Spending a fortune on succession planning?

Are you spending a fortune on succession planning? Are you lining up to spend tens of thousands of dollars on Succession Planning consultants and perhaps setting up a structure that is so complex that nobody will ever be able to disentangle it except the consultant who set it up for you?

What is required

Succession planning is very important for those running family farms and businesses, but it is not very complex and it is not very difficult. It is not hard to enable current owners to come up with who they want to own the operation when they don’t want to. Sorting out a fair solution for other family members is not difficult once the first decision has been made. Then the timing and trade-offs can be put in place.

Simple jig-saw

Succession planning is like a fairly simple jig-saw puzzle. The key is making sure that control rests where the owners want it for as long as they want it and how that is achieved. Like moving livestock, it works best if you take it a bit quietly and make sure that everybody stays happy as the process moves along.

People before profit

Whilst all consultants hope to make a profit out of advising their clients, in order to earn a crust for their own families, succession planning is about people more than money. It is about tradition and heritage. It often gives us a piece of the family history that is more precious than the land or the profit it generates. Younger generations are not always as tuned in to that as the older ones so both must be accommodated. Decades ago I lobbied parliaments successfully by Votergram to get more favourable tax and duty treatment of inter-generational transfers.

Experience

What is vital is that the consultants actually know from experience what it is like to hand on or take on family farms or businesses. I bought the farm my great-grandfather had settled in 1865 and I took over the business my grandfather had started in 1937. Succession planning should not be seen as a “good source of fees”, but as a chance to give professional assistance to a family in order to facilitate succession in a way that avoids causing dispute or disappointment within the family.

It needs time, not money

For that reason the earlier it is thought about the better, without necessarily putting anything in place too early, because family situations and goals can change over time. Early planning allows flexible options to be developed so that changing circumstances can be easily managed.

In one winery business that we consulted, the winning factor was time for everyone to go away and mull the proposal over, then come back and adopt it a year and a half later, with everyone happy with the outcome.

It’s a molehill not a mountain

Some advisers, consultants and counsellors are making a mountain out of this small molehill and a motza of money in the process. What the consultant needs to know about the farm or business is:

What it is, where it is and roughly what it is worth.
Who owns it now and who might own it after them.
What others might be contenders for succession.
What average annual net profit was for the previous five years.
Retirement plans of current owners, no matter what age they are now.

Don’t waste hard-to-earn money on complex solutions when simple ones are better. If you want to know more give GBAC Advisory a call on 0428 417 496 or email greg@gbac.au Happy to just chat about it.

Aussie Farmers Beware of the bank financial supermarkets

Farmers borrowing from only one bank-paid broker is like selling produce to just one Supermarket. The banks have become financial supermarkets fleecing farmers with the skill of a gun-shearer. They close branches, cut phone staff to keep you hanging on for ever then want you to travel miles to prove who you are.

Farmers come out worst. The 4 Big Banks alone earned a profit last year of $36 billion. That is to say they charged their customers $36 billion more than the services cost. The Banking Royal Commission revealed that many of them act illegally, dishonestly and deceptively. That is why as a farmer/HELP consultant I established the Borrow Better concept and service. It is how you lay the foundations for a loan that determines how well it works for you

The key to farm borrowing in Australia is to:

Prepare a good loan application explaining to the bank why it should lend to you
Use the Borrow Better presentation to each of the banks most likely to lend to farmers
On receipt of offers negotiate the cheapest loan with best terms and most friendly bankers
Ensure that all loan terms are clearly understood to avoid unpleasant surprises
Ensure that loan repayments are readily affordable in all seasons and circumstances.
Establish systems to ensure that repayments can be made in advance in good seasons to cover relief in bad ones.
Aim to clear the debt as early as possible
Ensure title deeds are safely recovered and mortgages discharged on repayment.

That is why it is better to borrow the “Borrow Better” way. And it is run by people not robots. Put some competitive pressure on the banks to win your farm loan business. We all work better under pressure. That is when banks give you the best deal.

Unseen brokerage costs farmers dearly
For every $1 million borrowed through a bank broker, the bank pays the broker around $7,000 which the bank recovers in interest and charges from the farmer. The farmer will possibly get the loan, but how the contract terms suit the particular farmer’s budget or circumstances is another thing. Neither the bank nor the broker will be that much worried about the farmer paying the loan back as long as the security is enough for the bank to sell the farm up anytime it wishes. The contract probably lets the bank do that anytime. But as long as the farmer works sunup to sundown to pay the bank interest of $60,000 to $100,000 a year per $1m borrowed, the bank will be no hurry for the loan to be repaid. But just when things get tough on the land is when the bank will often cut and run, calling the loan in at the worst possible time for the farmer. That is often when farmers call me at GBAC.

Borrow Better
That is why I set up the Borrow Better human app in 1987 when banks were first de-regulated. Some farmers will remember we called it Moneygrams then. One of the first users paid the $100 fee and made a cool $300,000 in interest savings because of it, without moving banks! It is better to get the right help earlier rather than later. We help farmers obtain the most suitable, cheapest loan, with the most suitable contract terms from the most agreeable banker, right at the start. GBAC is a HELP consultant.

When taking the bait watch out for the hook
What is not obvious to most people when borrowing is that the money is the bait and the contract the hook. Like fish, many farmers offered the loan happily grab it while it is going, without noticing or even reading the contract on which they are hooked, with their family farm on the line.

The Borrowers’ Broker
Sometimes I think of us as the Borrowers’ Broker because we take the borrower to all the banks and tease out the best one for each particular borrower on the basis of the farm production, seasons, prices and government policies and the family needs of the farmers. We also help the farmer to clear that debt as fast as possible because very often the bank earns more out of the farm than the farmer does. (Compare your “Interest paid” with your “net profit” or “taxable income” to see how it is for you).

Inherited debt – the farmers curse
Leaving the debt to be passed on to the younger generation is not a good idea. Plenty of farmers remember when the interest rates went up to 24%. At present, rates are low because recession is hanging over the world and has been since well before Covid struck. The good thing about recession for farmers is that they can usually feed the family, but it can make a big difference if the farm income drops and the debt goes into default, so that the bank forecloses. My second cousin, from whom I purchased the beef cattle property settled by my great-grandfather, told me that when he was young and depression struck, the only reason the bank did not sell the farm up from under his family was that its value had crashed and would not nearly cover the debt. Today the bank just sells the farm and writes off the rest of the debt. Banks make so much money that a write-off is just like a drop in the ocean. We often turn that to the advantage of the farmers tricked into unaffordable loans by ruthless bankers. My cousin took over running the farm, cutting costs to near zero. The day, decades later that he cleared the debt and recovered his title deeds he took his staff to the pub to celebrate. It concerns me greatly that some rural consultants and counsellors may be encouraging farmers to have their children borrow from a bank to buy them out. One farmer described that to me as “Child Abuse”.

Drought
As he handed the farm over to me on a substantial cash deposit and long payment terms, he warned me, “Remember, when you come out of each drought, you are heading into the next one.” It was sound advice. As revenue came in I saved money and hay for those long hot sunny days when there was not a blade of grass on the ground. Then I adopted a policy of gradual de-stocking as drought hit and breeding up numbers again in good seasons. That worked surprisingly well. A neighbour commented on how fast our place re-stocked after drought without ever buying cattle in.

Whip Hand
Farm profit is a mental process. Decisions on spending are the key determinants of being able to continue the farming life. We help farmers make those decisions, because we know that farming is the best life in Australia, but it is hard won. We also help farmers guide governments into doing what is needed for farmers. Farmers, as voters, mostly hold the whip hand, but too often don’t use it.

HELP Consultancy
A HELP consultancy is there to help its clients, not to focus on making money out of them. Today we see too many consultants and government services based around the service providers getting rich whilst the farmers battle seasons, governments and prices. My grandparents and great-grandparents would be happy that I have been able to establish a HELP consultancy that has helped farmers from the tip of FNQ to King Island and up to the Kimberleys then into the centre. There are many better farmers than me, but to run sheep at Tullamore and cattle at Braidwood along with a national HELP consultancy that grew out of my Chartered Accountancy practice is thoroughly enjoyable.

Fair Go for All Aussie

Fair Go for Aussies

It surprises me that 40 years after we invented our Votergrams and Moneygrams, some Australians are still having trouble dealing with their banks and governments.

The words I learned in my youth ring true, “If we always do what we’ve always done, we’ll always get what we’ve always got.”

There are very specific new strategies required to obtain good results from both banks and governments. The world has changed and the old ways no longer work as they did.

The naïve belief that both the banks and the government are working to serve the people should surely be dispelled in a few words.

Borrowing & the Bank

Banks are making multi-billion dollar profits that enable them to pay multi-million dollar salaries to executives. If you were able to earn that much money would you want to stop in order to give customers a fair go? Not likely, when the customers just keep on coming regardless!!

Will brokers, paid huge commission of about .008% ($8,000 on $1m) on each loan they deliver to the bank, really look after your interests ahead of that of the bank that pays them? Not Likely!!

Bankers and borrowers sit on opposite sides of the table. One wants the best deal for the bank. The other wants the best deal for the borrower. As in arm wrestling, the one with the strength wins.

Australians who really want to borrow better, google “Borrow Better”. That brings them to BorrowBetter.au to borrow better as many have done since de-regulation in 1987. Then we can help them with proven borrowing and negotiation strategies so that they get an extra special deal as the bank saves a mountain of brokerage.

Sure it takes a bit more effort, but doesn’t everything that’s worthwhile? It is better than learning the hard way that “variable” means the interest rate can vary up as easily as down, at the will of the moneylender. ferris wheel

Government and Society

With 27million people, 17 million voters, how could any government please everyone. It can’t!! The government does what active voters persuade, bully or bribe it to do. The first step for Aussies is to take off their “Community” hats and replace them with their “Voters” hats. The parliament that they elect as voters is their pathway to good government. Those Votergrams have proved to be the very best vehicle for using that pathway to guide government departments, contractors and bodies.

Votergrams embrace not only the ability to reach each and every MP, but also a wide range of very successful strategies that have been progressively developed over those almost 40 years, many with the active assistance of Members of Parliament and parliamentary staff.

Votergrams are all about working with parliamentarians through polite, persistent political persuasion in the privacy of parliament.

FairGO

All Australians are entitled to a fair go and we have found that we can generally make that happen for them.

Greg Bloomfield

Trusting trusts and inherited debts

In the 1960s and 70s, Trusts were used a lot for what was then called, “Estate Planning”. Changes in tax, land tax and family law have removed many of the benefits for owners of small and medium sized businesses . Trusts in estate planning can often see the next generation facing unfathomable complexity. It can be even worse if a consultant has suggested that a bank loan should be acquired by the younger generation to buy out their parents. Then inherited debt is added to trust complexity ensuring the need for expensive advisers to handling accounting and tax obligations each year.

Business owners should carefully weigh up the pros and cons before letting advisers set up trust for them.

Trusts set up for taxes and duties

The great advantage of the trust is that nobody actually owns the real estate or money, though someone is trustee or controls the company that is trustee. Death does not trigger death duty, because the business or home is not owned by anyone. But as there is no death duty that is largely irrelevant, though if it was introduced it might then be to late to wish there was a trust. Capital Gains Tax (CGT) may apply not apply either if the assets have been held for long enough and the transfer is related to retirement. Obtaining specific advice for each family situation is vital. General advice cannot apply to any individual situation without specific modification as applicable.

Many family businesses are handed on to the next generation. The same may apply to homes given the housing crisis inflicted by federal immigration policies, so a trust holding the title would suit. But, if there is no death duty and CGT does not apply, the advantage is not so obvious even from a tax viewpoint. But involving a bank in a succession plan can lead to the burden of inherited debt on the next generation

Estate planning that retains control

What a trust can do is allow the older generation to control what the younger generation does in the business. That is not always wise. Young people need freedom to innovate and make mistakes of their own. That is how we all learn.

A trust used to be a way for a family, handing on the business or home to the oldest son, to ensure that in the event of a marriage split-up, his wife or partner would not end up with a share of the home or business. Family law seems to have scuttled that idea and many would say that is a good thing.

Skip DIY when succession planning

Families business owners should obtain professional accounting and legal advice to determine what happens to the business and its assets. They should learn whether or not it is possible and if so, how the succession plan should be structured. Each family situation is unique so this is not a field for DIY on the basis of a note like this or any other. “When in doubt, find out!”

Danger of using trusts for succession planning

The danger in trusts, is profits distributed to family members to minimise tax rates, are often not paid out to the beneficiaries in cash. Rather, those profits may credited to them but reinvested. However, the money distribution belongs to those beneficiaries. Parents need to be aware of the risks of them using that money without written permission of the beneficiaries.

Complexity can be a major disadvantage of a trust deed. It can cost more in legal and accounting fees to eventually unscramble the trust structure. The results may yield no tangible or financial benefits in doing so.

Sense of achievement

Rather than give the business to the next generation it may be better for all parties to consider selling the business to the children or one child. That way the child gains the satisfaction of obtaining the business through their own efforts rather than as a gift. The parents benefit by having cash to spend after years of pouring it into the business. There are very good ways of doing all of this without involving bank debt. Not handing over debt to the children is fairer .

Why try GBAC?

Big professional firms, those associated with business organisations, banks or government are not necessarily appropriate for succession planning due to conflicts of interest. They are often very expensive. Succession planning should protect businesses from banks and government.

Greg has managed transfers, succession of a major business from his grandfather and a farm that was settled by his great-grandfather, to his generation. Greg and Pat have both been involved in running business and consulting.

In a world of excessive greed, GBAC lets clients say goodbye to that greed and hello to good old-fashioned service. That is where the client comes first and foremost and always deals with the principals.

Family farms and succession planning

Start a succession plan early

Succession planning comes up when mum and dad are looking to the future of the farm and want to leave their legacy to the next generation of farmers. It may start when the children are in their teens or be left until they are in their 50’s. The earlier the better, but flexibility is important for the plan to succeed.

The end goal of the succession plan

A one size fits all approach does not generally suit and handing over debt to the next generation increases the risk of the farm eventually being lost to the bank. Main factors to consider are the goals of the parents and children. That sets the pattern, but within those boundaries will be many complex issues, including relationships, finances, taxes, mortgages, competition amongst children and differing views of mum and dad.

Family conferences help

First step is discussions with each family member. This includes a sound understanding of the farm, its operations and finances and patient family conferences where people are encouraged to put their thoughts on the table. This should not be done as a final statement, but to open discussions. We really try at GBAC to get this right. Because, if handled badly it could make some family members feel badly done by.

Avoid surprises that could cause consternation

Succession planning needs gentle diplomacy. Often some family members have expectations that others don’t share. In the end we want to make everyone happy. That is why if Succession planning starts in their teens or twenties, everyone has a clear understanding of what is happening and most wishes can be accommodated over time.

Our role

What has helped us with succession planning for clients is experience. From my teens I was raised on Dale Carnegie’s book “How to win friends and influence people”. It gave me a different perspective on working with client families. What I learned about dealing with finances in my Chartered Accountancy courses. Running my own Merino property out west first was a good lead in to me succeeding my 2^nd cousin by purchasing from him the beef cattle property in the Araluen Valley out of Braidwood, originally settled by my great grandfather.