Business transfer: How to navigate the succession of a farm business?

26 November 2021 by National Bank
Un père et sa fille récoltent des fèves.

A thriving agribusiness is often the culmination of a life’s work. Selling or transferring a farm to a successor can be a complex process—for both parties. Beyond the financial aspects, there is usually an emotional component to consider. Let’s look at exactly what has to be done, how, and when. 

How do you sell or transfer a farm to a relative?

In Canada, selling a farm property to one or more of your children is the most common type of transfer. When parents decide to pass their business on to the next generation, they are inevitably influenced by the human factor, which may trump financial considerations. 

Ownership can be (and often is) transferred within the family by valuing assets below their market value. There are important factors to consider in these arrangements, like making sure all children are treated fairly, ensuring the sellers will have the retirement income they need, and planning the leadership transition.

A specialist can help you make sense of it all and walk you through the steps involved in transferring a business so you make calm, confident decisions.

How do you handle transferring an agribusiness to a child?

One of your children may have a natural knack for farming. Even if none of their siblings show a similar interest, you should still consider the impact the transfer will have on other family members and key employees.

Monetary considerations: A source of conflict?

A farm often holds significant sentimental value for the whole family. Inheritance issues may arise. Be sure to talk to each child to figure out their needs and find appropriate solutions.

How do you handle transferring an agribusiness to siblings?

If more than one child wants to take over the farm business, it’s advisable that you:

  • Agree on the siblings’ long-term vision in advance
  • Define everyone’s roles to avoid conflict
  • Get a shareholder agreement registered by a lawyer or notary to properly plan the life stages of your business

How do you handle transferring a farm to an unrelated buyer?

No one in the next generation to take over? 

You can sell your farm to a buyer outside your family—often called an “unrelated party.” Transactions between neighbours or immediate neighbours are common, especially when they have dedicated successors. It’s a way for them to expand their own farm business but keep things close to home. This type of transfer can generate synergies, with neighbours sharing machinery or labour to better leverage their assets or justify making new hires.

Here are some other tips to follow in this type of transaction: 

  • You could work with a real estate broker who specializes in the farm sector, bear in mind, you’ll have to pay a commission. It may be a better idea to start by letting your surrounding neighbours know you’re thinking about selling. 
  • Is selling your best option? Sound out the experts, like your accountant or L’Arterre, a para-public organization supported by MAPAQ that connects owners with aspiring farmers. You could also decide to rent out your land to a neighbour. 
  • You will probably need to arrange several visits so the buyer can tour the facilities and the site. This type of transaction can take a while to go through, especially if the buyer isn’t already familiar with your business. Even someone who has worked on your farm may request multiple visits to do a thorough inspection before making the purchase.
  • The buyer may want to change how the property is used—turning a dairy farm into a vegetable farm, for example. Buildings are often used to store machinery. 
  • What about dismantling assets (i.e., buying the land but not the real estate assets)? The buyer could opt to remove the buildings and purchase only the subdivided land. But they would first need CPTAQ approval, which is a complicated process. To buy a building, you have to buy the lot it sits on. 
  • In terms of the sales price, as the seller, you may decide to give an unrelated next-generation buyer a leg up by agreeing to a balance of sale. Under this arrangement, the seller keeps a certain amount unpaid to make it easier for the buyer to get financing. 
  • Keeping the business going is often top of mind for owners. You could be flexible in assessing the value of the business to ensure its long-term viability, even if the buyer isn’t a family member. 

How do you prepare to sell or transfer a farm?

Whether you’re selling your farm to one of your children, a neighbour, or someone else, there are a few things to consider if you want things to go smoothly.

Give yourself time

The key is not to rush things, while making sure everything is moving forward efficiently.

For sellers: 

  • These days, a five-year transition period is standard for a business transfer. Take this time to flesh out your strategy, assess the impacts, and make the right decisions.
  • There are different tax considerations in the agriculture sector. Whether you’re a buyer or a seller, be sure to talk to a tax specialist well versed in farm tax planning so you know what you’re entitled to—for example, breaks to reduce your tax burden.
  • If you’re selling to one of your children, make sure they’re ready, willing, and able to take the reins of your business. Also think about what kind of role you’d like to play after the sale.
  • Take the time to consider what’s most important to you. After working on the farm almost every day of your adult life, what do you want out of this next stage? Take advantage of this opportunity to talk and think things over. 

For buyers: 

How much should you sell your farm for?

Determine the fair market value of your agribusiness. It’s a good idea to use business assessors that specialize in the agriculture sector. 

They will be able to put a market price on your property by determining the value of the land, buildings, and machinery plus the value of any quotas you may have.

Assess the business’s profitability and performance potential and your ability to build equity.

For sellers: Will you have enough money to retire?

Agricultural producers are not usually diversified in their investments, and the vast majority of their retirement income will come from the sale of the farm. Make sure you’re not jeopardizing your retirement by helping your successors take over the farm.

Follow these steps: 

  • Analyze your finances and calculate how much you need to retire. 
  • Contact a financial planner to determine what standard of living you will need to maintain. They will identify your sources of income, like any government benefits, RRSPs, and investments, and then discuss your personal goals to determine how much you can withdraw each year for the rest of your life. 

For buyers: How will you finance your purchase at its fair value? 

A farm property can be worth millions. It’s highly likely that you’ll have to get a loan from a financial institution to make the purchase.

Pro tip: Most large Canadian banks and financial cooperatives have an agriculture department staffed with experts who can provide the support you need. They may be able to offer a certain amount of flexibility or make arrangements to reduce your financial burden as you pay off the loan.

What does life look like after buying or selling a farm?

Many farmers continue to be involved even after selling their farm business. Keeping a hand in the operation as a mentor or occasional worker without bearing all the responsibility allows retirees to gradually move on to other things when they want to. 

Basically, selling the business doesn’t have to mean the end of your farming adventure, especially if you’re transferring it to your successors. If you’re the buyer, get ready to embark on a new adventure. Either way, it’s a process where you have to think about what you want and need for the future and plan the steps to get there. To make sure your business transfer goes smoothly, talk to an expert who can walk you through the process and give you some peace of mind.

Takeaways

For sellers:

  • Retirement planning is essential, especially when transferring the business to a family member. 
  • Think through the leadership transition. 
  • The tax landscape specific to agribusiness requires expert insight. 
  • If it’s a family transaction, make sure everyone is treated fairly. 
  • Consider the impacts the transfer will have on other family members and key employees. 

For buyers:

  • Think about your motivation for buying a farming business and your long-term vision in advance.
  • Read up on the steps in buying a business.
  • Get financing and advice from an expert.

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