resolution mechanisms. Copies of all relevant legal wills and prenuptial agreements could also be attached for reference.

Financial Plans

The farm business plan component concerns how the farm will meet the financial needs of both retirees and successors. This includes a financial analysis of the farm business — past, present and future — to determine whether it is profitable and viable. If the business is not currently profitable, then strategies need to be identified to address this shortcoming.

The financial plan also defines the future direction of the farm business and how this direction will affect the business, including financial projections.

Transition to New Ownership

Agree to a timetable for transitioning farm ownership. The abilities of the successors should be considered, as they must have the required skills and knowledge before they assume full responsibility for the farm. Consider including a training and development plan for the successor.