Planning for transition brings a family together

The following is a fictional case study created by BDO.

Siblings Graham and Camille worked together for almost 40 years managing a large grain and livestock operation. They represented the fourth generation on the farm and like their predecessors, expansion and innovation were cornerstones of the business strategy.

Both had young adult children working full time on the farm. The mutual assumption was that the farm would transition to the fifth generation. Everyone was on the same page until two years ago. Some aggressive land and equipment purchases combined with two poor crop years, rising input and interest costs, and a failed equipment retail start-up business resulted in financial hardship that challenged cash flow and debt servicing capabilities.

Graham’s son and daughter, Brody and Cleo, worked closely with their dad on the grain side of the operation. Camille’s two sons, Cole and Blake, worked with their mom managing the livestock.

Transition assumptions are tested

Over the past six months, regular meetings to review financials and discuss decisions had become more intense as the business continued trending in the wrong direction. Revenue projections weren’t being met, and costs kept rising. The equipment business was shuttered earlier in the year, and they’d taken a significant hit. Slowly, over time, the family started to divide into two camps.

Cole and Blake were worried. They were skeptical of Brody and Cleo’s plan to take on more debt and keep pushing forward with expansion and infrastructure upgrade plans for livestock and grain enterprises. Cole and Blake wanted to fine-tune the status quo, pay down debt and see what interest rates and inflation numbers looked like in a couple of years.

The discussions were becoming heated. Camille and Graham had a long history of working through these kinds of challenges – they knew it was easy to say something inflammatory but hard to reel it back in if others were offended. Camille and Graham got together on their own and talked it out. Camille finally said it out loud, “Maybe it’s time for the two of us to retire and figure out a way for our kids to go in whatever direction they think best.”

They agreed to talk with their families and meet again in a month. The proposal for Camille and Graham to retire via a transition plan, allowing the kids to go in different directions, generated a good discussion instead of rehashing the same old arguments.

Advisors provide clarity

They agreed they needed help understanding how the transition plan would manage a complex operation that included significant land and equipment assets and different enterprises. After preliminary discussions with their advisors, they better understood the many ways to approach this crossroads.

The income tax, financing and legal considerations could be complex. To prepare for the next steps, each family member was asked to think about how they saw the end result working for them. The next meeting would allow everyone to lay out their detailed visions. This would be the first step in crafting a basic implementation plan.

Emotional attachment is honoured

Graham and Camille felt it was time to take steps towards retirement, but both agreed they weren’t ready to abruptly end their involvement in the farm. They knew it was not financially possible for their kids to buy them out immediately. And emotionally, they were both struggling with the decision to split the operation started by their great-grandfather. They both wanted to retain some ownership in the land base for the short term and remain active on the farm for the next couple of years.

On reflection, Cole and Blake began to consider the feasibility of starting a new a livestock operation in a different part of the province where land prices were lower. Proceeds from selling their family’s share of the land base would allow them to buy land and build new facilities there. This was a longer-term vision.

Brody and Cleo had to re-evaluate the viability of their grain operation if Camille’s family were to eventually sell. They needed to investigate whether there was any way they could buy out their aunt and cousins over time.

Third-party valuations inform decisions

They obtained third-party valuations for all the real estate and large pieces of equipment held by the company. Even though Graham and Camille had worked together successfully for four decades, Brody, Cleo, Cole and Blake wanted to set up ongoing operations with a structure that would allow each of them to have autonomy in the future.

Subsequent meetings with their accountant, lawyer and lender led them to a transition plan that changed the ownership structure from one company that owned everything (except for a few parcels of land owned personally by Camille and Graham) to two separate companies.

Certainty and comfort in future plans

The new model saw Graham as owner of the now smaller original company, which included the core of the grain-producing land and the field equipment. A new company would be set up with Camille as owner. It would own less land, but it would also assume less debt to equalize the value of assets going to each family. Camille’s company would retain all livestock and related equipment.

Agreements were put in place to provide certainty for everyone going forward. The two families would continue to work with each other, but appropriate values would be applied to custom work, feed purchases, trucking and other considerations between the two companies. If Cole and Blake found an alternate location for their operation, Graham’s family had a first option to purchase any land sold from the existing operation at fair market value.

It took a year to get to the point where everyone was comfortable with the plan. However, each family could now plan for their own future. Graham and Camille were satisfied that their kids were positioned well for the future and, most importantly, that everyone remained on good terms.

BDO is a trusted advisor for agricultural accounting, tax planning and business consulting.

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