B.C. TRANSITION TOOLKIT FOR NON-FAMILY FARM TRANSFER – Stage 3
A business plan is the blueprint for a successful business in any industry. One study showed that entrepreneurs with a written business plan were twice as likely to successfully grow their business or obtain capital as those without a plan. If the farm business involved in the transition doesn’t have a written business plan, one should be developed as part of the transition plan.
A business plan will hold you accountable to the short- and long-term goals that help guide your decision-making process in all transition stages. Even the most perfectly planned and executed transition cannot be successful unless the farm business itself is profitable. Using a business plan to test feasibility and iron out kinks will increase your chance of success long-term. It can also be a fluid document that evolves as you refine your business, adjust your goals and set new objectives and benchmarks.
The land base is arguably the most integral piece of your farm business planning picture, so it is important for entering farmers that the written business plan accounts for how the land will be held or transferred. Your financial projections should include lease payments, rent increases, or restructuring to mortgage payments if the land is being transferred. A solid financial plan that answers questions such as, “How will your farm business cash-flow lease payments?” and “What can the business afford to pay in machinery rentals?” will help you negotiate financial terms that support your needs.
As an interim solution, the entering farmer may lease land, infrastructure, equipment, or the entire farm operation from the current farmer and eventually transition into ownership. Leasing may also be the permanent solution chosen where the entering farmer will not own the land; the land may be held in a corporation, trust, or by the current farmer’s heirs and leased to the farmer long-term.
Leasing generally means that the entering farmer will operate more independently from the current farmer, and often requires the entering farmer to have adequate experience, financial resources, and skills to run a farm independently. Leasing is frequently used in family farm transitions to give the junior generation a degree of financial and decision-making independence from the senior generation.
Leasing may also give an opportunity for the entering farmer to establish a new operation (see Diversification) and generate income, while at the same time slowly onboarding to the existing farm operation as an employee or through another interim solution. For example, in one potential leasing scenario, a cattle ranch in the Cariboo may not generate enough revenue to support two incomes during a transition. The current farmer may lease a few acres to the entering farmer, who plants a crop such as garlic or raises meat birds in order to generate income for themselves during the planning stages for the transfer of the ranching operation.
Considerations for Leasing:
- Leasing land may impact a current farmer’s ability to qualify for a Capital Gains Exemption.
- GST applies to certain leases; it’s important to know when a lease is exempt and not. Consult an accountant to ensure you are meeting your tax obligations.
- Many people express interest in lease-to-own but these arrangements are very complex; it’s essential to talk to a lawyer early on if you are considering this approach, and ensure you are exploring all options for gradual ownership of land, such as a corporation owning the land.
- A lease should be carefully drafted to address the needs of both parties and support the long-term transition. A lease should:
- be a written contract, not a handshake;
- specify the number of years and rental rate;
- set expectations around who is responsible for what maintenance;
- establish the lessee’s right of first refusal to purchase the property; and
- anticipate that the landholder’s heirs will assume the lease and establish that relationship.
- Seek free support for lease development through the B.C. Land Matching Program.
Many non-family transitions happen when there is a long-term employee who is dedicated, skilled, and valued by the current farmer, and there is a shared desire for the employee to take over the farm and/or land when the current farmer retires. If you don’t have a successor, employment can be a way to find entering farmers. It provides the opportunity for both parties to “test the waters” without locking into a commitment, and allows parties to build a relationship, explore shared values, and grow the entering farmer’s production skills and farm business management capacity. Employment also creates a clear structure in the relationship between the entering farmer and the farm business where compensation and responsibilities are outlined.
As an interim solution in a transition plan, the entering farmer would either become, or continue as, an employee of the farm, taking on more responsibilities every year and increasing their annual salary until the time came when everyone was ready to make the shift and have the employee become a business owner. This gives the parties an opportunity to work together in co-organizing the succession of the business, developing a transition plan, and documenting Standard Operating Procedures for the farm.
Considerations for Employment:
- Acting as an employer will require the farm business to have WorkSafeBC.
- Considerations must be put towards the cost of having employees, including paying taxes, respecting labour laws, and understanding human resources.
- If farm employees are working towards an expected transition, there should be clear agreements for what happens if the employee, or employer, changes their mind. What’s the exit strategy? Is the employee getting anything out of their time at the farm, such as severance, or a lump sum payout for anything they’ve contributed? If the employee leaves, how much notice must they give?
MINI CASE STORY:
In one case, the current farming couple has been operating a diversified farm, with a market garden and poultry, for 20 years. Their three children, as well as a long-term employee, are all integral to their transition plan, and will take over the farm as a team. Each of the four entering farmers has different skills, and the current farmers hope that the entering farmers’ complementary roles on the farm will allow the business to thrive into the future. The current farmers are mentoring their four successors, building production skills as well as financial and business management proficiency.
They are still in the early stages of solidifying a transition agreement, but have a solid vision and are putting their plans into motion. The three children of the current farmers will inherit the land, and all four, including the long-term employee, will become partners in the farm business. The farm business will lease the land from the current farmers, and eventually the three children, in a secure long-term agreement.
Because the long-term employee will not be gaining equity in the land, the current farmers are planning to set up an RRSP with an initial lump sum contribution and ongoing matching contributions. It is important to the current farmers that the long-term employee feels that they are a true partner in the business, and that they will be building a “nest egg” in other ways, given that they won’t own the land.
Current farmers who have achieved success sometimes hesitate to do transition planning because they worry that their farm business does not have the revenue-generating potential to support another farmer. Rather than looking at this as a barrier to transition planning, this is an opportunity for the entering farmer to develop a new enterprise on the land, which adds value to the farm business in the immediate, grows a new customer base, and builds long-term resilience.
Diversification can mean adding additional crop varieties to a market garden (such as flowers, or garlic), developing a value-added product out of an existing farm product (such as apple chips, pickled and fermented products, etc.), or adding an entire operation (such as poultry to a market garden or cattle operation). Opportunities for diversification will depend on the land base, available markets, and skills of the farmers.