When we talk about succession planning and ask what that means, most people think about the emotional aspect of wanting to pass the farming business through to the next generation. They include the desire to have the family name kept on the gate post and how good that would feel. Often the financial aspect of that transition is overlooked until further down the journey and this turns into the elephant in the room when families talk about how the next generation will afford to buy the family business. Couple that with how the parents consider their obligation to being fair and equal to all their children and a complex situation can then start to become complicated.
One problem that faces families is the value of the assets that have been created by the parents over their lifetime, and the financial barriers to getting the next generation into ownership. The conversations need to start early to discuss how the succeeding children financially afford to buy the farm, have a debt loading that allows them to survive and thrive, while at the same time meet the parents financial needs to live the life they desire for their next 20 summers.
The question being raised in this report is how we lift the awareness of the need for financial literacy to be part of the everyday primary industry language. How do we get the industry to move from seeing accountants’ roles as tax practitioners, bankers’ roles as providers of capital and other rural professionals as only needing to be called in at the last minute.
The aim of this study is to explore how rural professionals perceive the financial dynamics within farming families. The report draws on insights from accountants, bankers, and succession planning facilitators, gathered through targeted survey questions. Emerging themes were further explored through discussions with three groups of agribusiness bankers to better understand where future changes in thinking may be required. Findings highlight a consistent view that the rural sector would benefit from a stronger understanding of business financials. This qualitative approach was coupled with quantitative financial modelling based on average efficient Key Performance Indications (KPI’s) to represent what an average efficient farming or horticultural business could look like.
The financial modelling has been established using regional averages for physical attributes of the farms being described: Dairy farms in the Waikato and Canterbury, Sheep and Beef farms in the Waikato, and Kiwifruit orchards in the Bay of Plenty. These were modelled to show the Earnings Before Interest, Tax Drawings and Amortisation (EBITDA) of each business. The performance KPI’s were obtained from published literature from industry experts like, Banks, Dairy NZ (DNZ), Beef + Lamb New Zealand (B+LNZ), Zespri, Ministry of Primary Industry (MPI) and Rural professionals.
The modelling then represents what level of debt loading each entity could maintain, with a focus on having surpluses strong enough to support the succeeding family to be able to survive and thrive, and then the impact of how the remaining equity in the farming business (often being required to be left in by the exiting generation) can be dealt with.
This highlighted the complexity of how families need to see the reality of the financial performance of the farming business. The greater the leveraging of the next generation to enter into the farm ownership journey, the harder it is to provide a profitable business that will allow them to meet the parent’s potential income needs.
Recommendations
- Change How We See The Value of The Assets Owned by The 1st Generation.
The Primary industry needs to focus on financial literacy and help transition to looking at farming as a business that is profit driven rather than a business that has created wealth due to capital gains over time. - Impact Within Families of How They See Entry/Exit Costs During Transition.
The emotional intent of some families at the start of their succession planning journey, when they say that Mum and Dads wishes need to be respected, and that keeping the family name on the gate post is the most important thing that the family wishes to hold. Meeting this intention requires a shift in thinking of what wealth means, and how the next generation may be treated in respect of inheritance value. - Normalising The Financial Aspect of Farming Business at The Kitchen Table Early.
Accountants, bankers, and the succession facilitators all comment that the profitability of the farming business needs to be introduced into family discussions early. - Training and Education.
The Stigma of having a lack of financial literacy needs to change. Rural Industry needs to increase its purposeful conversations on this topic and promote programmes that are already available. - The Role of Rural Professionals.
Bankers need to start having stronger guiding conversations with customers to promote education and learning. Accountants need to start to sit alongside their clients and hold their hands more. Those that bring in industry KPI’s and compare their client’s businesses against others are helping clients understand their numbers to a greater degree than those accountants that don’t do that. - Promote and Use What Support is Already There.
The Regional Business Partners network is excellent at providing funding towards development courses. There needs to be a stronger awareness of this support to rural businesses.
Brett Robinson
