In the first three parts of this multi-part series, we stressed the importance of understanding and committing to very clear goals prior to entering into retirement planning. Part two stressed the importance of calculating your financial needs for retirement and your options to generate cash flow. Part three shed light on the tax considerations and implications to the numerous funding sources.
In this article we will address three types of risk most commonly associated with succession. We will examine the kind of risk and some mitigating factors that can help you to end up in Texas with the Lexus.
In our recent discussions with client Pierre Passidon we quickly realized that his daughter had married local French hockey star Jacques Strappe and it appeared that they were planning on returning to the farm to take over. This shed light on the most common risk associated with succession failure: relationship risk. Relationships often become a threat due to communication or lack thereof. The following points were discussed with the Passidons:
38 per cent of all Canadian marriages end in divorce.
Risk of divorce increases during the first three years of marriage.
The average age of Canadians getting married has increased from approximately 23 to just under 30 years of age.
These statistics apply directly to the demographics of the succeeding generation and cannot be ignored. Don’t dwell on it — think about it and prepare for it. Lack of quality communication doesn’t work for any large business and the rules are no different for the farm. The farm business must be conducted in a professional and respectful manner with ownership, management and employees all having a clear understanding of roles, responsibilities and expectations.
Ownership and management need to develop common vision and goals and be engaged in development and management of strategic, financial, and operational plans. This helps every member of the business clearly understand their role and everyone else’s role thus eliminating potential false perceptions. Someone needs to be a leader and a custodian of this process. As the majority owner and retiring manager, If you don’t want it, assign it to someone else in your team
The more things change, the more they stay the same. Lord Amherst was the commanding general of the British Forces in the mid-1700s and even then he stated the following, “There are three ways of losing money — racing is the quickest, women the most pleasant and farming the most certain.”
Financial risk has always been and will continue to be a significant risk in the agriculture industry, and it is the second most common reason for succession failure. The following points should be considered:
Financial Risk is comprised of production, market, cashflow, cost control and finance.
Just as important as the risk itself is the understanding of the risk within the business by ownership and financing partners.
Management must understand the financial statements — Someone in the business must be a Leader so again, as the majority owner and retiring manager, If you don’t want it, assign it to someone else in your team.
Utilize tools such as coordinated projected financial statements to execute the planning and communicate to the rest of the group.
Jacques Strappe had a pinpoint accurate shot but unfortunately doesn’t know wheat from canola and clearly illustrated the third main risk category, management skill set risk. Nobody can perfectly do each job of chief operating officer, human resource manager, agronomist, labourer and mechanic. As a management team, appreciate the diverse skill set that all bring to the table, but more importantly understand what skills are lacking and agree on how to address it.
After discussing and understanding the risks, we have to start working on mitigating this potential risk. Mitigating a risk doesn’t mean eliminating it, but rather finding a way to lessen the impact so you can sleep at night. Make sure the financial structure has synergy with the management philosophy.
Does day-to-day management also match the business structure? For instance, there are three brothers all working together that own separate land and a storm is coming during harvest. They all have wheat in the field and if their day-to-day management doesn’t worry about whose crop is harvested before the storm, then the business structure should reflect this.
Keep business structure current and don’t be afraid to change as the business changes. Consider a salary first for succeeding generations and then move into an ownership position. Transferring assets is often something individuals are not comfortable with but with some consideration given to how you can protect that equity it may help.
If you are the custodian of a pool of equity that was earned over numerous generations, it is your job and duty to protect this, grow it and pass it on to the next generation with similar values instilled. When selling land, regardless of the actual dollars changing hands, consider using a mortgage with forgivable payments or a forgivable note. This will allow you mitigate the risk of lost equity in the event of a relationship breakdown and prevents the missed opportunity to utilize capital gains. Consideration should also be given to the use of an option when selling land that will give you the chance to buy it back at some point. The next generation often comes preloaded with energy but not with knowledge and the following can help mitigate the risk of gaps in the management skill set.
Commit to developing, understanding and sharing a detailed financial plan on a regular basis.
Identify gaps in skills and form a skill development plan to fill gaps.
Hire professionals to fill gaps and facilitate discussion.
Consciously develop and maintain a healthy communicaiton culture, including conflict resolution, decision making, etc.
Insurance may be a fit to manage risk but it is not the only tool. Our philosophy is to insure what you cannot afford to lose but that it is not a savings vehicle.
A family owned and managed business can be very rewarding or drive an irreversible wedge between very important relationships. The result often hinges on your ability and willingness to recognize and mitigate the risks discussed above.
AndrewDeRuyckandMarkSloanemanage twofarmingoperationsinsouthernManitoba andarepartnersinRightChoiceManagement Consulting.Withover25yearsofcumulative experience,theyoffersupportinfarm management,financialmanagement,strategic planningandmediationservices.They canbereachedat [email protected] and [email protected] or204-825-7392and 204-825-8443