# Succession: the money conversation

A free short course from Farm CFO by Clunes Rural. 5 lessons, about 25 minutes in all. No sign-up.

Get ready for the family money talk about succession: what to gather, what to ask and how to check the farm can support everyone.

Who it's for: Farming families, parents and the next generation, who are starting to talk about handing on the farm.

You'll be able to:
- Know why to start early and what to gather first
- Ask the key money questions as a family
- Check whether the farm can support two families
- Know which professionals to involve, and what to ask them

## Lesson 1: Why start early

Succession means handing the farm, and control of it, to the next generation. It is about family as much as money. This course covers the money conversation. It is general information only, not legal, tax or financial advice. Every family is different, so get advice from an accountant and a solicitor for your own situation.

## Why early matters

Succession takes longer than most families expect. The [WA Farm Business Resilience Program's succession guide](https://www.agric.wa.gov.au/sites/gateway/files/Fact%20Sheet%20-%20Succession%20Planning.pdf) says to start as early as possible, and not to wait until there's a crisis. It also warns not to expect it to happen overnight, as 2 to 5 years is likely.

Starting early gives you choices. With time, you can:

- Build up savings or other assets for the parents' retirement.
- Pay down debt before the farm changes hands.
- Let the next generation take on more of the management, one step at a time.
- Talk things through over several meetings, not one tense evening.
- Get advice and act on it without rushing.

Starting late, or after a death or illness, takes those choices away. Decisions get made under pressure.

## What a good start looks like

A good start is not a finished plan. It is a first conversation, with everyone who has a stake in it. The WA guide suggests a first meeting, follow-up meetings, an agenda and notes of what was said and agreed. It also suggests using a professional to facilitate, which means running the meeting so everyone gets heard.

Our [succession first conversation checklist](https://farmcfo.com.au/templates/succession-first-conversation) sets out what to gather, who to invite and the questions to answer. We go through each part in this course.

## Money first, or feelings first?

Both matter, and they're tied together. Many hard feelings in succession come from money questions nobody has answered. Can Mum and Dad afford to retire? Will the farm support the son or daughter coming home? Is it fair to the ones who left?

Clear numbers don't settle those questions. But they take the guessing out, so the family can talk about what really matters. That's where we'll start: getting the facts on the table.

## Look after the business too

Handing on a farm that doesn't pay its way just passes the problem on. So part of starting early is checking the business is in good shape. Lesson 4 shows how.

### Worked example

**Invented example.** Jan and Phil (invented) are 62 and 60. Their daughter Kate, 30, has come home to farm. If they start talking now and it takes 2 to 5 years, they could be done by the time Jan is 64 to 67.

If they wait until Jan is 70 to start, the same 2 to 5 years runs until Jan is 72 to 75. By then Kate would be 40 to 43. She would have worked on the farm for 10 to 13 years without knowing where she stands. That is a long wait, and it is the kind of thing that leads to hard feelings. Starting now gives the family time to talk, check the numbers and get advice.

Open the first conversation checklist: https://farmcfo.com.au/templates/succession-first-conversation

### Check your understanding

1. How long does the WA succession guide say succession is likely to take?
   Answer: 2 to 5 years. The WA Farm Business Resilience Program guide warns not to expect it to happen overnight, as 2 to 5 years is likely.
2. What does it mean to facilitate a meeting?
   Answer: To run it so everyone gets heard. A facilitator runs the meeting, keeps it on track and makes sure everyone has a say.
3. Why does starting early help?
   Answer: It gives the family more choices and time. Time lets you save, pay down debt, hand over in steps and get advice without rushing. You still need professional advice.

## Lesson 2: What to gather

Before the first family meeting, gather the facts. It saves time, and it stops the talk going round in circles on guesses.

## The financial statements

Get the farm's last three years of financial statements from your accountant. These are the profit and loss, which shows income, costs and profit for the year, and the balance sheet, which shows what the business owns and owes on 30 June. Three years is better than one, because a single good or bad season can give the wrong picture.

## Assets and debts

Make a list of everything the family owns and owes. Assets are things of value, such as:

- Land, with the title details
- Livestock
- Plant and machinery
- Cash, shares and farm management deposits
- Off-farm assets, like a house in town or super

Debts include term loans, the overdraft, equipment finance and any loans between family members. Our [assets and liabilities spreadsheet](https://farmcfo.com.au/downloads/farm-cfo-assets-and-liabilities.xlsx) gives you a layout to fill in.

## Who owns what

This one surprises people. The farm is often not owned by one person. Land might be owned by the parents personally, while the stock and machinery belong to a family trust or a company. Some land might be in one name and some in another.

For each asset and debt, write down who owns it or owes it: which person, company, trust or partnership. A trust is an arrangement where a trustee holds assets for the benefit of others. A company is a separate legal entity. How each one works, and what it means for succession, is a question for your accountant and solicitor.

## Wills and legal documents

Find any existing:

- Wills, one for each person
- Powers of attorney, which let someone act for you if you can't
- Partnership agreements
- Trust deeds, which are the rules for each trust
- Company constitutions or shareholder agreements
- Leases or other agreements over the land

You don't need to understand every clause. Just know they exist, where they are and when they were last updated. Your solicitor will read them closely.

## Keep it in one place

Put copies in one folder, on paper or on a computer. Share a summary with everyone who will be at the meeting, so you all start from the same facts. Some families find this step tense. It helps to agree up front that the list is just facts, not decisions.

### Worked example

**Invented example.** Jan and Phil's list. All figures are invented.

| Item | Owned or owed by | Value |
|---|---|---|
| Land | Jan and Phil | $4,250,000 |
| Plant and machinery | Family trust | $450,000 |
| Livestock | Family trust | $600,000 |
| Cash | Family trust | $50,000 |
| **Total assets** | | **$5,350,000** |
| Term loan | Family trust | $900,000 |
| Overdraft | Family trust | $100,000 |
| Equipment finance | Family trust | $150,000 |
| **Total debts** | | **$1,150,000** |
| **Equity** | | **$4,200,000** |

The land is in their own names, but most of the rest sits in the trust. That matters for succession, and it's something to take to their accountant and solicitor.

Download the assets and liabilities spreadsheet: https://farmcfo.com.au/downloads/farm-cfo-assets-and-liabilities.xlsx

### Check your understanding

1. Why gather three years of financial statements, not one?
   Answer: One season can give the wrong picture. A single good or bad year can mislead. Three years shows what a normal year looks like.
2. What is a trust deed?
   Answer: The rules for a trust. A trust deed sets out the rules for a trust. Your solicitor can explain what yours says.
3. The land is owned by the parents and the stock by a family trust. Who should explain what this means for succession?
   Answer: Your accountant and solicitor. Ownership structures affect succession in ways that need professional advice for your situation.

## Lesson 3: The questions to answer

With the facts gathered, the family can start on the big questions. You won't answer them all in one meeting. That's normal. The aim of the first conversation is to get them on the table and agree what to find out next.

## What do the parents need to live on?

This comes first, because it shapes everything else. Ask:

- How much a year will the parents need, now and later?
- Where will they live? On the farm, in town or somewhere else?
- Where will the money come from? A wage from the farm, rent, super, savings or selling some assets?
- What happens if one of them needs care?

Our [household drawings tool](https://farmcfo.com.au/tools/household-drawings) helps add up living costs line by line.

## Who wants to farm?

Don't assume. Ask each person, one at a time if that's easier. Some children who left may want to come back. Some on the farm may want out. Then ask the next question: can the farm support them? That's the money question in lesson 4.

## Fair or equal?

Equal means everyone gets the same share. Fair means each person feels the outcome is reasonable, given what they have put in and what they get. They are not always the same thing.

A child who has worked on the farm for years on a low wage may feel fair means more for them. A child who left may feel fair means equal. Both views can be reasonable. The [WA succession guide](https://www.agric.wa.gov.au/sites/gateway/files/Fact%20Sheet%20-%20Succession%20Planning.pdf) talks about giving all stakeholders a voice and understanding everyone's needs.

There's no right answer we can give you. What's fair is for your family to work out, with good advice. A facilitator can help, and so can talking about it early, before feelings set hard.

## What's the timeframe?

Handing over has two parts, and they don't have to happen at the same time:

- **Management.** Who makes the day-to-day and big decisions, and when that changes.
- **Ownership.** Who owns the land, stock and machinery, and when that changes.

Management can be handed over in steps, over years. Agree some rough dates, even if they shift.

## Write it down

At the end of each meeting, write down what was agreed and what's still open. Share the notes with everyone. Then take that list to your accountant and solicitor. Our [first conversation checklist](https://farmcfo.com.au/templates/succession-first-conversation) lists all of these questions.

### Worked example

**Invented example.** Jan and Phil have three children. Kate farms. Tom and Ellie live in the city. The family's equity is $4,200,000, from lesson 2. All figures are invented.

If everything were split equally, each child would get $4,200,000 ÷ 3 = $1,400,000. For Kate to keep the whole farm, she would need to pay Tom and Ellie $2,800,000 between them. That's more than twice the farm's current debt of $1,150,000.

So an equal split in cash could mean selling part of the farm. That's why the family needs to talk about fair and equal, and about the parents' needs first. Their accountant and solicitor can explain the options.

Try the household drawings calculator: https://farmcfo.com.au/tools/household-drawings

### Check your understanding

1. Which question should usually come first?
   Answer: What the parents need to live on. The parents' living needs shape everything else, including what the farm must pay out.
2. What is the difference between fair and equal?
   Answer: Equal means the same share; fair means an outcome each person feels is reasonable. Equal is the same share for each person. Fair depends on what each person has put in and needs. The family decides, with advice.
3. Which two parts of handing over can happen at different times?
   Answer: Management and ownership. Management can be handed over in steps, while ownership changes on its own timetable.

## Lesson 4: Getting the numbers right

The hardest money question is often the simplest to ask. Can the farm support two families? That usually means the parents, plus the son or daughter coming home with a family of their own.

## Start with a normal year

Use the last three years of accounts to find what the farm earns in a normal year. Don't use the best year. Don't use the worst. Use what you'd expect most years.

The number to start from is EBITDA. That's earnings before interest, tax, depreciation and amortisation. It's close to the cash the farm makes before paying the bank and the tax.

## Then take off what must be paid

From EBITDA, take off:

- **Interest** on all the farm's debts.
- **Principal repayments**, the part of each loan repayment that pays the debt down.
- **Tax.** Ask your accountant for a fair estimate.
- **Replacing machinery.** Gear wears out. Set aside what it costs, on average, to keep it going.

What's left is what the farm can pay out in **drawings**, the money families take out to live on.

## Compare it with what both families need

Add up what each family needs to live on. Then compare. If the farm can pay both, with some to spare for a bad year, that's a good sign. If it can't, the family needs to look at options. Those might include off-farm income, growing the business, cutting costs, or the parents living partly on savings or super.

## Watch for new debt

Succession can add debt. A buy-out of a brother or sister, or a loan to the parents, has to be paid out of the same cash. Test it before anyone signs anything.

There are loans built for this. The [Regional Investment Corporation's AgriStarter Loan](https://www.ric.gov.au/agristarter) has a succession option for farm businesses going through succession. RIC says it can be used for things like refinancing farm loans, and succession costs such as legal fees and stamp duty. Eligibility rules apply, and at least half your total debt must be with a commercial lender at the start. Check the RIC site for current terms and rates.

## Don't forget the costs of moving assets

Moving land or other assets between people can bring costs. These may include legal fees, transfer duty (also called stamp duty) and capital gains tax. The rules differ by state and by situation. Ask your accountant and solicitor before you decide anything, and don't rely on what worked for the neighbours.

Our [five-year plan spreadsheet](https://farmcfo.com.au/downloads/farm-cfo-five-year-plan.xlsx) lets you test the farm over several years. The [Farm Health Check](https://farmcfo.com.au/health-check) gives you a clear view of where the business stands today.

### Worked example

**Invented example.** Jan and Phil's farm in a normal year. All figures and rates are invented.

| Line | Amount |
|---|---|
| EBITDA | $380,000 |
| Less interest (6.5% on $1,150,000) | $74,750 |
| Less principal repayments | $60,000 |
| Less tax set aside (estimate) | $30,000 |
| Less machinery replacement | $50,000 |
| **Left for drawings** | **$165,250** |

Jan and Phil need $60,000 a year. Kate's family needs $70,000. That's $130,000, leaving $35,250 spare.

Now say Kate borrows $1,000,000 to buy out Tom and Ellie, at the same 6.5%. That's $65,000 a year in interest alone. The $35,250 spare becomes a shortfall of $29,750, before any principal repayments. The buy-out would need a different shape.

Try the borrowing capacity calculator: https://farmcfo.com.au/tools/borrowing-capacity

### Check your understanding

1. Which year should you use to test whether the farm can support two families?
   Answer: A normal year. A normal year shows what the farm can usually afford. Then test a bad year as well.
2. In the example, what happens when a $1,000,000 buy-out loan is added?
   Answer: The spare $35,250 becomes a shortfall of $29,750. The extra $65,000 of interest is more than the $35,250 spare, so the farm falls $29,750 short.
3. Who should you ask about transfer duty and capital gains tax when moving farm assets?
   Answer: Your accountant and solicitor. These rules differ by state and situation. Get professional advice before you decide.

## Lesson 5: Who to involve

Succession is a team effort. The family makes the decisions, but it needs good advisers to make them stick. The [WA succession guide](https://www.agric.wa.gov.au/sites/gateway/files/Fact%20Sheet%20-%20Succession%20Planning.pdf) recommends seeking professional advice, and names independent facilitators and legal, accounting and insurance professionals.

## The family

Everyone with a stake should have a voice, including children who don't work on the farm. Leaving people out early often causes trouble later.

## An independent facilitator

A facilitator runs the family meetings. They help everyone be heard, keep to the agenda and write down what's agreed. They don't take sides, and they don't make decisions for you. If the conversation is likely to be hard, a facilitator is worth it.

## Your accountant

Ask your accountant about:

- How the farm's structure works, such as any trusts and companies.
- The tax side of moving assets, including capital gains tax.
- Whether the numbers stack up for the plan you're thinking about.

## Your solicitor

Ask your solicitor about:

- Wills and powers of attorney, for each person.
- Changes to trust deeds, partnership agreements or company documents.
- Transferring land or other assets, and any transfer duty.
- Written agreements between family members.

Where family members want different things, ask your solicitor whether each person should get their own independent advice.

## Insurance

Life, disability and other insurance can matter in succession. Talk to an adviser who deals with it.

## The bank

If debt will change, or the farm will be restructured, talk to the bank early. It will want to see the plan and the numbers. Our [bank ratios page](https://farmcfo.com.au/templates/bank-ratios) shows what it will look at.

## Where we fit

We're not your accountant or solicitor, and we don't give legal or tax advice. What we do is the numbers. Can the farm support the plan? What happens in a bad year? How much debt can it carry? That helps your family and your advisers work from the same facts.

If you'd like that clear view, our [Farm Health Check](https://farmcfo.com.au/health-check) is a good first step. If money is already tight, the [Rural Financial Counselling Service](https://www.agriculture.gov.au/agriculture-land/farm-food-drought/drought/rural-financial-counselling-service) offers free and independent financial counselling to eligible farmers. The national line is 1300 771 741.

## Your next step

Book the first family meeting. Use the [first conversation checklist](https://farmcfo.com.au/templates/succession-first-conversation) as your agenda. Write down what's agreed and what's still open. Then see your accountant and solicitor with that list.

### Worked example

**Invented example.** Jan and Phil plan their first year of succession work. The costs are invented, not quotes, so ask for your own.

| Step | Cost |
|---|---|
| Three family meetings with a facilitator, at $1,500 each | $4,500 |
| Accountant: structure and tax review | $2,500 |
| Solicitor: new wills and powers of attorney for Jan and Phil | $6,000 |
| **Total** | **$13,000** |

Against assets of $5,350,000, that's a small cost to start the plan well. They also book a meeting with the bank once they have a draft plan, so there are no surprises.

### Check your understanding

1. What does an independent facilitator do?
   Answer: Runs the meetings so everyone is heard, without taking sides. A facilitator keeps the conversation fair and on track. The family still makes the decisions.
2. Who prepares wills and powers of attorney?
   Answer: A solicitor. Wills and powers of attorney are legal documents, so a solicitor prepares them.
3. What does Farm CFO help with in succession?
   Answer: The numbers: whether the farm can support the plan. We work on the numbers. Legal and tax advice come from your solicitor and accountant.

## Next step

Farm Health Check: https://farmcfo.com.au/health-check

## Sources

- [WA DPIRD Farm Business Resilience Program, Succession planning: a guide to success](https://www.agric.wa.gov.au/sites/gateway/files/Fact%20Sheet%20-%20Succession%20Planning.pdf)
- [Regional Investment Corporation, AgriStarter Loan](https://www.ric.gov.au/agristarter)
- [Department of Agriculture, Fisheries and Forestry, Rural Financial Counselling Service](https://www.agriculture.gov.au/agriculture-land/farm-food-drought/drought/rural-financial-counselling-service)

General information only, not financial, tax, legal or credit advice. These courses are not nationally accredited training.