Effective succession planning is like playing team sport ­– the better you plan, train and work with your team, the higher chance you have of winning. Similarly, the higher grade you play at, the more the intensity increases, training gets harder, commitment is more vital, and the game is more difficult. You might have noticed that teams at the peak of their sport are also supported and governed by a lot more people. When two generations come together on the farm to usher in a new era, it’s akin to stepping up and playing a higher level of sport in that the more people who are involved, the more governance is required.

Having a strong plan for the direction of the team is a crucial step towards reaching your shared goals. There is often a misconception when completing a farm succession plan that the transition will take place as soon as the plan is finalised. Eighty percent of our plans are not about immediate succession, but rather setting a defined direction for the transition of the business or land in the future when the older generation are financially independent from the farm.

When should you start transition planning?

The best time to start planning for your farm’s future is before the next generation enter the business full-time. Often this is after having completed a trade, university, farming business school or from working professionally.

What needs to be considered at this point in the game?

The first step is to carefully consider the existing policies in the business around:

• – Assets ­– what are the policies around the farm and the off-farm assets?
• – Employment – how do people enter and exit the business?
• – Non-working and working family members compensation policies
• – Business – how does the business support this?

Getting succession ready.

At SproutAg, one of our most important statements is ‘succession ready’. This means the current generation/owners are equipped to take charge of the transition process early, allowing them to take the front foot for a smooth and successful transition. The process enables them to articulate and lead the family as the current family leaders.

The importance of these decisions being led by the family leaders cannot be understated. The way a team looks to their coach for guidance is not coincidental in that a clear leader who is on the front foot to provide direction and clarity is essential to success. Initial transition planning is best completed at this time to formulate a strategy for the current owners and set expectations going forward.

For more information on succession planning click here.

The pitfalls of not having a plan.

Having a clear succession plan in place sets the foundation for the future of the farm. Like running onto the field without a game plan, you can’t expect a peak performance and winning results. On a farm, what often happens is the next generation grow up working on the farm, and when they get married and have children there are no guidelines or policies in place. This then causes friction between multiple generations and their families working on the farm. Taking the initiative to complete some initial family farm planning at this point can alleviate these issues and set the business and the family up for success.

Family farm leadership.

Effective leadership is very important, however unfortunately with leadership comes many challenges. At times, not every decision is liked, however the family farm requires leadership around transition.

The challenge with family leadership is that there is an inclination to coddle as a parent, and often it can be difficult to distinguish between family relations and the farming business. While a family business has very important aspects and has a strong structure, there is a risk that the focus won’t be on the business and there will be too little leadership allowing for indecision and a lack of clarity.

Key Messages:

• – Two generations working together is a heightened risk and additional governance should be put in place.
• – Start your transition planning early and get some work done and it will assist the business in the long term.
• – Succession isn’t the traditional thinking where it happens straight away, it’s vital to set guidelines early.
• – Our succession ready program is the best work we do as it is proactive.

The most change in Agribusiness Finance since the GFC.

Slow, Slow, Slow.

Slow seems to be the common feedback we’re receiving across the board as we place transactions with various lenders in the industry. In general, we are seeing a withdrawal of services from rural lending with one bank ‘top heavy’ in the beef sector limiting them from taking on new deals, one bank going through a major restructure, and another agribusiness player being purchased. In addition to these industry movements, we have also observed a large reduction in the branch network that impacts many rural clients. Based on current trends, in the medium term, unless you have lending over $5million, it is likely that you might not have a dedicated relationship manager in the next 5 years.

So, why are Agribusiness divisions going through large restructures?

Restructures and consolidation across the industry have been happening for some time. We’re seeing Agribusiness divisions undertaking restructures because in comparison to previous years, they’re not seeing lending books or future profit returns grow as quickly as they have. It is estimated that the main cost to an Agribusinesses Division Bank are the people (approx. 80%), and the only way to increase profitability is to reduce people and digitise their offering. For clients requiring less than $5milion in lending, it is anticipated that their communication channels will be through a call centre or over the phone with their manager. These changes will be made to ensure that future profits are delivered as the system growth reduces in future years due to a deliberate slow down by the RBA.

Why are bank branches closing?

Many banks are shutting branches because of a reduction in face-to-face cash transactions by retail customers. This doesn’t have a direct impact on Ag lending, but more of an indirect impact. As business owners, it can be difficult to open new accounts with trusts and companies involved, and often this requires face-to-face expertise that is usually associated with an in-person meeting.

Why do banks stop lending in certain sectors?

At times, banks grow too quickly within a sector, and this is when we see restriction on lending to new clients put in place. Banks may follow a one client in, one client out scenario, and this is currently what we’re seeing, because they have grown too quickly through ‘boom year’s’.

Acquisition making change in the Ag lending.

One major bank is currently going through the process of buying another Regional Bank with around 4 billion in Ag lending. This acquisition will likely generate a large amount of change, particularly in the Queensland market. This change will be around people and the consolidation of those businesses overtime.

As we navigate these changes, we recommend to our clients:

• It’s never been so important to properly present your business to lender.
• It’s never been more important to be on the font foot and proactive around finances.
• Given the turmoil in agribusiness lending, it is critical to get another option right now.

The nose in, hands out approach.

Different lifestyles and stages of life often drive the succession conversation. Generally, we see two different generations working together with different cashflow needs.

Typically, the existing or the current generation may be aged between 50 – 80yrs of age and tend to take less risk to allow more time for family and travel. To achieve this lifestyle, they will need to increase their cashflow by way of dividends, salaries or drawings. In contrast to this, the next generation is wanting to grow the business, and growth of any kind requires cashflow.

With different generations and life stages comes different business strategies based on what each generation is working to achieve. As an advisory business, we spend a lot of time working with clients to develop and agree upon an intergenerational business strategy, often working through tension and tough conversations around reinvesting back into the business and when to take cash out of the business.

Developing and agreeing upon a business strategy is a normal and difficult step to take, as there can be an underlying, natural conflict between the generations before taking the business and family relationships into consideration.

Ideally, we look for a nose in, hands out scenario from the existing generations, where they are adding value, involved where they want to be, and are more strategic, however they have their hands out of the day-to-day business. This positioning will allow the next generation to step up and execute the business activities and get the day to day done their way.

To execute this approach, families need to set the guardrails and provide governance to the next generation and outline what is important to them.

When working with families, we start by developing an Owner Strategy Statement, with three key steps:

Step 1. Define Your Purpose

• Defining the purpose of your family business.
• Why do you want to own your business together as a family?

Step 2. Set Your Owner Goals

• Specify your concrete goals.
• A great exercise we do to determine goals is to review the Owner Strategy triangle. You can choose to prioritise any two of the goals at the expense of the third.

Step 3. Create Owner Guardrails

• It’s time to translate your purpose and goals into specific measurements that can be used to make decisions.
• Guiderails can be financial or non-financial.

Once a family’s strategy and guardrails are set, the next generation will be able to take the lead on the business knowing what’s important to both generations.

To create an Owner Strategy Statement, contact us today; Contact Us – Sproutag

“If you fail to plan, you are planning to fail.”

As farming businesses grow, the level of planning needs to grow with the business, so the planning process becomes much more important and complicated.

At SproutAg, one of our mantras to our clients is to “get organised”. When we have this conversation with clients, we’re quite direct because we see first hand the difference that being organised can make to a farming business and the opportunities that can arise.

2023 saw a large variance in commodity prices and seasonal fluctuations that saw working capital requirements and the cost of interest much higher than anticipated. Currently, we are still facing inflation in Australia, the cost of goods has not come down and we anticipate that interest rates will remain high. But within all of this, opportunities have arisen, and it is the well organised family businesses that can take advantage of these opportunities.

To get your family business organised, these are our top three areas for you to consider in 2024:

1. Getting through 2024 and what to consider
2. Planning for growth with positivity
3. Family business planning and generational planning

Getting Through 2024

The first step to getting through 2024 is to review 2023, and identify where your family business is at. This is achieved by using the ‘Where did the money go’ tool from our AgPro program. Following this review, you can complete three cashflow forecasts for the year, before setting up appropriate funding to achieve success.

Your first goal in working capital is to set funding limits that will cater for most scenarios, where you will only need to go back to the bank once as opposed to hat in hand later in the season asking for more. It is important to factor in higher costs and lower revenue, and to set your debt limits up one bracket for the year ahead. What we find with clients is that working capital increases were quite frequent towards the end of 2023, and they take time, so it is important to have the philosophy to tackle this only once in 2024. This is also the time to consider and work in small opportunities for your family business, i.e. livestock purchases or other opportunities.

For additional help and tools talk to your local SproutAg adviser.

Planning for Growth

If you’re planning to develop your country or farming infrastructure or looking to buy new machinery or another property, get organised and don’t wait until the last minute – plan for the acquisition and development and get the acquisition pre-approved ahead of time. Getting pre-approval can take a considerable amount of time, so it is important to get your ducks in a row early in the year to make the process easier.

It’s important to remember that growth often comes from careful planning.

Family Planning and Generational Planning
Your third area to consider in 2024 is family business planning and generational planning. You need to start by asking yourself, “What are my asset policies in the business?” What we mean by this is, you have your farming assets, and you may have three children. How do you think about your assets longer term and how do you start to set yourself up so that one day you may not rely on the day-to-day farming or trading entities.

Family businesses who do well with succession planning and transitioning start the process early, giving themselves time. There is no better time to start your longer-term planning than today!

Here are some key questions to ask yourself to get started:

Do I want my family business to continue to the next generation?
What are your family’s long-term (10-30 year) goals?

Once these long-term goals have been identified, we break it down and look at the next three to ten years:

• Where do you want to live?
• What do you want to be doing?
• What will your lifestyle look like?
• What will your asset policy look like for working and non-working family members?
• How do you communicate and set expectation early?

Find out more about our succession planning guide here.

To get your finance organised for 2024, our biggest advice is to be proactive and do something about it!

Getting stuck in farm succession planning and how to get out.
We often work with families on farm succession planning who’ve frustratingly been going around in circles for years and have become stuck in the decision-making process. When we start the conversation, it’s soon discovered that there may only be a few small changes to make and that it is easy to become unstuck. For some families it may take a significant catalyst to commence their succession planning i.e. a health diagnosis, serious fallout or a long-held disagreement.

When working in a family business, you’re managing blood relations, finances and a business, and it can often be difficult to get the combination of the three correct. When there is deep respect and love for family members involved, the conversations can be more difficult to have.

What do we mean by getting stuck in farm succession planning?
Families can often get stuck in the decision-making process, when issues are avoided or when discussions go around in circles, sometimes for years, or even decades. An issue may be approached, but if there are disagreements or misalignments it can easily become stuck.

What does being stuck look like?
Being stuck can take many forms, an issue may never be spoken about, or if it is, there is constant conflict over the smallest discussion.

What are the consequences of being stuck?
In our experience, ‘becoming stuck’ not only has consequences on the business, but also strains on family relationships that continue to escalate and mental health issues that arise from unresolved problems year after year.

What can happen to the business?
When families aren’t aligned, a business can go around in circles and major decisions are delayed or put on hold. This can affect a business’s ability to make acquisitions or further develop the operation with new or innovative ideas limiting the business’s productivity.

Commonalities and tools to manage being stuck.
Common areas where we see clients stuck and unable to progress with succession planning are:

Common Barrier Number One:
When an existing generation worry that there will be a divorce event in the next generation, and that they will lose their wealth. As a result, the decision-making process grinds to a halt, sometimes before it even starts.

This scenario may take the SproutAg team two or three conversations to understand that this possibility is seen as a roadblock to the current business owners in that family. While there are many tools available to mitigate the risks for family members against family law events, family members can feel uncomfortable raising the topic, which leads to the family being stuck on an issue they don’t feel comfortable discussing. Each family and family business structure is different, and to enable future growth and to protect the broader family there are different tools available including:
– Marital deed or prenup (although these are not as common in Australia)
– Sunset clause
– Registering a caveat and/or second mortgage.

*Note that every circumstance is different, and that these tools are not recommended for individualised scenarios. For individual advice, reach out to the SproutAg team.

Common Barrier Number Two:
The existing generation wants to keep working on the farm and still be involved.
The next generation can often see the desire for the existing generation wanting to stay involved and not wanting to give up control or take on the next generation’s new ideas. These unspoken feelings can lead to family conflict and can cause families to become stuck. Often there are few roles and responsibilities that the existing generations wish to keep, however it is important to identify these early in the succession planning process and keep them at the forefront of the plan to ensure all parties are accountable.
– Meeting schedules
– Roles and responsibilities map.
– Future organisational chart.
– Employment contract with set roles and responsibilities.

Download a copy of our free succession planning guide on our website here.

Ag Bank Appetite 

When assessing borrowers for a new farm loan, we’re generally seeing banks play a long game around commodity prices and using averages across a five-year period. Most Australian banks that offer agrifinance use what’s referred to as ‘year-in-year-out’ to determine cash flow and annual cashflow average when assessing whether or not a farming business has the ability to pay back the facility. This year-in-year-out approach takes into consideration where the business will be in four or five years and factors in the build-up of livestock numbers, seasonal prices and normalises one-off expenses. The SproutAg team have seen a measured and practical approach to this, in particular using the five-year averages for commodity prices.  

In addition to this, some of the rural banks have changed their policies around serviceability and have started to move away from fully amortising these loans in their assessments and are now using interest only coverage ratios. There are also some banks that have not changed their policies and this has impacted on their ability to service new loans, so this approach has been adopted by some while other banks are yet to catch up. For the banks yet to catch up, in most of their annual reports they have identified that they will be allocating more capital to their business bank portfolios and hopefully their agribusiness divisions.  

All in all, we’re still seeing a strong appetite from some of the banks, however there are others who have turned the tap off!. 

Agribusiness Finance Interest Rates 

As we move towards the end of 2023, We’re currently seeing some inconsistency across interest rates, with up to 2.70% difference over the last few weeks – a massive contrast! This large variation in rates offered by the banks is the unlike anything we have seen over SproutAg’s seven-year history. 

We have managed to help our clients navigate this though, recently placing a client’s banking out to tender. During this process we were able to help them reduce their rate of 9.05% down to 6.35%.  

What can you do about it? 

With all the changes happening in agrifinance, here are our top tips for you to navigate the rocky waters: 

• If your operation needs more working capital for next year, we’d recommend starting the process now and completing it for the whole year ahead.
• Cashflow and financial structure are more important than interest rates in the current market.  
• If you have fodder or grass available, set up a livestock finance facility so you can take those good buying and trading opportunities when they present.  
• Chat to an advisor about reducing your interested rate if it is more than 1% over the market. 

Getting farm finance while you’re growing your breeding stock can be challenging. This period typically doesn’t look great financially because you lose potential income when you hold back female stock to increase your herd/flock or have higher costs if you opt to buy new livestock. Despite this, it’s not impossible to get farm finance if you do your homework.

Many of our clients have difficulty getting farm finance during this time. However, with these simple tips, you can show your bank manager that your business is viable.

1. Show you have a plan

A plan shows your bank manager you have a strategy guiding your business. The plan should clearly show your farm’s optimal herd or flock size and when you expect to achieve it.

2. Line up your livestock numbers with your financial statement

Pull together the number of breeding stock you have, with retained female numbers separate from the last five years. These numbers should be presented against your financial statements to show the impact.

3. Use your livestock schedules to support your growth goals

Your livestock accounts are an important way to back up the herd size you want to get to. This also shows how you will achieve this goal and should match up with your cash flow projects.

4. More on cashflow

You need to prove you have the cash flow reserves to support your business during the lean years when you’re building your breeding stock by keeping female livestock. Often, this is the time to take up interest-only payments.

5. Keep it simple

Sometimes you can overcomplicate the information you provide the bank when all you should do is show a clear story on how you’re working toward your goal.

This is a summary to give you general information on how to raise finance when things are lean while building breeding stock. All farming businesses are different, we can help you create a plan and help you present your business when it comes time to raising finance. Get in touch with your local SproutAg representative today to find out more.