A little while I ago I wrote that I might talk about our succession plan, given we are now in the throes of implementation.
Several people have emailed and chased me up about that prospect and I guess I shouldn’t be surprised as I’ve been interested in other people’s plans and thoughts over the years.
I’ve picked their brains and attended seminars and workshops on the issue, so only fair that I offer up our own action plan.
I’ve concluded there is no right plan or template, but it is hoped to get to something specific for your own family and situation that works. So, this is what we are doing and I’m not suggesting others copy it.
Ours will have started when we had our firstborn, 31 years ago. The son who is coming into this business in a couple of months.
As is common, at that point we formed a trust to ensure some protection of the family assets for the future. In 1992, those assets were modest, 180ha with a reasonable amount of debt. I look back at the balance sheet of the time and am surprised we formed a trust at that stage. Probably on advice from our lawyer and for future benefits, as it turned out.
We called it the Lorax Trust, because even then I was a bit of a greenie and admired Dr Seuss’s book The Lorax. This was one of the first environmental books written as a children’s story, with the message to respect the environment to preserve the planet for future generations.
The next 20 years were busy, buying small parcels of land and focusing on paying off debt after each purchase before making the next.
I was given a hard time for our modest lifestyle and my tightness, but having escaped the farming recession of the 1980s by not going broke, I was keen not to re-encounter those times.
In hindsight, the caution meant we were never going to be big farmers due to being risk-averse, but focusing on debt repayment kept us out of financial trouble and stress and has proven to help our succession planning now.
The next main move was to form a company, about a decade ago. I’d read a particularly informative book, Keeping Farming in the Family: A Guide to Farm Succession by Ian Ross Blackman, a rural lawyer. I recommend it to you.
Around the same time our lawyer and accountant were going to their own seminars and a company structure was being favoured for farming businesses.
So, we formed Lorax Farming Ltd because a company is a good legal vehicle to operate a farming business while the trust owns the company shares, thus giving protection to the family assets.
There are taxation advantages to operating as a company, but it was set up as our main succession tool. It allows for the sale of a proportion of shares, which is what we are now planning.
Jason and Rosa bring a good amount of capital with them and will use that capital to buy a small proportion of shares in the company. We were planning to use some of that to retire the last of the debt but have recently bought a house so it will be used for that instead.
This allows them and their daughter to move in here, which is a better proposition than a small cottage on another block.
I’ve written before that at most of those succession seminars we went to, the refrain for farm succession is that you can be fair but not equal.
For us, our priority is family harmony above keeping a farm down through the generations, so we plan on our three sons ending up with equal shares in the family equity.
This makes it harder for the farming successors but not impossible. It means we can’t extract any other capital for ourselves other than the house purchase, and none of them get any capital in the short term.
This will happen when the new farmers begin to borrow money to buy more shares and increase their share of the company.
Our thinking at present is to wait out the current interest rates until the rates reduce again to make the servicing easier.
When these capital amounts are distributed to their two brothers, they will get an equivalent amount of further shares in the company. So, borrow $1 million and get 1.5 million of shares in exchange.
The scale of our business is a limiting factor, but we have a good legal structure, sound balance sheet and are profitable.
Time will tell if the plan works out.
There are other challenges, not least sharing the income after paying a good manager’s package, but that subject can wait for another time.