Succession planning and family equity

Considering those family members not identified as farming successors

Economics dictates that succession in a farming environment can rarely directly involve all family members of the next generation.

Economics also dictates that farming successors require what can often be viewed as a ‘leg up’ to ensure the successful continuation and future viability of farming or grazing operations.

It has been our experience, that, among most farming families today, there is a recognition of the need to explore avenues for achieving, where possible, some measure of equity in dealing with continuing farmers and their off-farm siblings.

“We’re seeing a move away from acceptance of the old concept where it’s considered reasonable for the continuing farmer to just get the lot.”

Yet, from an economic and financial perspective, the views of all family members need to be challenged when it comes to an understanding being reached on what amounts to equity within the unique circumstances and dynamics of each individual family.

An objective (and some may say clinical step) in our planning process that can be employed is an analysis that seeks to take account of not only discounted transfers, or gifts of assets, that are being considered as part of the succession plan, but also past gifts of substance and ultimately the intended distribution of assets via one’s estate. This exercise raises for consideration and group discussion, concepts surrounding the attainment of equity such as “earnings value vs market value”, the recognition of “sweat equity” and “early inheritances”.

Briefly, the first two concepts recognise the inherent nature of farming. That being a business endeavour that typically yields low income relative to the market value of assets employed.

Families that subscribe to recognising “earnings values” as opposed to the more traditional “ comparative sale values” acknowledge that succeeding farmers are merely “custodians of the land” for future generations with no intention of realising capital value, the only relevant value in an equity analysis is the capitalised value of likely future income.

As to “sweat equity”, family recognition here acknowledges that low-income yields of the past, has seen farm family members contributing to the enterprise at a level in excess of the remuneration or financial reward received.

In his next article, Wayne will explore the roll of Wills and other legal agreements. Read more about Carrick Aland’s succession planning process here.

By proactively planning for the handover of your farm business and related assets, contemplating the future needs of family group members, borrowings and appropriate entities, be prepared for the unexpected when it happens and gain certainty for the next generation wanting to take over the family business. Wayne Turner understands the difficulty in starting those conversations and can have you and your family turn those into a positive and constructive succession planning process. Call Wayne on 07 4669 9800.