Case study | Succession planning

Succession Planning Moore Stephens Markhams

Prepared by Barry Rosenberg Moore Stephens Markhams director and succession planning expert

Introduction

The Stoddart family has been farming in Porangahau, on the Central Hawke’s Bay coast for almost a century. The family’s roots are very deep in Porangahau.

In the late 1970s, Walter and Frances Stoddart, along with son Mark and his wife Chris, began working on an expansion plan to increase the family’s rural business, firstly by purchasing a coastal farm (Arataura Station) after the dissolution of the farming partnership of Walter and his two brothers. Subsequently in 1992, they purchased a neighbouring block, then expanded again in 2008, with the purchase of a third farm about 25 minutes west of Porangahau.

Whilst the three farms are physically apart, financially they currently operate under one umbrella, with Barry Rosenberg working with all members of the family.  About 10 years ago, when Mark and Chris’ three sons were in their late 20s, active steps were taken to initiate a succession plan.  Read more about the Stoddart family here.

Problem / Challenge

Mark and Chris recognised early that passing on the family’s farming business would need to provide a ‘fair’ opportunity for all three sons, and their respective families.

Alternative solutions

1.  Sell all three operations and distribute the capital
Selling the family business / farm is always an option. It is much much easier to divide cash up than it is business assets and / or land.

However, for the Stoddart family, the sale philosophy and strategy was not an option. The original block had been pioneered by Mark and his father Walter, and more recently acquired blocks had been considerably improved with family “blood, sweat, and tears”.  In short, farming in Porangahau and that community is in the Stoddarts’ ‘blood’.

2.  Share the three operations within the family business between the three sons
It would therefore be likely in the Stoddart family case, that each son and his family would ultimately farm his own block independently. Given that each farm differed in size, location, stocking capacity and profitability, the next big question is how to treat each son fairly?

Recommended solution

The second of the two options is the one the Stoddart family is pursuing.

In the ‘bigger picture’ of the plan, the agreed main way fairness will be achieved is by each of the sons contributing to debt servicing in proportion to the number of stock units they each will farm.

This succession option will allow each to manage and make their own future choices in terms of farm strategies, expansion of their businesses, and planning for their own succession (which I might add should begin now).

Farming independently will also make this incoming generation’s succession a lot simpler than if all the sons were to farm collectively.  The risk of a breakdown of family relationships is seen as being far greater if they were farming collectively. Research tells us that the chances of brothers farming successfully collectively is very low.

Implementation

Practically, the succession planning process comprises two elements:

1.  Management and decision making
For the past four years, each couple has been responsible for managing the day to day operations of their respective property, with Mark and Chris acting as mentors to their sons.

2.  Ownership transfer
On 1 July 2018, ownership of the respective farm properties will change to the entities of each couple’s choice. Barry will put forward alternative business / legal structure options to accommodate these changes. With this will come a natural change to the current structure of land ownership and trading entity. Confirmation of the final arrangements of the transfers are still to be made.

Results

With a history of astute farm and financial management, the family has farmed very successfully for a long period of time.

There is strong evidence of best farming practice being implemented and in the areas of communication, regular meetings, accurate budgeting and close attention to setting and monitoring of capital debt reduction targets, and a great work ethic. Such practices ensure all family members are motivated to succeed sustainably into the future.

Throughout the succession process to date expectations of both generations have been met, through clear communication from Mark and Chris (the outgoing generation) to their sons (the incoming generation). This has ensured everyone knows what is happening, and when. The future of the Stoddart family business is set to successfully continue.

Contact your advisor or learn more about the importance of successful succession planning and exit strategies here.

Succession planning – facts to consider
  • Around 80 percent of the world’s businesses are family businesses
  • The success of intergenerational transfers of family business is very low – 25 to 30 percent from founding generation to second generation; 15 to 20 percent to the third generation
  • The bulk of current family business transfers are between the Baby Boomers (born between 1946 and 1964) and Generation Ys (born between 1980 and 1994)
  • Over the next decade, up to 80 percent of current NZ business owners will be looking to exit their businesses
  • Very few NZ business owners have a formal succession or exit plan – around 10 percent.
Succession planning  success factors
  • Start early (start your business with the end in mind)
  • Ideally the incoming generation should be introduced into the business by 35 years of age; at least in a management and decision-making role. At this age, the incoming generation has 10 good years of high level energy to give to the business
  • If children are brought up to be ‘part of the business’ i.e. spend time at the business premise, have holiday jobs there, observe dinner table discussions, etc there is a greater chance of succession success. Whilst there may not necessarily be a direct expectation they will take over, those that have such exposure to the family business at a young age have a far greater chance of making a success of their tenure in charge of the business
  • The incoming generation should ideally have time away from the family business experiencing the world and learning how others operate their businesses
  • Open, transparent communication is paramount if business succession is to succeed
  • Each generation must have mutual respect for the other
  • Financially the plan must be economically sustainable for the retiring generation and the incoming generation
  • There must be an acceptable plan for those family members who are not going to participate in the family business
  • The end plan must be able to be ‘lived with’ by all family members.
Succession planning challenges
The succession process will have its challenges. The main ones being:

  • The outgoing generation’s reluctance to ‘let go’ and ‘hand over the baton’ to the next generation. This is a characteristic of human nature
  • Intergenerational differences. The characteristics of each generation can be poles apart e.g. Baby Boomers v Gen Y
  • The insular nature of family members (particularly of the outgoing generation) means communication is often very limited. This can lead to the younger generation walking away from the family business
  • Managing expectations. Where unrealistic expectations exist, managing these can be very challenging.

Published May 2017

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