Farm Succession Planning: Why Fair Doesn't Mean Equal

Podcast transcript from Your Farm Business Podcast

Succession is the one conversation nearly every farming family has to have, and the one most put off. In this episode of Your Farm Business Podcast, host Tom Moir sits down with Mike Krause, founder and CEO of P2PAgri, to talk about the elephant in the room: how to hand a farm from one generation to the next without tearing the family apart.

Drawing on three decades of helping more than 20 farming families through the process, Mike explains why being fair rarely means splitting things equally, why management and assets do not have to change hands at the same time, how to keep a non-farming child's connection to the land alive, and where financial modelling takes the guesswork out of who can actually afford what.

An Accidental Craft: How Mike Got Into Succession Planning

Tom Moir:

We've talked about the software side of P2PAgri and your own background and training. Today I want to take a bit of a side road, into something that probably wasn't front of mind when you started P2PAgri, but that every farmer runs into at some point: succession planning. How did you come into that space?

Mike Krause:

Good question, Tom. I started my own consulting practice about 30 years ago. My background is agricultural economics, so I come at things from a numbers perspective, and I'd help farmers with questions about buying land or changing their farming system. But the closer you get to farmers, the more they share the other challenges they're wrestling with. A few of my clients said, look, succession hasn't happened, or it should have happened and we haven't got around to it. How do we go about it, Mike? Should we even do it?

So I looked around at examples of families who'd been through it, and some of them were disastrous. I thought, there must be good ways and bad ways of doing this. One client asked me to help, and like any good consultant I don't say no to a challenge, so I said yes. But Tom, it was like being handed a beautifully wrapped Christmas present. You're excited, you tear the paper off, and then you think, what have I got myself into? You never know what's in the room until you get there.

I've since helped around 20 farming families work through it, some with great success and some that fell apart. It's all to do with family dynamics, expectations, and whether there's openness and honesty, or a lack of it. To me it's one of the biggest elephants in the room that farm families have to confront, because the objective is to get the land from one generation to the next as effectively as we can. Around 95% of Australian farms are family farms, so this is not an uncommon issue. But there are good principles that help you work through it.

Why Succession Is the Hardest Conversation on the Farm

Tom Moir:

Why do you think it's such a difficult conversation? What keeps it being the white elephant in the room?

Mike Krause:

It's about management and control, Tom. The older generation may never quite want to relinquish the wealth and the running of the business. Or they do want to, but the next generation aren't sure they want to take over from mum and dad. There are a lot of assumptions built up as a family grows up, and if those assumptions aren't challenged or talked through, they may turn out to be wrong. The hardest part is creating an environment of open, clear and honest communication, and that's very difficult for a family to do on its own. That's why having a third party to facilitate is so important.

But it has to be the right third party. I've come in after facilitators who were combative, who thought having people fight it out across the table was how you reach a solution. It's like they've pulled the pin on a hand grenade, rolled it into the middle of the family dinner table, and walked away. It just makes everything worse. What you actually want is open communication, respect, and a genuine wish to work out the best solution for each other.

Fair Doesn't Mean Equal

Tom Moir:

On the other side of that coin, what are the risks and mistakes you see when families delay, when they keep saying we'll get to it one day?

Mike Krause:

The worst situation I ever saw, Tom, was a son who'd worked at home for about ten years helping his father on the family farm. He was one of twelve children, but he was the one who came home to help, and he always assumed he was getting the farm. When his father passed away and the will was read, the intention was that everyone would be absolutely equal, every child getting a slice of the pie. His farming future ended the day that will was read out. Whether that was his father's real intention, I don't know, but to me it's the worst outcome: a son gives ten years of his life to the farm and is rewarded no differently from siblings who didn't.

That's where this idea comes in that we need to be fair with succession, but fair may not mean equal. If our objective is for the family farm business to keep operating into the next generation, the farm might only really support one of the children. The challenge is to be fair to the others, so little Johnny and little Julie don't miss out, while accepting that dividing the wealth exactly equally could destroy the very thing you're trying to pass on.

Keeping the Family's Connection to the Land

Tom Moir:

The farm is often the family home as well as the business, so people have strong emotional and historical connections, a wish to continue the legacy. How do you balance that with the fact that it's still functionally a business? Working out what's fair gets very complex.

Mike Krause:

You're right, Tom. The way I run family meetings is to start on the phone with mum and dad. I'll say, if I was your fairy godmother and waved a magic wand so we're ten years down the track, how do you see the farm being managed, and who's managing it? That gives me a list of agenda items. Then I'll do the same with each of the children, one at a time, and I'll ask each of them what the elephant in the room is for them. My job as facilitator is to raise those elephants myself, so that little Johnny isn't the one who has to say the hard thing and then get jumped on for it.

When we finally meet around the table, I ask everyone to be patient, to listen, and to respect each other. My role is to stop any one person dominating, because there are always different personalities in the room. The objective is to help mum and dad achieve their goals first, and then work out how the next generation blends into that. I've had cases where children who don't want to farm still don't want to lose access to the land, because the creek or the hill out the back is where they camped as kids and they want their own children to have that. So we negotiate ongoing access even though they may not own or farm it. We separate that emotional connection from the business of farming, and mum and dad, who hold the purse strings, are usually the ones whose goals drive the rest of the discussion.

What Good Succession Planning Looks Like

Tom Moir:

We hear plenty about how badly these things can go, and the grenade image is a good one. What does good succession planning actually look like?

Mike Krause:

The textbook answer, Tom, is start early and do it often. When little Tom is five you can already tell whether he'd rather be out on the ute with dad or inside playing video games. Have the conversation early and keep understanding what the next generation actually wants. To me it's a continuous process: plan, review, then execute, and then come back and review again. What you decided ten years ago may not hold today, because one of the kids has divorced, or another has had three children and now has more need. So you revisit the plan: Tom's coming home, we'll hand over the management when he's 25, and we'll look at handing over the assets when he's 35 or 40.

That's an important point: you don't have to hand over the management and the assets at the same time. And I've always thought it a good rule of thumb that if Tom is taking over the farm, he should get some control of the chequebook before he's 30. When he's writing a $60,000 cheque for fertiliser, knowing he's spending that to bring in maybe $300,000 of grain, he learns what it is to take a risk and be a business person. Far better that than handing him the chequebook at 65, after a whole career as a worker, and suddenly expecting him to be the manager.

If a family hasn't done any of that, and mum and dad are now in their 70s and physically don't want to keep farming, then we run a series of meetings. We set the agenda, work through the items, and some we'll agree on and some we won't have enough information for yet. We might need to talk to the accountant about the capital gains implications, or the bank about redrawing the loan so Tom can take on the business rather than dad keeping the liabilities. So we go away, do our homework, and come back. It might take three or four meetings to tick everything off, but you end up with an overall plan that covers when things happen and how mum and dad will be looked after, including whether they stay in the family home or move to town while the next generation moves in.

Where to Start If You've Left It Late

Tom Moir:

If a family has done no preparation at all, no early planning, how do they start? It must be much harder once it's been put off.

Mike Krause:

The best place to start, Tom, is when mum and dad are ready. Even if Tom knows it's coming, if his parents aren't ready to talk about it, it's like pushing water uphill. But once mum and dad are ready, that's the first box ticked, and I'd strongly suggest they find a third party to facilitate and bring the family together. If they're in their 70s and still haven't spoken to their kids about it, there are obviously a few elephants in the room stopping it, so you need someone to help identify those and work through them.

I'd look for a facilitator who would rather listen than talk, who will ask the hard questions and draw out the answers. I know accountants and lawyers who have no such process. They'll come in and say, this is how it should be done, and try to force a round peg into a square hole. And lawyers tend to be adversarial: one can only act for mum and dad, so Tom has to get his own lawyer, and now you've got two lawyers butting heads. That makes it very hard for the family to own the solution, and a solution the family doesn't own usually isn't a lasting one. So find someone with a wise head who is a better listener than a speaker.

Tom Moir:

Great advice. It might have been you in an earlier episode who said it, we've got one mouth and two ears, and we should use them in that ratio.

Mike Krause:

Exactly. Any facilitator of a difficult process like this needs to listen far more than they speak. I won't pretend it works every time. I've had people stand up, swear at me and at mum and dad, and walk out never to return. But my view was that was probably going to happen anyway. Better to ask the question, get it out in the open, and then work out how to deal with it.

Bringing the Numbers In: Modelling the Next Generation's Farm

Tom Moir:

Where does the P2PAgri side of things, the data and the number-crunching, fit into succession? You probably can't run an exact model of a succession, but the data must help make the decision.

Mike Krause:

It does, Tom, and that's actually what drew me further into succession work, because I find the financial side is missing from a lot of succession planning. Even if mum and dad know what their business has done, once Tom takes over and has to assume some of their loans, and maybe take on more debt to pay out little Johnny and little Julie, the business looks quite different from the one mum and dad ran. Tom needs to be comfortable that that's a level of risk he's willing to walk into. Our scenario analysis gives Tom a clear view of what his version of the business would look like, while showing mum and dad where the business has come from and whether it can fund their financial independence going forward.

Here's a classic example. About 20 years ago I helped a family where dad said, the two boys both want to farm, so we'll move to town and you boys keep farming together. They also wanted to qualify for the pension, and to do that mum and dad had to divest their assets a full five years beforehand. We did the modelling, it worked, and that's exactly what they did. But ten years later the boys came back to me and said, we know mum and dad think we can't survive economically apart, but if we keep farming together we're going to kill each other. So I pulled the software out again and modelled splitting it up. The boys had already agreed who would take which parcel of land, so that was the easy part. I modelled each brother's farm, showed them the debt each would carry, and asked, is this a risk you want to take? They both said yes, and both looked viable. Then we went back to mum and dad, who'd wanted the farm kept together, showed them the modelling, and they agreed to the split. That was about eight years ago. Last I heard they've gone their separate ways, they're both happy, and they're both still farming. Mum and dad deserve credit, because they raised two boys who could both go off and farm.

Strategies to Treat Everyone Fairly

Tom Moir:

When there are several kids and only one or two want to stay on, but the others still want a slice, there seem to be different ways to handle it. I know people stuck paying out their siblings, constantly cycling debt, and the land becomes a burden. What have you seen work?

Mike Krause:

There are a number of strategies, Tom, and a lot depends on how early you start thinking about it. Sometimes it starts with education. If mum and dad recognise early that Tom would rather play computer games than farm, they might send him to boarding school and invest in a profession, an accountant, a teacher, a doctor. That investment in his education is itself part of his inheritance, and it sets him up for a career while leaving the farm able to support whoever stays.

Another strategy is to put a particular parcel of land in the non-farming child's name. Tom knows he has that asset, even though it won't be sold any time soon, and the family member still farming might lease it back from him. That lease payment becomes income for Tom, and he can borrow against the asset to buy a house in the city if he wants. A third option is additional borrowing: Tom takes over all the land, but the parents want, say, $200,000 to go to their daughter Jenny. They don't have it in cash, so a loan is taken out and it becomes Tom's liability, as long as the farm stays viable, while Jenny gets her deposit for a house. There are lots of strategies, and the earlier the family's intentions are settled, the more of them you can explore. You can even ask the neighbours how they handled it and what worked.

The big risk is when a father in particular makes decisions independently of his wife and children, and nobody finds out until the will is read. Say the will leaves all the land to Tom and not to his brother and sister. The siblings might have accepted that, but their spouses, who have a big mortgage back in the city, see all that wealth going one way and decide to contest. A contested will is generally divided equally, and so Tom loses the chance to keep farming because the court has split it. If you want to avoid that risk, mum and dad should pass the assets to Tom before the will is read, so there's nothing left to contest.

Don't Let the Accountant Have the Last Word on Land Size

Tom Moir:

Something I find interesting is that the accountant often looks at the current portfolio and says you can't split the place, it becomes unviable. But if you do split it, someone with a farming mind might look at 800 acres and see a profitable business where the accountant saw an evaporating one. The real difference seems to be management, not the land.

Mike Krause:

That's true, Tom, and I'm not taking anything away from accountants, they do a brilliant job, especially on tax. But they generally look at the business through the profit and loss from a tax perspective and the balance sheet. The future vision of the next generation can be very different. They might say, I'm not going to run sheep and grain anymore, I'm going to move into pastured eggs or something more intensive, and the asset I'm inheriting is perfect for that. Unless someone models moving into that different enterprise, and accountants generally don't, you never see whether it works. That's the modelling I think should be done. In the two-brothers example, the evolution from grain into hay actually improved profitability enough to let them split the farm. So your point is well made: viability is often about management, not just the land.

Tom Moir:

And it highlights the value of being able to model those scenarios, whether it's chickens or anything else, to punch the numbers in and ask, can it work under the current system? No? Then under what conditions could it work?

Mike's Advice: Start Now

Tom Moir:

If you could give one piece of advice to families either in this situation or about to start, what would it be?

Mike Krause:

First, go in with your eyes open. You can pick your friends, but you can't pick your family, and we all carry some history. Ask honestly, can we solve all the risks? Some of the elephants in the room are exactly the things people avoid, the marriage that might end in divorce, the will that might be contested. Work out how you'll manage each of those risks rather than pretending they don't exist.

And don't ignore the financial modelling. Some farmers say they want to pass the farm on debt-free, and I've seen that done, but the farm ends up too small to grow from. Passing the farm on with some debt isn't a bad thing, as long as it keeps its scale and stays a good platform for the next generation. Above all, start early rather than late, because it gives you far more options to manage the dynamics and to keep the farm in the family.

I hope it's helped anyone who's listening and thinking about succession. Start now. You can always put it on the shelf and leave it till next year, but every year you wait, your options get more limited.