Planning without numbers is like flying blind, and farm transition planning is no different. Before going too far in the farm succession or continuation process, it’s critical to understand the value of the farm asset as that figure sets the stage for the rest of the process.
According to Derryn Shrosbree, CEO of 33seven Continuity Planning, close to 90 per cent of farmers do not have a continuity plan. Shrosbree attributes this partly to the daunting nature of the process and a lack of a clear roadmap, as well as potential “billable hour” and “invoice fatigue” associated with professional services. As a farmer himself, Shrosbree emphasizes that continuity planning is vital for passing on the farm, knowledge, and experience to the next generation.
What is a farm worth? Shrosbree says that getting to this number involves understanding both the worth of the farm itself and the total enterprise value. The enterprise value encompasses all assets, including quota, actively farmed acreage, rented acreage, and any related businesses.
Check out the full interview with Derryn Shrosbree of 33seven below and send us your feedback or questions at [email protected]. This discussion is the first in a short series on continuity planning of the farm business.
Once the enterprise value is determined, Shrosbree stresses the importance of dissecting this value into tax-exempt and taxable components. Examples of tax-exempt components can include quota and actively owned and worked farmland, although ownership structure can add complexity.
Conversely, non-related businesses on the farm would typically be taxable. Using a $10 million example, Shrosbree illustrates a scenario where $5 million is tax-exempt and $5 million is taxable. This distinction reveals the legacy (tax-exempt assets) and the potential liability, primarily in the form of taxes. A $5 million taxable portion could lead to a significant tax bill, posing a substantial risk. “The west was won by horses and cattle and will be lost by death and taxes,” to underscore this risk, he says.
Shrosbree says that a focus on numbers is only one part of a continuity plan. There is a crucial emotional component tied to farm valuation. Rising land values can lead to increased interest from off-farm children, sometimes without a full appreciation of the labour or business complexity involved. This necessitates open and honest family communication regarding the farm’s value. He advises prioritizing emotional aspects and family dynamics before focusing solely on the mathematical calculations, emphasizing that “equal is not fair” when dividing farm assets.
Subscribe: Apple Podcasts | Spotify | RSS | All Podcasts
