Components of a Farm Succession Plan

Agdex#:	812
Publication Date:	October 2004
Order#:	04-073
Last Reviewed:	October 2004
History:	new
Written by:	Peter Coughler - Succession Planning and Business Agreements Program Lead/OMAFRA

Table of Contents

1. Introduction
2. Components of a Written Succession Plan
3. Description of Each Component
4. References

Introduction

Succession planning is a continuous process to plan for the transfer of knowledge, skills, labour, management, control and ownership of the farm business between one generation and the next. These are sometimes referred to as the founder or retiring generation, and the successor or next generation. Since succession is a process and not an event, it takes time and effort to work through and develop a comprehensive plan which best meets the needs of the farm family.

There are two main parts to developing a succession plan: (1) the "process" — discussing it, thinking about it, researching options, planning, deciding and (2) the "documentation" — recording the decisions through a written succession plan.

| Top of Page |

This Factsheet deals with the components of a written succession plan. Four main items must be addressed before preparing the written succession plan. These items include:

• Determine if the family goal is to transfer the farm business to the next generation.
• Identify the successor(s). If the family goal is to transfer the farm business, than the successor(s) need to be part of the entire discussion and decision. Much of the initial work relates to this item. It focuses on opening the lines of communication, discussing the roles and responsibilities and defining each individual’s personal and business goals and objectives.
• Determine whether the farm business is profitable and viable both now and in the long term. If the business is not profitable and viable, then strategies need to be developed to address the short fall
• And determine a timetable to implement the plan.

If the family does not address these items as part of the process, then they may have challenges in completing the written succession plan outlined below.

A succession plan deals with three main areas:

• transfer of labour
• transfer of management and decision-making (control), and
• transfer of ownership (the actual assets).

In most intergenerational farm transfer situations, the transfer of labour occurs first and is relatively straightforward. On the other hand, the transfer of management and decision-making can be more difficult as it involves letting go of the control of the business. However, the transition of management and decision-making is key to the success of the entire succession process.

The transfer of management and decision-making should be supported by a training and development plan. It will help to ensure that the next generation has the necessary knowledge and skills to take over and successfully operate the farm business in the future.

The transfer of ownership of assets involves the actual purchase/sale and/or gifting of the farm assets from one generation to the next.

This Factsheet outlines the "components" of a farm succession plan. The components described in this factsheet are the same as those required for succession plans funded with the assistance of the Canadian Farm Business Advisory Services’ SBPS (Specialized Business Planning Services) program offered by Agriculture and Agri-Food Canada (AAFC). Information on this program may be obtained by calling Canadian Agri-Renewal Services at 1-866-452-5558.

| Top of Page |

Components Of A Written Succession Plan

A written farm business succession plan records and describes the decisions made relative to how the transfer of the three main areas (mentioned above) will take place. The format for a succession plan can take different forms. However, there are some common components:

1. Business Overview (e.g. a summary and description of the farm business).
2. Description of Business and Personal Goals and Expectations.
3. Retirement Plan.
4. Training and Development Plan for Successor (also referred to as the "Successor Development Plan").
5. Farm Business Plan (e.g. future direction, etc.).
6. Operating Plan (e.g. roles and responsibilities).
7. Management, Control and Labour Transfer Plan.
8. Ownership Transfer Plan.
9. Communications Plan.
10. Contingency Plan.

While not all of these components will be applicable in every succession plan at any given time, it is still worthwhile to consider each one.

Furthermore these components may appear to be separate in the written plan, but it is important to ensure everything fits together and creates an integrated and comprehensive plan for the transfer of the farm business.

Description Of Each Component

A. Business Overview

Similar to a business plan, it is useful to begin with an overview of the business that everyone involved understands and agrees upon.

This includes an executive summary of the overall plan along with the action points to implement the plan. It also describes the current farm business, including relevant points like:

• the size of the operation, its location
• what the farm produces and how much
• who is involved in the business and in what capacity (e.g. makes decisions re genetics, cropping, etc.)
• the type(s) of business arrangement(s) (e.g. sole proprietor, partnership, corporation, rental agreements, etc.).

This sets the stage for the rest of the plan. It contains enough detail to provide a clear and concise picture of the business but it should not be overwhelming.

| Top of Page |

B. Description of Business and Personal Goals and Expectations

This component describes the business and personal goals and expectations of the founder (retiring) and the successor (next) generations.

As noted, discussing, clarifying, addressing and defining these goals and expectations is one of the first things that needs be dealt with. Writing everything down is secondary to reaching an understanding and agreement on certain issues. However, by writing decisions down, it helps give everyone a reference point and ensures a clear understanding.

Once this part is completed, the rest of the process and the resulting plan should flow from it.

C. Retirement Plan

The retirement plan component deals with two issues — financial and lifestyle. It outlines what is going to happen in retirement (lifestyle) and how it will be financed.

Lifestyle considerations include desired activities for the retirees, how the founders (retirees) will be involved in the business and so on. Part of this discussion addresses the living arrangements for the generations (i.e. who will live where).

The retirement financial component describes where the retirement money will come from (e.g. sale of the business, interest on savings, etc.), an explanation of any retirement-income strategies (e.g. RRSP’s, RRIF’s, LIR’s, annuities, CPP, OAS, etc.) and how the money will be spent. Living and lifestyle costs are serious considerations at this point.

D. Training and Development Plan for Successor

It is critical to ensure that the next generation has the necessary skills and knowledge to successfully operate a complex farm business.

This component of the succession plan then outlines these necessary skills and knowledge. This includes a current "skills profile" of the successor compared to a successful farm manager. Any gaps between these are then identified and an action plan of how to attain anything missing is discussed.

A "skills profile" basically breaks down common farm activities into the skills needed. For example, the capital purchases activity requires research skills, financial management skills, negotiation skills and so on. It might be identified that a successor lacks the negotiation skills. An action plan will then be developed to address this gap. This process will be completed for all of the skills needed and an action plan developed.

This action plan may include such things as additional training, responsibility sharing, job shadowing and a multitude of other learning possibilities.

For example, continuing with the negotiation skills theme, an action plan might include the successor being authorized to negotiate small ticket purchases, such as farm inputs and as experience is gained, the authority would increase to make larger value purchases.

| Top of Page |

A performance review process is also outlined under this component. This review process is a tool to give the successor feedback on how they are doing in their development. It helps identify both strengths and where improvements are needed.

The review process should be appropriate to the training and/or skills being acquired. For example, in a supervised training situation (i.e. learning to operate a specific piece of equipment), the review would be continuous (hourly or daily) with feedback. Moving across the spectrum from daily operations to delegated decision-making authority, the review would focus on the overall situation rather than continuous monitoring.

In all cases a regular meeting should take place to review the successor’s progress. It should focus on what has worked, what has not , why and what could be done differently. This should be a two-way discussion and a positive experience for both the founder and the successor — a chance to share and learn.

Some of this discussion will look at technical production issues (e.g. feeding program, planting of a certain crop, etc.). It is also important to focus on management issues and responsibilities (e.g. purchasing decisions, financial management decisions, etc.).

E. Farm Business Plan

The farm business plan component of the succession plan describes how the farm business will meet the needs of both the retiree(s) and the successor(s).

This includes a financial analysis of the farm business — past, present and future — to determine if the business is profitable and viable. This is critical. If the business is not currently profitable and viable, then strategies need to be identified to make it so.

This component also describes the future direction of the farm business (e.g. maintaining the same scale, downsizing, expansion, diversification, value-added, etc.) and how this direction will affect the business and includes projected financial statements.

F. Operating Plan

The operating plan outlines how to manage everyday business activities. This is divided into two main parts:

• The first identifies the roles, responsibilities and authorities related to the day-to-day operations and how decisions are made (e.g. vote, one person, debate, etc.). This part is especially important where multiple generations (2 or more) will be working together for a time period (overlapping timeframe).
• The second part outlines the plan for family business meetings to discuss the transfer process. This includes information about how the meetings will function, who will be responsible for what, where the meetings will take place and the involvement of non-farming family members.

The two parts together result in a "user’s manual" for family business meetings.

| Top of Page |

G. Management, Control and Labour Transfer Plan

Related to the operating plan [F], the management, control and transfer plan goes one step further by describing how the transfer of management, control and labour (basically decision-making and workload) to the successor will take place. This includes a timetable for the transition (linked to implementation timetable [I]).

This component also needs to be closely connected to the successor development plan [D] because successor(s) needs to have the skills and knowledge before the full responsibility can be transitioned to them.

H. Ownership Transfer Plan

The ownership transfer component outlines how the farm business is currently structured and how it will change during the transfer process (link to business overview [A]). This includes a description of the business arrangement that will be used (e.g. sole proprietorship, partnership, corporation, etc.). Below is a brief example.

The farm is currently structured as a partnership with three partners. Under the plan, a corporation will be formed with three shareholders, each with an equal number of common shares. The non-real estate assets (cows, crops, supplies, machinery and quota.) will be rolled into the corporation. The individuals or partners will hold the real estate outside of the corporation. The corporation will then lease this farmland from the individuals or partners.

This component also explains how the transfer of asset ownership will be handled, including a description of the transfer mechanism (e.g. purchase, gift, bequest, combination, etc.).

For example, a sole proprietor plans to transfer the assets to the successor through the purchase/sale of individual assets (or a category of assets like machinery and equipment) over time with a mortgage back to the founders (parents).

Other parts of the ownership tranfer plan component include:

• an explanation of the financing required, the various sources available and the preferred financing option(s)
• an inventory and valuation of assets and liabilities
• an explanation of the tax implications of the proposed transfer process along with a description of how these items will be addressed
• a discussion regarding the treatment of non-farming children, and
• an outline of the insurance requirements related to life, disability, disaster and related insurance tools, and
• a description of the legal agreements (e.g. employment contracts, partnership agreements, shareholder agreements, buy-sell agreements, etc.). Copies of these could be attached as appendices for reference purposes. It should be ensured that these legal agreements include dispute resolution mechanisms. A copy (or copies) of the legal will(s) and any prenuptial agreements could also be attached for reference.

| Top of Page |

I. Implementation Timetable

The implementation timetable provides a timetable to complete key activities. These key activities need to be prioritized with deadlines (i.e. what must be done first and by when). This assists with monitoring and measuring progress. It also helps to identify if adjustments or amendments are needed.

J. Communications Plan

The communications plan has two basic parts:

• a description of how the family communicates about transition and succession planning (link to the operating plan [F]) and
• a discussion of how disputes are managed and resolved.

First, the communications plan addresses the details of the process for family communications and how decisions are made relative to the succession planning process. It outlines the basic "rules" of family meetings and discussions regarding the direction of the succession plan. The communications plan includes:

• a schedule for regular "family business" meetings
• an outline of who will participate in these family business meetings (e.g. only family members active in the farm business or all family members)
• if family business meetings only involve those active in the business, a decision must be made regarding the need for a separate "family" meeting to involve all family members
• a discussion regarding meeting location and if meals will be involved
• a description of meeting responsibilities and decision-making processes such as who will set-up the meeting and agenda, follow-up on decisions, chairing meetings, etc. (link to operating plan [F]), and
• an outline of the ground rules for the discussion (e.g. everyone has a turn to talk, not interrupting, no blaming, stay focussed on the agenda item, etc.).

The second part of the communications plan discusses how disputes will be managed and resolved. This might include such strategies as family voting, third party mediation, etc.

K. Contingency Plan

The contingency plan component outlines what will happen and who will ensure the implementation of the contingency measures in such situations as illness, death, disability, divorce, disagreement, disaster, business downturn or failure.

This includes reference to the insurance requirements and selected mechanisms (link to ownership transfer plan [H]) particularly life, disability and disaster insurance as contingency planning and risk management tools.

References

Adapted from: "Minimum requirements for succession plans." Specialized Business Planning Services (SBPS) How to Apply for Funding. Canadian Farm Business Advisory Services, Agriculture and Agri-Food Canada. 2004.

This publication is intended as general information and not as specific advice concerning individual situations. Although it outlines some of the legal and tax considerations of farm succession planning, it should not be considered as either an interpretation or complete coverage of the Income Tax Act or the various law affecting farm succession planning. The Government of Ontario assumes no responsibility towards persons using it as such.

| Top of Page |