As an ongoing and frequent discussion, families should communicate openly and honestly about their wants and expectations for the business to ensure you develop a plan that fits with everyone’s interests. You don't have to be nearing retirement to start your succession plan. In fact, the sooner the conversation starts, the better.
Getting the ball rolling
Many business owners find opening up the conversation about succession planning difficult, whether due to family politics, the concept of facing one's own mortality, or the reluctance to handover a business built up over many years of hard work. You should try to avoid thinking of succession planning as a negative process, instead, see it as a necessity to ensure the future success of your business.
From the outset, it’s important to encourage an honest and open discussion. There may be a number of family members who are interested in running the farm, or conversely, those you assumed were interested may not be. Though many people find it difficult to make decisions, the key is to leave emotions at the door and do what is best for the business, which starts with clearly outlining everyone’s objectives and expectations.
How long does it take?
This really depends on the nature of your business. For larger, more complex businesses, a succession plan can take up to 20 years or more. It involves major ongoing decisions on the long-term plans for the business, how assets are owned, the role of each family member, and much more.
Beyond allowing time to create your plan, starting early also gives you more time to train and prepare the next generation. Equipping them with the necessary practical skills and industry awareness will enable you to handover the farm with confidence.
Keeping your business in the right hands
Family units are ever changing – and when you’re creating a succession plan you need to remember there may well be marriages, divorces and unforeseen deaths in the future. To ensure your business ends up in the right hands, the business arrangements should be carefully and clearly documented by way of company articles, a shareholders agreement or a partnership agreement. Anyone involved should also have a will that takes into account the business arrangements, and should consider whether pre- or post-nuptial agreements are appropriate. You may also need to outline expectations for stepchildren.
Benefits of agricultural partnership
An agricultural partnership is a flexible business structure that can adapt over time, enabling you to make the most of your business opportunities. While keeping the business in the family, partnerships can help avoid disputes by clearly setting out what is owned by whom, and what everyone’s business responsibilities are. It can also help to maximise available inheritance tax reliefs, as well as lessen the burden of one individual running the business, helping to strengthen it for the future.
Diversification
When documenting your succession plan, you will need to think about how to maintain or increase profitability in the future. Diversification can be a great way of ensuring the future success of your business. This could be anything from opening a farm shop or a visitors' centre, to letting out properties on the farmland or using land for sustainable energy generation. By being open-minded and planning early, you can consider all the options available to you and determine which is going to add the most value to your business in the future.
Tax implications
Tax must be considered carefully as part of any succession plan as tax law is subject to constant change and scrutiny. As it stands, farming businesses can get inheritance tax relief on agricultural property and business property. However, the availability of the reliefs can change with the situation ‘on the ground’, particularly with diversified activities. Capital gains tax must also be considered when passing assets down the generations.
Understanding tax is no easy feat and it is always best to seek expert advice for clarity.
Getting the right advice
You may wish to seek legal advice at the very start of your succession planning, getting a facilitator to support your early discussions. By involving a specialist early on, they can get a clear picture of your business and circumstances to ensure you have the right agreements in place to protect your family and business.
To discuss any of the succession planning-related issues covered in this article, please contact Mike Westbrook.