Start the conversation.
Farming in Canada has evolved. When it comes to structuring farming businesses, many operators have been moving away from sole proprietorships and partnerships towards corporations. This can offer business and legal advantages. That said, many of these agricultural operations are still operated by families, with nearly 23% reporting their operations as family corporations in 2016¹.
Using a written succession plan to transfer ownership of an agricultural operation is important, yet only 8% of farm operators, 16% of family and non-family corporations and 6% of sole proprietorships and partnerships have a written succession plan¹.
A succession plan involves the transition of a farming business by the principal operator to the next generation. It may involve selling the business, or renting out farmland to a third party, while allowing the owner and family members to enjoy the financial benefits arising from the sale or rental. The earlier the planning begins, the better prepared the next generation likely will be. Engaging in a constructive discussion can help minimize family disputes and disharmony.
Start the conversation
A farm owner should have assets properly valuated to ensure that the succession plan works from a financial perspective. We work with a team of multi-disciplinary TD specialists to help guide the discussion to ensure the wishes and concerns of all family members are heard and that emotional topics are discussed constructively.
• Are there family members interested in (and competent to be) taking over the business?
• How will the children who are not involved in the farming business be able to receive a 'fair' inheritance?
Gather and review financial information
Compile tax returns, financial statements, banking information, financing arrangements, investment statements, legal contracts, shareholder agreements and estate planning documents (farmer’s Will, Powers of Attorney, etc.). Documentation is essential to analyzing the financial position and results of operations. It helps:
• Form the basis for a performance appraisal against industry standards • The process of business valuation '
• Establish the farm’s viability and profitability
• Determine a value for the business that the farm owner may pass on to the next generation or sell to a third party
Discuss options and make initial decisions
We believe it’s critical to identify issues and assess “what if” scenarios that could come up due to changes affecting the industry or family.
Be realistic about any family tensions or differing goals among individual family members. For example, how could the estate distribution in a farmer’s Will be affected if one child wishes to take over the farm, but two other children wish to move on and simply receive an equitable inheritance? What strategies might be used to equalize the inheritances of all the children?
Some of the issues to be reviewed for purposes of the succession plan include:
• Identifying the successor and method for ownership transfer
• If the successor is a family member, are there training needs, and should there be a period of overlap from one generation to the next?
• If the farm is to be sold, how will the value of the farm be maximized for sale and allocated for estate distribution?
• Retirement planning needs of the farmer
• Estate Planning issues
• Shareholders’ or partnership agreements
• Insurance needs
• Possible tenancy issues
• Financing options
Develop the plan
Create a written succession plan and set a timeframe for the succession. The plan may include:
• A business overview and wealth plan
• A plan to achieve identified goals
• A farm management plan
• A sale plan
• A contingency plan (e.g. premature death of the principal farm operator)
Execute the plan and monitor its progress
Give relevant parties a copy of the plan. Use a timetable to illustrate assigned actions and who is responsible. We recommend regular meetings to monitor progress and address any roadblocks that arise.
Family farm succession involves a complex matrix of issues that take time to execute effectively. We believe it is important to start as early as possible and seek professional advice. Our team at Morse Wealth has been successfully navigating clients through this process for decades. Start the conversation with us.
Contact:
Paul Morse, CIM®, FCSI
Senior Investment Advisor & Founder of Morse Wealth
TD Wealth Private Investment Advice
T: 705-330-0036
morsewealth.ca
linkedin.com/in/paul-morse-td
¹ Statistics Canada, “A portrait of a 21st century agricultural operation”, 2017 Morse Wealth is part of TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc. which is a subsidiary of The Toronto-Dominion Bank.
