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Episode 6: Mallee Farming AgVic Series | Succession planning with Mike Krause

March 26, 2020 - 11:57 pm

Mike Krause, from Plan2Profit Agri, joins Drew Radford to talk about the ‘Elephant’ in the room: Succession Planning. Mike discusses why succession planning is becoming more of a pressing issue as he unpacks his guiding principles to deal with it more effectively.

Podcast Transcript

INTRO - Welcome to this podcast, brought to you by Mallee Sustainable Farming and Agriculture Victoria from the MSF Research Update at Lake Cullulleraine in February 2020

  • Succession planning. Is it the white elephant sitting in the corner of the room that many farming families are avoiding? Mike Krause from P2P Agri reckons it is. Indeed in tough times, he thinks it's even more important because it should be viewed as a business risk. He joined me in the Mallee Sustainable Farming studio to discuss why it's becoming a more pressing issue and how to deal with it effectively.
  • A lot of family farms that I've worked with as a consultant and looking at ways of improving profitability and viability, it's always an issue that's sitting back there that it's more strategic. Do we have to deal with it today? No, we don't. Is it uncomfortable to deal with? Yeah, can be. Have we heard good results from other neighbors who've gone through it? No. So it tends to be an issue that's not dealt with or if it's dealt with it's dealt with very late in the piece. So as we're going on in our agricultural lives, the average age of farmers is going up, where in the late fifties, early sixties, and these topics are becoming more real as we're getting along. So it's the elephant in the room because it tends to be not dealt with effectively.
  • Is it also a case too, that once upon a time it went down via family lines. You know it was the oldest son who inherited the property. Whereas it's a very different scenario now and often the children may not even want to go into the business?
  • Well, you're exactly right. And it's very hard for me to generalize because each family is quite unique. It could be that yep, the oldest son gets it and no one gets any other choice in the matter when they do want to have choice in the matter, or no, no one wants to come home, so how do we peel this up? The other issue too, is that we're having a lot of stress on profitability of businesses at the same time we're having land asset values going up. So the old days where we could divide the farm up and support the three next sons in the family to go off and develop their own farm businesses is really challenging and nearly impossible in some instances.
  • Or even access to the capital to buy Dad/Mum out?
  • Yeah, exactly. Well, we might get access to the capital, but the ability to repay that capital is almost impossible. So that's why I think there's gotta be a balance of I guess good facilitation, psychological management to make sure people are heard and understood, as well as don't forget the economic capacity of the business. Not as it just sits now, but how we might want to pair it up or adjust it in the future for succession to check that those businesses we're moving into are also going to be viable. So there's two elements to this equation.
  • The backbone of what you do is business focus, but you talk there about facilitation, you you're removing it to a certain extent from what has always been, I would argue an economic conversation.
  • Look, I've tended to go that way. Perhaps experience tells me, but most decisions are made from an emotional basis, not necessarily a logical basis. Which disappoints me as an economist, cause I'm thinking most of us should be logical, but both of those elements need to be dealt with in this situation and my observation is that generally only one is and so makes the solution problematic.
  • That kind of makes sense as well though because families are complicated, you know, it's a family business, but the family is kind of first and foremost.
  • The family is first and foremost and there's a great saying that you can pick your friends, but you can't pick your family. And generally what I find, if families come to me, it's a bit like, and ask me to help them with succession planning. It's like giving me a Christmas present that wrapped up and I'll say, yes, I would love to help you and until I unwrap the Christmas present, I don't really know what's in there and how much family baggage will come to the table. When we've got to deal with this, the family baggage is important to deal with, and that's why we should have facilitators to help us talk through the issues. Have everyone have their same right to speak and everyone the same right to be listened too, so we can work through and work through the family issues that will come with making these decisions. Will we please everyone? No, but hopefully we can please the majority and more importantly, we've got to please Mum and Dad, as we're going through this.
  • In these exceptionally dry times, does this force the conversation further forward, the need to have it or does it sometimes bury it?
  • Look its really interesting. I'm, I don't get run over in bad times to do this, and I think it tends to bury it, cause most people are saying, hang on finacially we are stressed. How do we think about dividing the farm up or passing it to the next generation, when even now we're financially stressed, by the way, do we bring in a consultant that we're going to charge us as a consultancy bill to do it because we're financially stressed. No, it's probably the last thing we think about at the moment.
  • For GRDC you are pointing at the elephant in the corner of the room, what are some of the guiding principles you're hoping that people might walk away from after hearing you speak?
  • That is a really good question and I can't give a recipe that says, okay, this is going to work for every family, but I think there's some principles that we really need to follow. One is that it's good, I think to have a third person come in, cause that's where a third person can come in and help quieten those who want to dominate the discussion and help facilitate other people being heard in the process. It's tempting that we handle it ourselves, but like we talked about earlier there's family issues and family issues can mask good communication. So having a good facilitator, I think is a really good thing to have come in. That facilitator has got to facilitate good listening and good communication, not being dominant and also the idea of the facilitator isn't to dominate what they think should happen, it's really gotta be elicited out of the family. Cause they've got to own the solution for the solution to even be viable to go into. There are elements I think, good financial planning needs to come into it, a lot of us leave the accountant to do it. Now, if you think about your accountant, the accountant is employed to minimize your profits so that you minimize the tax, so their skills are aimed at that. They're not necessarily aimed at increasing profitability or looking at viability of a business. So you've got to have the right mix coming in to do it. It's not a one off, it's a process. Some of the people I've worked with we've had three or four meetings over a period of 10 years, because what happens today, will be outdated in two years time because suddenly little Johnny has got married and he's got now three kids and so the dynamics of that changes. So I think we set plans and patterns in place, which is important because communicating what our intent is to the business over the years needs to be sowing the seed today and then we water it over five or 10 years as changes happen to make sure we can still in the right intent and still achieve what we've set out to start with.
  • These are tough conversations and I imagine during difficult times like now, that's just one more tough conversation.
  • Well, yeah and they can be tough. I've set over family tables and Dad and Son are in tears in front of each other, working through some of the issues that they're going through. So it is tough, but the emotional benefits of having that plan succeed at the end of the tunnel is worth the effort of getting in the tunnel and going through the process.
  • You talk about succession planning being tied to risk management, why is that?
  • If it's not handled well, the risks could be we don't have a business next year. So, yes, risk management is a big part of that because you've got issues like there's tax implications of changing ownership of land and does that imply capital gains issues? So they're accounting type questions, there's issues about do we have trust to help protect the risks of potential divorce of the next generation? So they're illegal type activities to go through. To really, okay, if we split the assets up and people have to inherit liability, have we still got a viable business going ahead? And what happens if we do that and it's a drought next year, have we still got a viable business so that, there's risks in all elements of those.
  • So it's a far bigger question than just Dad's retirement plan, isn't it really?
  • Yeah, sure. I guess it starts with Mum and Dad and what they would like to do and how they deal with the next generation passing the land over. But, it's a bigger picture than that because the next generation have got to be committed or want to do it, or don't want to do it. We need to understand what their goals are too and not in some regards, I've seen older generations thrusting their desires on the next generation and the next generation saying, Oh, not quite sure I want to do that, but haven't been able to voice that because you know, they don't want to disappoint Mum and Dad.
  • Mike Krause, thank you for joining me today in the Mallee Sustainable Farming studio
  • Drew, it's been a pleasure, thank you.