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 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 lets you test the farm over several years. The Farm Health Check gives you a clear view of where the business stands today.