Latest / Dollars In The Dirt / #039 - What Most Graziers Get Wrong About Structuring for Succession

Transcript

#039 - What Most Graziers Get Wrong About Structuring for Succession · Dollars In The Dirt

• 0:00
  What is the biggest mistake graze users make when structuring for succession? They
• 0:03
  assume everyone knows the plan. We see it all the time. Children working
• 0:07
  in the family agricultural business for a decade, sweating it out in the
• 0:10
  yards with absolutely no idea what the long-term plan is
• 0:13
  for them or the property. After helping hundreds of farmers secure
• 0:17
  over a billion dollars in finance, I can tell you that that silence
• 0:20
  is the fastest way to destroy a family's farming legacy. So in
• 0:23
  this video, I'm going to break down what most graziers get wrong about
• 0:27
  succession structuring, why you need a documented deed, and how
• 0:30
  to set clear expectations before the banks get involved. The
• 0:34
  first major mistake is relying on unspoken assumptions. In
• 0:38
  many family farming operations across Australia, this is
• 0:41
  a common story. Parents put in a decade of hard work building
• 0:45
  up the property and the business and naturally they want their
• 0:48
  children to continue the legacy. They assume the children who
• 0:51
  stayed on the farm know the plan that eventually they will take over.
• 0:55
  But too often that plan is never actually spoken about.
• 0:59
  The child assumes that their years of hard work on below market
• 1:03
  wages are building sweat equity that will be recognised when
• 1:07
  the time comes. They're putting in the hours, handling the
• 1:10
  cattle in the heat, managing the fences, and they believe that
• 1:13
  this effort means that they'll inherit the family farm one day. Meanwhile,
• 1:17
  siblings who have moved to the city or pursued other careers assume
• 1:21
  something completely different. They figure that when the parents pass away, the
• 1:25
  farm will be sold and the proceeds divided equally. It's
• 1:28
  just like any other inheritance. They might not understand or
• 1:31
  even be aware of the work their sibling has put in on the farm. So
• 1:35
  each person is operating on a completely different set of assumptions and
• 1:39
  no one is talking about it openly. And this is a ticking time bomb. I've
• 1:43
  seen it happen in many cases where the parents finally decide to step back.
• 1:47
  or a sudden health crisis forces the issue quickly. All
• 1:50
  those conflicting assumptions collide at once, and the result is usually devastating.
• 1:54
  Families end up in a bitter dispute that sometimes goes to court, racking
• 1:58
  up massive legal bills that eat into the estate. The
• 2:01
  worst case scenario, the farm gets forced onto the market, sold
• 2:05
  off, and the family legacy is lost. An example of
• 2:08
  this, I work with a family cattle operation in Queensland, where
• 2:12
  the eldest son had been managing the herd for over 15 years. He
• 2:15
  assumed the farm was going to be his one day. But
• 2:18
  when the parents suffered a stroke, the siblings who lived in Brisbane pushed
• 2:22
  for a sale, wanting their share in cash. Without a
• 2:25
  clear, documented plan, it ended in a long, painful legal
• 2:29
  battle that drained the family farm financially and emotionally. That's
• 2:33
  why communicating the plan with the kids from the very beginning is
• 2:36
  absolutely critical. If a child is going to commit their most productive
• 2:40
  years to the family business, often their 20s and 30s, they
• 2:43
  need to know what the end game looks like. Are they working towards
• 2:47
  full ownership, a partnership, or just a manager's wage? You
• 2:50
  can't expect the next generation to drive the business forward if
• 2:54
  they don't know if they'll ever actually own it. Without clarity, motivation
• 2:58
  can fade and resentment can build. The key is to lay
• 3:01
  out everything early and keep the conversations going as circumstances
• 3:05
  evolve. The second mistake is thinking that a conversation around
• 3:09
  the kitchen table is a binding succession plan. I can't tell
• 3:12
  you how many times I've heard, well, we all agreed on what
• 3:15
  would happen. But the truth is, a verbal agreement means nothing
• 3:19
  when the pressure is on, when spouses get involved, or when the bank
• 3:22
  needs to see a formal structure. You need a document deed
• 3:26
  that outlines the family succession plan. And this is often called
• 3:29
  a deed of family arrangement. This document is a blueprint for the
• 3:32
  handover. It details exactly how the assets will be transferred. how
• 3:36
  the off-farm children will be provided for, and what the timeline looks
• 3:39
  like. It takes the emotion out of the process because everything
• 3:43
  is agreed upon and signed when everyone is still calm and rational. This
• 3:46
  clarity can prevent a lot of headaches down the track. And
• 3:50
  from a finance perspective, this document is absolute gold.
• 3:54
  When we go to the bank to restructure the debt for the handover, the
• 3:57
  bank wants certainty. They want to know that there won't be a
• 4:00
  legal challenge from a disgruntled sibling that could freeze the
• 4:03
  farm assets. A formal deed of family arrangement provides the
• 4:07
  lenders that the succession is structured, agreed upon, and
• 4:10
  legally sound. It makes securing the finance for a
• 4:14
  buyout significantly easier and often
• 4:17
  results in better terms. I recently worked with a mixed farming family in
• 4:20
  northern Victoria. They had a large operation with cattle and cropping. Three
• 4:24
  adult children, two lived locally and worked on the farm, and
• 4:27
  the third lived overseas. The parents wanted to ensure the children were
• 4:31
  all treated fairly, but also wanted the farm to stay in
• 4:34
  the hands of the children who'd been involved in the day-to-day operations.
• 4:38
  The deed documented that plan to transfer the farm to the two
• 4:42
  local children, while the third child would receive equivalent value in
• 4:46
  off-farm assets. When we presented this to the bank, it
• 4:49
  gave them the confidence that the succession was legally binding and fair,
• 4:53
  and so the loan structure went through smoothly with good interest rates and
• 4:56
  manageable repayments. One of the most complex parts of
• 5:00
  succession structuring is figuring how to handle the off-farm
• 5:03
  siblings without destroying the core business. The traditional approach
• 5:07
  is to saddle a farming child with a massive debt to pay for their brothers and
• 5:10
  sisters. This usually involves the farm inheriting a huge mortgage
• 5:14
  so the farming child can buy out the others. As we have discussed,
• 5:18
  this rarely works in the long term. The business simply can't generate
• 5:21
  enough cash flow to service the level of debt. The stress on the cash flow
• 5:25
  can stunt the farm's growth and cause real strain on family relationships.
• 5:29
  A smarter strategy involves using the farm's balance sheet to build off-farm
• 5:32
  wealth long before the succession actually happens. And
• 5:36
  if the business is performing well, a broker like me can help the parents release
• 5:39
  this equity from the farm to invest in commercial properties, shares,
• 5:44
  or other income producing assets outside of ag. And this is a
• 5:47
  strategy I've seen work well with sheep and cattle operations in
• 5:50
  New South Wales, Western Queensland, all over the place. Over
• 5:54
  a 10 or 15 year period, these off-farm assets grow in
• 5:57
  value and generate their own income streams. And when
• 6:00
  the time comes for succession, these assets are used to
• 6:03
  provide for the off-farm siblings. The farming child inherits
• 6:07
  the agricultural assets and the core debt, while the siblings inherit the
• 6:11
  commercial properties or investment portfolios. This completely removes
• 6:15
  the need for a massive cash buyout. It protects the farm's cash
• 6:18
  flow, ensures the siblings are treated fairly, and provides a
• 6:21
  clean, structured break that the bank is happily to support. This
• 6:25
  approach also aligns with how banks view risk. They prefer
• 6:29
  seeing a diversified asset base and clear succession plan
• 6:32
  rather than a single heavily leveraged farm asset. It's a
• 6:36
  win-win for everyone involved. If you're starting to have these succession conversations
• 6:40
  and you want to know how a formal handover will impact your borrowing
• 6:43
  capacity and debt structure, that's exactly what I can help with. Book
• 6:46
  a free call with me and we'll review your situation. The
• 6:50
  free call link is in the description. The final mistake is treating the succession
• 6:53
  plan like a rigid, unchangeable document. A good succession plan
• 6:57
  sets clear expectations around everyone's role in the family business, but
• 7:01
  it also acknowledges that these roles can change and evolve over
• 7:04
  time. And the child who currently is the head stockman might
• 7:08
  need to transition into being the manager role over a five-year period.
• 7:12
  And the parents who are currently running the show might need to transition into
• 7:15
  more of an advisory board role before completely stepping away. This
• 7:19
  flexibility is vital because farming is tough. It's an unpredictable business,
• 7:23
  and market conditions, health issues, or personal circumstances can
• 7:27
  shift roles unexpectedly. For example, I work with a cattle
• 7:30
  operation in central New South Wales where the son was expected to
• 7:33
  take it over. But after a few years, the daughter developed
• 7:37
  a passion and skill for managing the business finances. The succession
• 7:40
  plan was adjusted to reflect this new dynamic, allowing the daughter
• 7:44
  to take on a leadership role while the son focused on the operation. Without
• 7:47
  a flexible plan, this kind of adjustment would have caused
• 7:51
  conflict. The financial structures also need to evolve alongside
• 7:54
  these roles. As the younger generation take on more responsibility, they
• 7:58
  should also be taking on more and more financial risk and reward. We
• 8:02
  often help families structure the finance so the younger generation can
• 8:06
  start buying into the herd or purchasing adjacent blocks of
• 8:09
  land under their own entity, while still operating under the umbrella of
• 8:13
  the family business. This phased approach builds the younger
• 8:16
  generation's balance sheet and credit history. And by the time the
• 8:20
  final handover occurs, they're not as risky, unproven borrowers
• 8:23
  in the eyes of the bank. They're an established operator with a track record
• 8:27
  of success. It makes the final transition of the core
• 8:30
  debt seamless. An example of this is when I helped a family in
• 8:33
  North Queensland. The daughter gradually purchased the cattle and leased
• 8:37
  an adjoining property under her own company. This gave her the
• 8:40
  financial footprint and credit history. When it came time to
• 8:43
  formally take over the family farm, the bank viewed her as a
• 8:46
  low-risk borrower, which smoothed the family process considerably. As
• 8:51
  the succession plan moves from theory into practice, one of the most
• 8:54
  effective structures can be to implement is a formal advisory board.
• 8:58
  In the early stages of a handover, the parents are often reluctant to
• 9:01
  completely let go of the decision making, and the younger generation
• 9:05
  can feel micromanaged. An advisory board bridges this
• 9:08
  gap. It brings a formal structure to the business meetings. Instead
• 9:12
  of arguing over the kitchen table, you sit down once a quarter with your accountant, your
• 9:16
  lawyer, your finance broker, and the family members involved in
• 9:19
  the business. The board doesn't make the day-to-day operational decisions,
• 9:23
  but it oversees the strategic direction and the financial health of
• 9:26
  the business. It holds the younger generation accountable to
• 9:29
  the financial targets required to service the succession debt. It
• 9:33
  also gives the parents comfort that the business is being managed professionally, allowing
• 9:37
  them to step back with confidence. And from a finance perspective, an
• 9:40
  advisory board is a massive green flag for a bank. It shows
• 9:44
  the lender that the business has moved beyond a simple family farm and
• 9:48
  is operating with a corporate level governance. When we present a succession
• 9:51
  finance proposal to a bank, highlighting the existence of an active
• 9:55
  advisory board, this significantly strengthens the applicant and
• 9:58
  often leads to more favourable lending terms. I've seen this
• 10:02
  work really well for sheep and cattle operations across Australia. The
• 10:05
  advisory board included external professionals who challenged
• 10:09
  the family to improve efficiency and profitability. This not only helped
• 10:12
  the business to grow, but made the bank more comfortable in
• 10:15
  extending finance, knowing that there was strong oversight. Succession
• 10:19
  is never simple, a handshake or a vague promise. It's a
• 10:22
  complex process that needs clear communication, legal documentation
• 10:27
  and a financial structure that supports the evolving roles. The
• 10:30
  families that take these steps early have a much higher chance of preserving
• 10:34
  their legacy and growing their business for future generations. Remember
• 10:38
  guys, succession isn't a secret to be kept until the reading of
• 10:41
  the will. It's a business strategy that requires communication, documentation
• 10:46
  and the right financial structure. Don't let silence destroy your
• 10:50
  family's hard work. If you need help structuring the finance, support
• 10:54
  or document a succession plan, reach out to Season Finance as
• 10:57
  a broker This is exactly what I do for my clients, and we'll see you
• 11:00
  in the next episode. Thanks for tuning in to Dollars in the Dirt. If you've
• 11:04
  got value from today's episode, make sure to subscribe so you never
• 11:07
  miss the insights you need to grow your business. And if you're ready to stop being just
• 11:10
  another number to the banks, visit Season Finance via
• 11:14
  the link in the show notes. Remember to follow us on socials and catch