Succession planning without drowning the kids in debt
Succession planning without drowning the kids in debt

Succession planning is more important in farming than in any other form of business. That is because it involves the family home and the farming lifestyle. I have been involved with succession planning for decades and it really does need a good bit of thought – by everyone involved and from an early time.


I deal with many cases where there are major disputes between family members and I am asked to quietly work with each party to  develop a good solution that delivers a fair benefit to everyone. Some years ago I handled an estate planning issue in respect of a winery for a family of the nicest people one could imagine. Over the weeks that I spent chatting with all family members, they sometimes became quite fractured and at other times seemed intent on reaching a good resolution. I was disappointed when in the end when pens were ready to be put to paper on the succession agreement, it all fell apart at the last minute and family members decided to go their own ways. It is always disappointing when a lot of effort has been put in, but no satisfactory outcome has resulted.


In an idle moment recently I decided to check up on the winery only to discover that exactly the outcome we had reached in our discussions had eventuated within a short while of the discussions collapsing. It had just required a little time for everyone to consider what they wanted and fit the pieces in the family jigsaw together to reveal a picture that suited everyone perfectly. One good feature about the settlement was that it did not involve the younger generation borrowing money from a bank to buy out the parents who had so successfully founded the enterprise.


Many of the debt problems I see have arisen from a younger family member buying out the older generation with a substantial mortgage loan from the bank. This is not necessary or productive. It in fact saddles the younger generation with the millstone of debt hanging around their necks and it is easy for it to grow rather than reduce.


Banks don’t like to see debts repaid, or rather they like them repaid within terms until they are half repaid, then they like to see them increased so that they continue to share in the rewards of the farmer working from sunup to dark. The best way I suggest that this be handled is by a vendor loan from parents to children, interest-free over between 10 and 20 years, with perhaps a substantial initial deposit to give the parents enough to blow some money on something they really want to do.  In return for not requiring interest they might continue to live in the family home with the youngsters living in a second cottage on the place. The parents usually do not need a cash sum of money equal to the farm’s value given to them. Often a huge hunk of money like that gets frittered away and is gone before they know it. Money received over a decade or two can be wisely invested to keep them safe in old age.


Long before retirement is on the horizon it is important for parents to decide between themselves what they want to do with the farm and who will end up with it. One benefit of sale and vendor finance to the child who ends up with it, is that a fair share of the purchase price can go towards a child who does not end up with the farm. That saves childhood relationships from being torn brutally apart when one child feels unfairly discriminated against, in favour of another. Nothing breaks up families like that does. Once parents have decided what they want to do it is only fair for them to let the children know. Children who work their hearts out on the family farm in the expectation of it being left to them, only to find that it isn’t, get very and justifiably angry at their parents.


Another thing that should be attended to well before retirement is to clear the debts on the farm. There is nothing worse that a parent can do to their son or daughter than leave them with a farm that they must never sell and a bank mortgage debt that must be repaid. I have heard that referred to in farming circles as child abuse. Loans are a blight on any farm, though they are often needed to buy land. Loans are frequently an absolute disaster in any form of business if used to fund operations. That is because of the financial and nervous drain they place on the borrowers in hard times. They should be obtained the same way we buy sheep or cattle, by hunting around for the very best loan at the cheapest price.


Our Loan Apps are very handy for getting competitive  loans from banks. It is not just the interest rates that count. Bankers are very clever critters, highly skilled at fooling farmers into taking loans that will eventually, after a decade or so of struggling day and night to make repayments, result in the farm being sold up and most of the proceeds going to the bank. There can be punitive terms never discussed, included tucked away in the middle of a loan contract or letter of offer, like an agreement to sell part of the farm to clear debt within 12 months of any arrears.


In one case I handled there was not one mention anywhere in the letter of offer of the dollar amount to be repaid, even though the annual repayments would be nearly $1 million dollars more than what the farmers earned. That ended in tears for the farmers, fat profits for the bank.


Never sign a bank document that you have not read and completely understood or on which you have not received legal advice from a lawyer and a loan impact report from a loan consultant.


GBAC Farm Debt Solutions has put a lot of work into ensuring that farm loans suit the operation and that the farmers are fully aware of what they are signing up for. Weather is an important factor in farming and it needs to be taken into account in farm mortgage loans. Handing on the farm is the greatest thing a farmer can do for the next generation, provided it is capable of earning good profits. The best guide to that is past performance.


Give us a call if you would like some professional assistance with your plans for handing on the farm.

Don’t wait until it is too late!