FARM FAMILY

Jonathan Small BSc. P.Ag FEA

O:403.356.1281 C: 403.352.3704

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Farm Management Consulting

Farm Management Consultants ?What do they do ?

The things you might expect:

• Business Plans.• Feasibility Studies.• Crop Planning.• Cash Flows & projections.• Financing proposals.• Economic Studies.• Marketing.

Farm Management Consulting

Farm Management Consultants ?What do they do ?

The things you might expect:

And things you might not:

• Training.• Litigation Support (Expert Witness).• Insurance Claims.• Succession Plans.

FARM FAMILY

Get succession planning that works for both.

&

Fast Facts

80percentage ofall businessesworld wide areowned byfamilies

70 percentage of

new jobs created byfamily businessesannually in Canada

Average No. ofemployees is

18

64 percentage of family

businesses have notestablished a process forselecting a successor

43 percentage of entrepreneurs

in their 60’s or 70’s have NO exitstrategy

4.7 number in

millions of peopleemployed full timeby familybusinesses inCanada

60 approximate percentage of Canada’s

GDP generated by family businesses

Challenges of Family Enterprises

John L. Ward’s 6 Biggest Challenges Peter Leach’s Four Challenges

1. Maturing business life cyclesand increasing competition.

2. Limited capital to fund bothfamily needs and business growthneeds.

3. Weak next-generation businessleadership.

4. Entrepreneurial leadership’sinflexibility and resistance tochange.

5. Conflicts among siblingsuccessors.

6. Disparate family goals, values,and needs.

1. Lack of communication ( conflict).2. Family members; employment in

the business (Merits VSEntitlement).

3. Business transition to nextgeneration (Succession).

4. Manage Change un both thefamily and the business(changes).

Challenges of Family Enterprises

* Source; 1. Growing the family business: special challenges and best practives. John L. Ward, Family businessreview, (1997), 10(4) ; 2. Family Business Rulebook, 2008, Peter Leach.

Transition Statistics

• About 30% of family-owned

businesses make it to the secondgeneration.

• About 13% make it to the

third generation

• About 3% make it to the

fourth generation and beyond.

Transition Failure Causes

60%

25%

15%

Breakdown of Communication and Trust withinFamily

Heirs Unprepared for Required Roles and Accountability

All Other Causes

• Lack of a common visionbetween interestedparties

• Lack of communicationframework for all partiesinvolved

• Difficulty of dealing withconflict, particularlyaround sensitive issues

• Unwillingness for allinvolved parties tosupport the succession

• Owners are ambivalentabout planning fortransition and/orreluctant successors

• Managing businessprofitably throughchange

INTRODUCTION

“MULTI-DISCIPLINARY SOLUTIONS FOR AMULTI-GENERATIONAL LEGACY”

Transition planning is: Transition planning is not:

• A highly complex process

• About family, people andrelationships

• About ownership, managementand estate

• About what is fair

• Driven by family values, wantsand concerns

• An event

• One person’s problem

• About minimizing taxes

• About equality

• Driven by technical issues thatare handled by lawyers,accountants and financialplanners

Introduction

Introduction

• Successful Transfers• Common Vision of business development

• New owners and managers are clearly identifiedand trained

• Open dialogue, free circulation of information,formal and informal team meetings

• Successors involved in decision making andbusiness management

• Mutual respect & trust

• Transferors accept the idea of leaving their place

Introduction

• Unsuccessful Transfers• No communication/consultation

• Do not see themselves as young entrepreneurswith similarities to those in industry

• Successors unprepared

• No monitoring

• Surprises

• Business is not viable

• Lack of trust

– Source: Caroline Collard and Brigitte Pare

Introduction

What makes Farm Succession so unique andchallenging ?

• It is where you grew up.

• It is the family home.

• Farmers have some unique tax advantages that require careful planningto utilize.

• Agriculture has a culture of family succession like no other.

• The business includes a unique and attractive lifestyle loved by thosewho enjoy it.

• Typically farms are “asset rich” with valuable but active business assets.

• Agriculture is exposed to many levels and many types of risk.

Which is why you need people working with you who understandthose things, understand your business and understand you.

Introduction

Typical farm family that I meet….

• Mom and Dad in their mid/late 50’s.

• Successors in their late 20’s/early 30’s

• Have been trying to solve the puzzle for a while.

• Are focussed on each of the technical parts.

• Have been getting “informed” for a while.

• Relationships are getting strained.

• Dad’s worried about tax, Mom’s worried about relationships, in-laws worried about security, successor just worried about when.

• Nothing is happening although some parts of the “plan” may becompleted while others are not.

• Wills out of date

• Successors have mastered farming but minimal or zero financialknowledge

Introduction

Transition Planning is like getting from here….

Introduction

Transition Planning is like getting from here….

Introduction

To here….

Introduction

To here….

Introduction

The more you try to solve each problem….

• The more jumbled it becomes.

• It feels like you hit a brick wall.

• Its exhausting.

• Eventually more compelling, interesting or rewarding things take overand…

• It gets put off again ………. Aka – “nothing happens”

• In fact, complete silence may descend on the matter.

Introduction

Rubik’s Cube Facts (for a 3 X 3 cube):

Possible combination: 43 Quintillion

For those of you who like numbers that’s:

43,252,003,274,489,856,000

Introduction

Rubik’s Cube Facts (for a 3 X 3 cube):

Fewest moves – 20 (known as “God’s Number” in the speed-cubing world).

Introduction

Rubik’s Cube facts (for a 3 X 3 cube):

World record:

Two handed - 5.5 seconds

Introduction

Rubik’s Cube facts (for a 3 X 3 cube):

World record:

One handed - 9.03 seconds

Introduction

Rubik’s Cube Facts (for a 3 X 3 cube):

Blindfolded (yes blindfolded) – a whopping 23.19 seconds !

Introduction

Rubik’s Cube Facts - Summary :

Possible combination: 43 Quintillion (43,252,003,274,489,856,000)

Fewest moves – 20 (known as “God’s Number” in the speed-cubingworld).

Two handed - 5.5 seconds

One handed - 9.03 seconds

Blindfolded - 23.19 seconds !

Introduction

Aside from a gifted few who somehow instantly “see” the solution,the consistent Rubik’s solvers use a process which they learn andrepeat many times….

You can learn the process but in your lifetime you will only have tosolve the puzzle once. You only get one-shot at it.

With so many possible combinations, so many moving squares youalso need something else – you need a team.

What do all these record holders have incommon ?

Introduction

A team that not only specialises in each of theirrespective colours (ie tax, insurance, law,relationships etc)

If each specialist only worked on their own “colour”without reference to the others would they eversolve the puzzle ?

So they need to collaborate to solve your puzzle andserve the needs of your family….

Who’s in the team?

Succession is a Team Sport - The TransitionTeam

Introduction

Who’s on the team?

• You and your family

• Lawyer

• Accountant

• Estate Planner

• Wealth Advisor

• Insurance Agent

• Counsellor

• Therapists

• Family Facilitators

• Business Consultants

• Human Resource Consultants

The Transition Team

Introduction

Everything is connected to everything !

And remember, just like theRubik’s cube

Introduction

1. Start with the end in mind – before youstart solving the puzzle, moving thecolours around, decide what you wantthe end result to look like.

What does Rubiks teach us?

Introduction

2. Everything is connected toeverything – remember, every time youmake a change in one place its going toaffect other places, remember the 3 circles(Ownership, Business & Family)!

What does Rubiks teach us?

Introduction

3. Holistic – remember you have tosolve this puzzle all at once, it is a singlesystem, you cannot solve it one piece at atime or linearly.

What does Rubiks teach us?

Introduction

4. Use the process – which meanseither learn the process or use someonewho follows a process.

What does Rubiks teach us?

Introduction

5. Team Sport – expect to use a team,expect to be part of that team and requirethe team to communicate.

What does Rubiks teach us?

Introduction

There is only one desired outcome with Rubik’s cube – all the facesthe same colour:

Every Farm Family has a different desired outcome – what theywant their cube to look like at the end (not necessarily 6 matchingsides).

If your advisors are going to stand a chance of giving you effective,consistent and implementable solutions then the first thing youneed to do is to describe what your “cube” has to look like when itsfinished before you ask them to work on the solution.

START WITH THE END IN MIND……………….

Why is Rubik’s cube easier thantransitioning your farm?

Where are we now?

Decisions, decisions, decisions ….

• The only thing for certain is one day you will transitionand therefore its important to be well prepared toensure a seamless transition that provides you themost security

• Above all you should avoid the “inadvertent-succession” path which is littered with damagedrelationships and failed businesses.

• Where most families seem to start is by trying to makeall of these decisions – they begin in what shouldactually be the final phase.

Where are we now?

How do you eat an Elephant ?

• The Answer: One Meal at a time (and invite manypeople over) and it’s a set menu !

• In other words - break it into stages and use a teamapproach and a systematic process.

• That is the transition.smart approach

•Anyone who claims to be able to develop all parts of your

plan by themselves will probably do none of them well !

THE THREE STEPS

WHERE DO WE WANT TO GO?

Your Dreams, Hopes & Inspiration

Where do you want to go? Where would you live?

How much moneywould you earn?

How much free timewould you have?

Would you take vacation? Howoften? Where? For how long?

Where do we want to go?

WHERE ARE WE NOW?

Where are we now?

• There is a common attitude amongst farmers when itcomes to transitioning their operations that:

• “If it ain’t broke don’t fix it”

• The reality is:

• Maybe you have not looked hard enough

• By the time it is broken, it is too late to fix it

Where are we now?

• If we look at farm operations across Canada we see the followingtrends:

• Farm asset values have increased

• Farm debt levels have also increased

• Farm income experiences large fluctuations from one year toanother

• Average Farm Debt/Asset ratio was 15.9% in 2007

• Generally, farms cannot service Debt/Asset ratios greaterthan 40% without off-farm income

• This means that if you want your money out now and youwant your children to continue to farm then you can onlyexpect 40% of market value (and you have to clear the debt!)

Where are we now?

• Alternatively, you leave your money invested in thefarm, sell your assets over an appropriate timescale, take enough out to live on and gift theremainder on death

• BUT, if retirement lifestyle is most important

• Sell the farm at market value, enjoy retirement, giftas much as you want while living and set up a willto distribute anything left over

Where are we now?

Situational Analysis– This is key to any ownership transfer – what are we dealing

with/where are we starting from ?

• Calculate Net Worth as of today.

• Calculate projected income and cash flow of the farm forthe next several years.

• Consider any potential income taxes!

• Is the farm/business financially capable of attaining thegoals already defined. If not – what has to change (thegoals, the business or both) and by how much ?

HOW DO WE GET THERE?

1

3

4

It’s a process

Invest the time

You get one-shot at this… get help

Team approach

2

5

How do we get there?

In Summary

“Multi-disciplinary solutions for a Multi-generational legacy”

Start with the end in mind

Introduction

There are many pieces to your puzzle (and your puzzle is unique).

No plan is complete until it has considered (to name but a few in noparticular order):

1. Retirement Plan (income, involvement, accommodation).

2. Business (viability, affordability, structure, tax).

3. Estate Plan (fair vs equal, tax, insurance)

4. Ownership Transition (tax, timing, wealth transfer)

5. Management Transition (control, labour)

6. Successor readiness (training, mentorship)

7. Contingency plan (The Five D’s)

8. Communication (internal & external)

The TransitionSmart Plan – what’s in it?

A. Retirement and Estate Plans

• Retiree’s future lifestyle

• Financial plan (annual living and relocation, ifnecessary)

• Address(es)

• Tax consequences

• Future retiree (non)involvement

• Estate Plan:

– Fair vs Equal

– Flexibility vs Straitjacket

– Inclusion and Communication

B. Training and Development Plan

• Is the successor ready – in every respect?

• Skills profile for successor

• Skill gaps

• Action plan for filling skill gaps

• Performance review & feedback process

C. Farm Business Plan

• Business viability – can we afford this plan?

• How much money can we take out?

• How farm business will meet needs ofsuccessor(s) and retiree(s)

• Analysis of current farm business (if necessary)

• Plan for future direction of farm business &description of how this will affect business(along with projected financial statements)

D. Management, Control & Labour Plan

• Management of daily activities

• Daily roles, responsibilities, and authorities

• Outline of transfer of management, control,and labour

• Includes timetable for transition tosuccessor(s)

• What are everyone’s expectations here?

E. Ownership Transfer Plan

• Outline of current farm business structure andchange during transfer process

• Company, partnership or joint venture?

• Explanation of transfer of ownership of assets

• Inventory and valuation of assets & liabilities

• Future business arrangement

• Transfer mechanism

• Prenuptial agreement (if necessary)

E. Ownership Transfer Plan (continued)

• Tax implications and how to address them

• Required financing and sources

• Treatment of non-farming children

• Insurance requirements

• Copy of the will or overall description of intentto assist with ownership transfer plan

• Description of any other legal agreements

F. Implementation Timetable

• What is going to happen and when – and whois responsible for what?

• Timetable for start and finish of key activities

• Time frames for monitoring and measurementof progress (and amending, if necessary)

G. Communication Plan

• Who within the family needs to know what theplan is?

• Who outside the family needs to know?

• What’s the process for communicating withthem (call, email, write, meet etc).

• Plan for ongoing family business meetings

• Communication and decision-making process

• Management and resolution of disputes andconflict

H. Contingency Plan

• Identifies possible challenges to the plan

• THE FIVE D’s:

– Death, divorce, disability, disagreement anddisaster

• What will happen in such situation(s)

• Who will ensure contingency implementation

• Steps incorporated to mitigate risks

• Updates to contingency plan

• Easier to consider before rather than after theevent.

H. Contingency Plan

We are happy to discuss your needs with noobligation.

That way we can answer your questions aboutwhat will we do, how long will it take and whatwill it cost.

Just call Jonathan Small on:

Cell: 403-352-3704

Office: 403-356-1281

Email: jonathan.small@mnp.ca

Want to know more ?