Finding balance: A farm CEO approach to succession

The following fictional case study was created by BDO.

For most of their adult lives, Gerald’s two kids, Heather and Gord, had almost nothing to do with their parents or the family farm. Heather left home right after high school and only came back once or twice a year for a short visit. She had moved to the city and established a career and family far removed from the farm.

Gord stayed local and started his own farm. He drove a truck for many years until he was able to start farming full time. He rarely visited home or asked for help from his dad.

Gerald knew his strong personality and need to control every detail were a benefit to his farm, but a problem with his interpersonal relationships – especially with his family. As his wife Jenny often said, “You’re all three the same – stubborn and independent to a fault!”

When Jenny became ill five years ago, both Heather and Gord stepped up to help as much as they could. Gerald came to understand that he could talk to his kids and lean on them for support, softening his “my way or the highway” attitude. When Jenny died, he was thankful that he was building a fresh, adult relationship with his children.

Changing times, changing plans

Now almost 80, Gerald wants to revisit his estate plan. When he was estranged from his kids, he assumed that when he could no longer farm, he would sell everything and retire and that when he and Jenny died, Heather and Gord would simply split the value of the estate. But he feels differently now. He wants to help Gord grow his farm business and support Heather and her family.

Gerald ran a very successful mid-sized grain operation and all the land and equipment was owned by his farm corporation. He hadn’t been diligent in building a personal financial portfolio outside the farm corporation or even taking out life insurance. Priorities were on re-investing in the farm by buying land when it became available and keeping the equipment up-to-date and in immaculate condition.

Multiple options

When Gerald met with his accountant to discuss his desire to pass the farming assets to Gord and find a way to be fair to Heather, he learned there were numerous options with different pros and cons:

1. Transfer his entire corporation to Gord and Heather, either now or after he dies. Heather could be given preferred shares with a set value that could be sold to Gord over time. She wouldn’t share in any growth of the company or have a say in operations, but she would receive her share of the value of Gerald’s company over time. This assumes that Gord would be able to generate enough revenue to fund payments to Heather. The accountant cautioned that this path requires a solid relationship between the siblings.

2. Sell shares in Gerald’s company to Gord. He could pay for the shares now or in the future via a promissory note that would be transferred to Heather after Gerald dies. This option has Gord as eventual sole owner of Gerald’s company, but it creates a liability between Gord and Heather. This could be problematic if Gord’s farm business runs into financial difficulty down the road when Gerald is gone.

3. Merge Gerald’s company with Gord’s. They would have to jump through some hoops to get all liabilities and assets into one corporation, but it would simplify things for Gord going forward. They would still need to create a plan to get Heather her share of the company’s value.

4. Split Gerald’s company. He could move some land into a separate corporation allowing it to be transferred to Heather. This path would require a lot of accounting and legal work but it would mean the siblings affairs weren’t intertwined with Heather relying on future payments from Gord.

5. As Gerald worked through the options, other ideas popped into his head:

• Equipment
  Maybe Gord had sufficient equipment within his own company. Could Gerald sell his equipment to generate cash that could go to Heather?

• Sell a farm
  Gerald didn’t like the idea of dispersing land assets that he had worked so hard to buy, but maybe selling a farm, paying the tax and gifting the proceeds to Heather would be a simple way to resolve the challenge of getting funds to Heather without burdening Gord’s farm business.

• Pull value from his business now
  Gerald had some RRSPs but not a lot. The farm company did owe him some money and he could pull that cash and hold it personally. He could also start taking higher compensation from the farm so that there would be more to pass to Heather in his estate.

There is a lot to consider, but Gerald had always been good at working through these kinds of management challenges. The bigger adjustment would be to learn to work cooperatively with Gord and Heather and get comfortable involving them in the decision-making process.

BDO is a trusted advisor for agricultural accounting, tax planning and business consulting.

From an AgriSuccess article.

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