An article written by Kylie Wilson – Partner, Sparke Helmore
At Sparke Helmore, we have many primary producer clients in their fourth and fifth generations of long-held family businesses. It is our experience in acting for these families that communication, planning, and structuring are all essential elements of a successful transition.
One of the most common questions we receive is about longer-term planning for families who want to work through transitioning a business is – where do we start?
As lawyers, we are often referred matters only when family members are already in dispute and because of this, we think it is essential to do a fact gathering exercise upfront to properly assess the position of the business and the family members in the context of transitioning a business from one generation to the next.
Communication is the key to preventing a dispute, and frequent communication needs to occur so that information is made available to all the key participants in the family before a transition can be effected. It’s important to know what information you need however to make this exercise productive.
It is not uncommon for a son or daughter to have been involved in the family farming enterprise for many years, sometimes decades, without any discussion occurring between the relevant child and his or her parents about essential issues such as:
- How is the business structured? Is the structure optimal for the business moving forward? Are there any unexpected risks hiding in the structure?
- What are the ‘wants and needs’ of parents when they are no longer able to be involved in the business due to physical and/or mental impairment from age?
- Have parents thought about what they want to do in retirement?
- Do parents have sufficient off-farm capital to do what they want in retirement without relying on the farming business?
- What are the competing interests for parents from siblings not associated with the family farming enterprise?
- How are aged care and medical expenses to be funded, and by whom, if needed for aging parents?
- Are there risks to the future of the business if the transition of major business assets (particularly land) is only planned for in the Wills of asset owners where they could be at risk if a claim is made against the estate in due course?
- Can the business fund transactional costs, particularly capital gains tax and in some instances duty, if assets are to be transitioned during lifetime to secure the business for the next generation?
- If parents need retirement funding, and capital gains tax and debt also need to be funded, is the business viable to transition to the next generation?
Parents don’t generally want to set a child up to fail and children don’t generally want their parents to be destitute after years of working hard, often with no holidays or time away from the farm. Where we often see a transition fall apart is when these questions aren’t discussed amongst the family in an open, fair, and non-judgmental way.
If you are having issues communicating as a family, don’t be afraid to get help if it is needed. Also, don’t avoid asking the difficult questions—they won’t go away and resentments will build over time leading to disputes that could have been avoided—and don’t avoid talking about the transition plan, analysing the business, and importantly understanding how to work together to keep the business in the family. The earlier a plan is started, the easier these questions are to answer.
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