INSIDE BREEDING ARTICLE – 2007

By ADAM TIMS, Partner, Martin O’Connor & Partners

WHO SHOULD GET THE FARM?

Climate change is receiving its fair whack of public attention, yet another imminent challenge is the important economic impact of Australia’s changing demographics. Put simply, research has shown that a large number (depending on the source some 40% or so) of small to medium enterprises (SME) will change hands within the next ten years. For horse industry participants, this is more likely to be the sale of the farm and/or livestock and other business assets. For many farming families it may involve the handballing of the business to the next generation. However, for various reasons, the “traditional” methods of inheritance may no longer be a viable way to manage the intergenerational transfer of the family farm and alternatives should be considered.

A large number of horse owners and breeders operate their business from their own property. For some, a break-even business is viewed as acceptable as long as the underlying property is growing in value at a healthy rate. The bank remains happy and the owners sleep well with the knowledge that they are sitting on a goldmine. The story so far is very digestible, but is there a well thought out strategic farm succession plan in place to help achieve the personal goals and maximize the value for the owners? This is especially relevant if the bulk of business assets sale proceeds are to be used as retirement funding.

What is a farm succession plan?

A succession plan is a blueprint for an owner to exit their business. A farm succession plan often involves the transfer of business and assets to the next generation. In addition to the financial aspects of exiting a business, a well developed succession plan should ensure;

1. a smooth transition of ownership and management control;
2. deal with the specific issues of family members, staff and business partners;
3. address possible tax and legal issues;
4. address financial planning and risk management issues;
5. provide for equity and fairness;
6. communicate the nature and timing of the selling process; and
7. document the personal goals of the owners.

Steps to succession planning

A successful succession requires good communication between all parties and a planned process based on a broad knowledge of the options available. The process is NOT simple and will require more than just one family conference or trip to your accountant and lawyer. Nevertheless, if the process is properly structured it becomes less daunting.

Step 1 – what are your goals and aspirations?
The initial step requires a large amount of soul searching including;

• Identification of the personal, financial and business goals of all concerned eg: family members;
• Goals can range from minimizing tax to providing children with experience in ownership.

• Analysis of the current business position. Alternative approaches should be discussed and may involve restructuring with a view to maximizing the possible value or sale price. Subsequent tax, estate and financial ramifications following the proposed succession are also considered;
• Identification of potential successors. For horse industry participants this could include family, staff, competitors or new entrants to the industry;
• The preferred timing of succession and/or sale of business assets should be determined;
• A large amount of information gathering is performed at this step to present to relevant parties. For instance, a current Statement of assets and liabilities together with the existing tax structure is documented;
• Discussion as to possible sale price. For the land and buildings and livestock this may be determined by independent valuations or letting the market decide.

• Commonly reflects a continuation of many of the objectives commenced with Step 2;
• Establish a timeframe for implementation;
• Beginning to position the business so its dependency upon the current owner(s) is reduced;
• Confirm and qualify all potential succession options;
• May include transferring assets to a new structure;

• Follows the selection of the succession model and sourcing of the suitable successor;
• Should include drafting of contracts;
• May include the preparation of a financial plan and investment strategy to manage retirement.