Succession depression

TRACEY COOPER
Last updated 07:31 09/07/2012
Succession depression

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Handing on the family farm can be a minefield, Tracey Cooper writes. 

Farm succession can be one of the most stressful things a farmer ever does. It's one of the big contributors to depression and anxiety in the farming industry and when something goes wrong, the results can be tragic.

"That has really shown out with the Macdonald-Guy case," says Matamata counsellor and former dairy farmer Allan Baker.

"It's quite obvious there were issues there a long time ago. There were lots of warning signs where an intervention could have happened and it wouldn't have got to where it did."

The act of passing what can be a hugely valuable asset from one generation to the next, while keeping that asset growing, allowing the farm owners to retire in comfort, catering to the often conflicting needs and desires of children, their spouses and their own growing families is a complex area fraught with potential pitfalls.

There may be equity partners (investors) to factor in, blended families, in-laws and seemingly no end of other considerations when it comes time for a farmer to look to the future.

An ANZ business survey last month – which included a dedicated agribusiness section – found successfully passing on the farm to the next generation without creating a "hell of a nightmare" is one of the most pressing long-term issues farmers face.

ANZ commercial and agri-managing director Graham Turley says farm succession can create all sorts of problems for families.

"Simply handing over the farm to a son or daughter and retiring from the business is becoming increasingly problematic for many farmers.

"Today, like all New Zealanders, farmers are living longer, so they want to continue getting an income from the business. Farms are also incredibly valuable assets and selecting an offspring to take over can create huge rifts in families."

It was one of the main concerns farmers raised in the survey.

"How to keep the farm in family hands but in a way that is fair and ensures the future viability of the business. The stories of contested wills and family estrangements are all too common in the rural industry."

But it doesn't need to be that way, Baker says.

"It can go smoothly, but it can trip up easily if you don't pay attention to the small details."

It's important to deal with the small issues, before they become big issues.

"In all families, there are underlying things that exist and when you get into this environment [of talking about succession], it gives those focus. Often there are misunderstandings or miscommunication, when you think I'm saying something I'm not. Things get confused."

Deal with these things early, he says, "because it will only get worse".

"If it is identified early, it can be dealt with and relationships can be restored. It's actually really important to restore broken relationships. One broken relationship can sabotage the whole enterprise."

Morrinsville accountant Nigel McWilliam – who runs farm succession seminars – agrees strong relationships are vital for successful farm succession and all parties need to be involved from the outset.

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A good way to start what can be a lengthy process – sometimes taking several years – is a simple conversation.

"It's a long conversation," he says.

"I often recommend them to start about Christmas, get thinking about it.

"Often everyone's around, off-farm family are coming, all the parties are there – it's a good time to do it. You can have a really good discussion over a few days."

And it should cover lots of ground, he says.

"It's a process around how much we need to retire, how much we can borrow, how we structure it. Parents need a retirement income, kids need to be treated fairly."

And, he points out, "fair does not necessarily mean equal for every kid".

"One [child] may be successful off-farm and done well and be quite well off. Another may have stayed on the farm, working for minimum or low wage and building the asset. The off-farm one shouldn't expect an even split."

It's a tricky business, he says.

"Especially when you have got spouses involved and blended families further complicate the issue. That's why it's so difficult. It's quite a process and can take four or five meetings."

One of the key things, which some farmers overlook, is the need for the business to be making money and the owners to have built up equity.

"It could be worth $2 million, but they may have no equity. The expectations of Mum and Dad, if there's a lot of debt, may not be achievable. So get the farm operation in shape first, look at the cash and equity, then look at the expectations of all parties."

He's seen plenty of "robust discussions" taking place and that's a good thing.

"Often we get the blame, because they say, `We all got along until you got us on to this.' But it's really important to get all parties involved and talk about where you want to take that property honestly."

There should be open discussions with lots of different opinions and all sides should be able to talk about their wish lists, McWilliam says.

A heads of agreement document should clearly spell out what's going to happen and when and there has to be a clear pathway for everyone.

"It's quite a process and it needs to be seen to happen. A year down the track, have Mum and Dad bought in town? It can be hard for some of the old stagers to let go, so you have to keep reviewing it. It's about making a smooth transition. It's very important."

Baker says the succession process has become more complicated over successive generations.

"In the first generation, everyone sacrificed. The farm came first.

"Often it's been one person's vision and everyone has bought into it. It was almost an authoritarian system and it worked well. The problem is that sort of governance structure doesn't work once the children have become adults. There's a change in positions and the transition can be difficult to make.

"The next generation, they may not want to sacrifice everything for the farm like Mum and Dad did. They may have family commitments and it's hard to find ways for partners to share ownership and be involved."

Over successive generations, there can be more outside people involved who are able to make valuable contributions. And while there may be many shared goals among different parties, there could also be different ideas about what direction to take.

"New ideas are often perceived as criticism of the way things have been done, but it's not that at all," Baker says.

There has also been a level of mistrust of people from outside the immediate family, he says, with the Matrimonial Property Act feeding that.

The belief that a broken marriage could lead to someone walking away with half the farm is a common one.

"There is a fear that this is going to happen," Baker says.

"There is a reality in that and it has a close link to so many of us because many of us have experienced something similar."

So "it's hard to find ways for partners to share ownership and be involved".

"There are the relationships between in-laws and parents and how to equalise the power between adults and partners, how to set up the structure and give all people equal say."

Compounding the problem is the fact that many farmers are not keen on seeking outside help for issues they feel they should be able to handle themselves.

It's something Baker finds frustrating.

"We get the vet in when we don't know what's wrong with stock. We get the mechanic in when there's a machinery problem.

"But farmers do things themselves, they work it out themselves.

"Farmers don't easily go looking for help and where do you go for that sort of help?"

Fonterra runs governance courses, which help, and Baker says he's noticed more farmers are open to seeking help, so times are changing.

"I think there is more awareness around it. Young people, I notice them coming in more and more, nice and early. It's a change in culture that it is actually OK to ask for help."

He says it's difficult to understand the stress involved in farm succession.

"Dad experienced it and really only people who are in it can understand the mental pressure that's going on.

"Because he experienced it, he decided we wouldn't experience it, too.

"So he said: `If you want a farm, go and get it and I'll give you a hand up'."

Baker also avoided it himself by selling his farm to train as a counsellor.

Selling the farm and realising its value is one of the cleanest ways of dealing with succession, but most farmers want to see the farm continue into future generations.

McWilliam says there are countless options of how to structure the business side of the process, including forming a company with shares split between parties, holding the farm in trust, leasing it to a third party or borrowing against the farm to give children a head start on their inheritance.

It's unlikely, given the value of farms these days, that children would be in a position to raise the capital required to buy out their parents and it's possible the process of farm ownership for them may take more than one generation to complete.

"The outlay to get into property is high and the return on capital can be quite low," McWilliam says,

"Farm ownership may not happen in a generation. It can take a long time."

It's an easier process in dairy than sheep and beef, he says.

"It takes longer in sheep and beef. It can take 15 years – dairy can take one year.

"Dairy assets are readily realised, there is a market, but sheep and beef is a different market.

"A sheep farm can take years to sell."

There's also a clearer pathway through the dairy industry, from labourer to sharemilker, buying some cows and eventually farm ownership.

"In sheep and beef, farm ownership is really challenging. You only really go from salary to ownership."

Baker says there have also been big changes in the way farming success is measured, with governance now a much more important aspect than it was, particularly given the large scale and value of modern farms.

"Years ago, success was judged as someone who could grow grass and turn it into milk, then it was judged by managing staff to do the work because you couldn't do it all yourself, then it was financial management, now we're looking at new skills in governance structures to enable these good enterprises to keep on growing."

Waikato Federated Farmers president James Houghton says it's never too early to begin talking about farm succession and he worries more farmers are not on top of the issue.

"Most of them aren't," he says. "There is a big hole ... it's an in-depth thing you really need to think about.

"Even if you haven't got kids, you need to think about a succession plan."

The perils of not planning are evident and most farming families know someone who didn't get it right.

"It can create a lot of resentment within families. `You get the farm and what do I get, nothing, why should I help you?'

"People I know, the father had that attitude and none of the kids wanted to be there and he struggled to farm by himself. It was very disappointing because he ended up working himself into a very early grave."

McWilliam agrees it's never too early to begin talking about farm succession and bad outcomes are more likely if it is forced on to people.

"Don't let it get to a stage where it's being done because of health issues, or with a key party unable to take part," he says.

"It really does take a lot of time to get everybody's objectives out then actually physically do it."

But when it works well, it can be hugely satisfying, he says.

"You can see the excitement of it all. When you tell Mum and Dad to go and find a house they love, when the kids take over, the excitement of the next generation."

It's a dynamic process but one which can be difficult to come to terms with for older farmers who have spent their lives on the land, Baker says.

"Their whole identity is tied up in the farm, they take pride in it.

"They are often defined by their farm and the value is there for everyone to see."

And if the right structures are put in place, there's no reason that value shouldn't remain for generations to come.

- Waikato Times

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