Does everyone know and understand the financial performance, options and constraints of the business?

Succession: Only treat your children equally if it is fair

Peter Flannery

Peter Flannery

I often hear, “We need help to put together a succession plan for our family. We want to treat all of our children equally.”

“That’s easy” I say. “Sell the farm(s), take out enough capital for yourselves, plus a bit more, and then divide the remaining capital equally among your children.”

“We can’t do that. One of our children has been working here for the last five years and has been instrumental in improving the business. We want to give him/her the opportunity to take over, and besides, the farm has been in the family for 80 years. We don’t want to sell it.”

The starting point to define fairness is to seek first to understand, and then to be understood. Fairness comes from understanding. Does your family understand your dreams and aspirations? Do you understand their dreams and aspirations, and do they understand each other’s?

“Well, if that is the case, you probably can’t treat everyone equally, but you can treat everyone fairly. And that is a lot more difficult.”

Fair and equal are often different things. Equal is a piece of cake. However, fairness is very subjective. What is fair for your neighbour’s family may not be fair for yours. Every family and business is different.

I tell clients you should only treat your children equally if it is fair to do so. Furthermore, not only should you treat your children fairly, you need to be seen to treat them fairly.

Fairness comes from understanding. Does your family understand your dreams and aspirations? Do you understand their dreams and aspirations, and do they understand each other’s?

Does everyone know and understand the financial performance, options and constraints of the business? The stronger the business, the more options. It is a lot harder when the business only just supports the current owners.

Most families I have worked with have Mum and Dad at the top of the tree, and all agree their needs come first. Occasionally children feel quite entitled and almost resent their parents for not having made a better fist at growing the business. A short and swift reality check is required.

What is everyone’s emotional connection to the business/farm and are they willing to sacrifice a payout to keep that connection? Sometimes I hear, “We don’t need or expect a big payout from the farm. But what we do want is to be able to come home from time to time and let our own kids experience a bit of farm life.”

What contributions have family members made to the business, and does everyone agree on the value of that contribution? Have those that have contributed been rewarded?

Ideally a family can achieve more together than separately. Rather than weakening the business by removing assets or capital, it would be better to keep it intact. Rather than pay family members out, use the business to leverage off, and add complimentary additions. There are some fantastic examples of this, but the norm is to remove capital to pay family members out. I often hear “We do not want to go into business together. It will end in disaster and will rip the family apart.”

Another thing people grapple with, is the asset-rich/cash-poor nature of farming.

The return on capital is generally lower than the cost of capital. This means the successor of a $10 million business will require concessional terms from the family. Generally, over the next 40 years, the business will provide the successor a comfortable lifestyle, by which time the cycle will be repeated. They will have received a return on the capital, but they won’t have accessed (or spent) the capital. And on it goes.

However, at some point, someone will cash it up, and will effectively have won Lotto. How do you factor that into a fairness calculation?

Only about a quarter of all farmers can be in the top 25%, so three quarters of successors won’t create future options.

The only way a family can define what “fair” means is to have strong communication. Often, this will require the use of a professional who can help the family define what is fair and write a plan to achieve it.

The stronger the business the more options you will have, you should only treat your children equally if that is fair, fairness comes from understanding, and understanding comes from communication.

  • Peter Flannery is an expert in farm business planning, family succession planning, financial management and equity partnerships. He and his wife Margaret run Farm Plan Ltd, based in Southland.