John (58) and Betty (57) live on a 5 hectare lifestyle block near Feilding and have three children, Sharon, Jenny and Mike. Their family trust owns a 165 hectare dairy farm near Palmerston North, which is milking 520 cows with a contract milker and has 184,000 Fonterra shares. Stock and plant are owned by the parents in a partnership. A 64 hectare coastal runoff was purchased in 2001 and this was the catalyst for the formation of the family trust and the transfer of the home farm into that ownership. A debt of $1.8 million is owed to the bank.
The Catalyst
John and Betty are still active on both farms, although they want to stop their physical labour input over the next three years to spend more time with their grandchildren, relaxing and travelling. John is the third generation to milk on the farm and they’d like to involve the children in the business. After a brief discussion with the Rabobank Succession Planning Facilitator, they decided to bring the family together using the independent facilitator and his structured agenda to agree on family goals and a process to manage the business in the future.
The Succession Planning Process
At the facilitated family meeting there was a brief recount of the family’s historical ownership and discussions about the business’ current state, with family members sharing their own perspective. In three years time, John and Betty don’t want any responsibility for farm work, but John still wants to “tinker” around the farm and they wish to continue living there.
Sharon (34), husband Phil and family are settled in Napier. They own a plumbing business, which has slowed with the domestic recession. Sharon is concerned about her father working too hard.
Jenny (33) and husband Geoff currently 50:50 sharemilk 450 cows in Canterbury and are ready to take up an option on a 700 cow job in Ashburton. This could leave them with a debt free herd and plant in three years, when they would like to share milk the home farm with their children to be closer to both sets of grandparents.
Mike went overseas for five years after completing an Agriculture degree, but recently lost his job with an English bank and is returning home. He is quite keen on dairying and has $40,000 equity in a London apartment. In 2008, his equity was worth $100,000, so he is considering leaving it there hoping the market will recover in 3 to 5 years.
The Succession Plan
The family trust is going to borrow $220,000 to on-lend to Sharon and Phil to repay their house loan and clear the business overdraft. Jenny and Geoff are taking up the opportunity in Ashburton for three years and then will likely come home and sharemilk, preferably for a five year term. Mike will take on the contract milking job at home for three years and will also be able to manage John’s workload, growing into most of the responsibility sooner rather than later.
The opportunities to release capital out of the business will be the sale of all or part of the herd and the plant when Jenny and Geoff come home with their own herd and plant. Sale proceeds would be available for John and Betty if they wished to invest off-farm, pay an early advance to Sharon and Phil, or help Mike start his own herd. Mike has the opportunity to grow out some heifer calves to start his own herd or look at share milking and may want to buy the top part of the family herd, which could be at concessional terms.
The family accountant and solicitor will be engaged in the next 12 months to look at existing ownership entities, forward plan the sale of the stock and plant from John and Betty’s partnership and investigate whether a company structure that allows partial changes of ownership may serve them better. This would allow any of the children to introduce capital to the business for the benefit of parents or siblings without triggering costs associated with sale of the underlying assets. The company could also have agreements about who shares could be sold to and how that is funded. They agreed that the land is the long-term capital base for the family and the stock and plant is a business opportunity for family members to work for their own reward.
The family will meet again in 12 months time to review their advice and implement appropriate changes. They will meet annually to update the needs of family members, hear how the farm is travelling and ascertain the capability of the business to provide for John and Betty’s needs. When Jenny and Geoff commence share milking at home, time frames about their contract will be discussed in conjunction with any likelihood of preserving opportunities for Mike and any of Sharon, Jenny or Mike’s children.