“The older you get, the less you know”
The 2019 NZDFA Next Generation programme was hosted at Haldon Station in the Mackenzie Country on 26 August and featured a valuable workshop on Succession Planning – a topic that is in hot demand by Next Generation attendees. This coverage comes courtesy of DINZ Producer Manager Tony Pearse, who was on hand to record the discussion and excellent presentations by former DINZ Chair Andy Macfarlane and later by Peer Review’s Tony Hammington.
ANDY MACFARLANE’S ADDRESS related to preparing for farming career progression, career positions, equity growth, pathways to involvement in land, stock and farm management, and ownership.
The discussion focused on:
- the power of compound interest and collective capital, and optimising productivity
- land purchase, land involvement (bearing in mind that only 20 percent of those involved in agriculture and land are in ownership positions).
Macfarlane stressed that the current Next Generation are the real drivers of change. They have widely differing expectations and plans, but these all combine to have a strong impact on where agriculture and livestock farming is heading.
Looking for opportunities with a positive lens and expectation is key, but you must expect that in farming it’s very hard to achieve these goals quickly. Progression in farming is never a straight line and, for many, getting ahead and realising a goal is commonly a journey of more than 15 years with a lot of effort.
Macfarlane said it was easy to get pessimistic just before you start to make progress, and recommended:
- continual small, measured risks rather than one big bet
- avoiding making yourself vulnerable by:
– focusing on what you can control, especially inside the farm gate
– looking for diversity of enterprise to spreads the risk, because you can often get into trouble in a monoculture.
He said common lessons learnt by young people starting to get on their feet were:
- seek and take external advice from trusted people
- focus on diversity of thought
- the best experiences are enhanced with a team, or collective experience
- long-term success is based on interpreting and utilising good science, good economic principles and keeping up to date with innovation in your field.
Citing the rough economic impact on farming from the Labour Government in the 1980s through changed taxation rules and livestock valuation, he said dramatic changes in government policy can be sudden, brutal and not necessarily well thought through in terms of unintended consequences.
“But it’s important to listen to government signals,” he said.
“The past two years have been an excellent example of that and the potential major disruption to business as usual that is occurring now.”
While the current moves around greenhouse gas emissions were not bad decisions, there would be widespread changes.
Agribusiness/farm ownership and equity growth
Reputation is everything!
Your reputation affects your current job and your next one, as well as your ability to access finance, banks and equity growth opportunities.
Macfarlane said reputations are enhanced or judged by how you get on with people, how you transmit your skills and how others get to know, trust and work with you. In a role where your reputation and skills are trusted, you quickly move into a mechanism of collective investment (inputs and outputs) that begin to mean “this is what’s good for us” in management and decision making, he explained.
“Be as professional as you can across the industry sectors you are involved in. Success is not just having few animal health challenges – it’s also about optimal feeding and having a clear and progressive breeding or finishing vision.”
Cash flow is king
Negative cash flows have a huge impact on management style and decisions and income. Punting on capital gain over time is not a good philosophy.
“You should not be concerned about taxation,” he continued. “With an investment in farmland you pay interest on your equity borrowings before tax, i.e. these payments are tax deductible for the business. Understanding the tax impact is very important.”
Macfarlane believes it’s important to involve children in the investment from the time of their late teens, keeping them well up to date with business information. He said success in the business requires discipline, especially in times of risk or crisis. “At that time, be decisive and take more considered action. Seek advice to ensure your decisions are well informed and relevant.”
While the deer industry is currently enjoying a period of prosperity and confidence, that should be a red alert too. “Plan and prepare in case a crisis or disruption comes our way, and stay focused if it happens.”
Two or three generations can all be actively involved in the farm at one time. Today, when a successor is required about half the family members might want to do it while half want to do something else. Opportunities include:
- Good experience and reputation are investments that can be paired up with capital
- Start saving early. Macfarlane gave an example of a “rainbow” investment for long-term growth. He said if you banked $10,000 a year from age 20 to 65 at an average of 3 percent you’ll have $927,000 by 65.
Macfarlane said there is a tension between a vision for land ownership and developing a professional career in farming. Today, rural professionals in business are a well-rewarded occupation if you develop the skills. In summary, he said:
- •Start saving early.
- Build your skills, competency and a value set that is important to you.
- With land, sometimes you get an opportunity that is just too good to be true. Do the research and if it stacks up, sometimes you should just cash it and take the profits.
- If you just put that cash in the bank, you risk getting scared to take it out. It pays to reinvest on the same market.
- Reputation is your biggest asset. It’s hard to gain a good reputation but easy to lose it. It says how you react under pressure and what your skills, values and ethics are.
- Take calculated risks.
- Always look for a great entry point, think through the challenges, and understand market volatility and risk.
- Utilise sweat equity where the opportunity is offered.
- Borrow amounts that may stretch you, but you can handle. Pay it off, reborrow and establish a record at the bank (remembering that interest paid is pre-tax, not post-tax, so there are incentives).
- A 5 percent return on a 4 percent borrowing is a “positive carry” but a 3 percent return on 4 percent interest is a “negative carry”. Because land prices are now finally stable, flat or even decreasing, rates of return on capital are increasing and interest rates are falling. Now is the best time in decades to consider borrowing.
- Cash is king.
- Get a range of advice and be prepared to act on it.
- Look for a step change potential in land value. Invest in land that has a potential for increasing capability and adding value to that investment.
A few further good points came out in discussion following Andy Macfarlane’s presentation:
- Your reputation is built from your early years and can be continually improved.
- Develop your people management skills and an understanding of psychology and behaviour so you can encourage the best from people.
- Recommended essential listening/reading: former All White, forensic psychiatrist Dr Ceri Evans and mentor to All Blacks his new book: “Perform under Pressure”:
- Interview with Dr Evans: bit.ly/2V9qmlg
- Read the book: bit.ly/2M8647I
- When extending a good idea it’s important to steer people and the right expert advice together.
- Invest in relationship management and building trust.
- Your CV must be backed up by your reputation.
- Fixed or floating? With current geopolitical disruption it’s hard to say. It might be best to focus on short-term loans and investments for now, but also develop a back-up plan.
Succession planning workshop
Facilitator Tony Hammington (PEER Review) introduced the succession workshop with an example of Richie McCaw’s uncle having breakfast with his nephew before his stellar All Blacks career started. He asked if Richie could summarise his vision and commitment for the future on a table napkin. Richie wrote simply “GAB” (Great All Black). Hammington encouraged delegates to take that advice to articulate their own vision and passion in a short, simple statement that can guide, direct and inspire them on the path towards that goal.
He introduced the concept of developing a simple lifeline from birth onwards and writing three simple goals. These might include personal, family or business goals.
The key point was getting a simple, clear focus to drive the journey, review progress and adapt or shape the plan at regular intervals.
That clarity starts the conversations, including the difficult ones, like succession within the family or business.
Hammington invited any of the attendees to the 14 successful workshops on succession planning held around the country to share any thoughts from that experience.
Grant Charteris (Hawke’s Bay) said splitting family groups (“stags, hinds and fawns”) based around age groups worked well, as the same questions were much more easily discussed in those age and status groups. Feedback had reflected different views, values and expectations. He felt that process encouraged the start of further communication and wasn’t as difficult as people may have expected. Just getting the discussion started is tough, Charteris said, but this approach showed that it’s not that hard if some prior thinking along these lines is involved.
Hammington suggested that in setting ground rules, ideally there should be no taboo subjects (except maybe some rules about the financial position initially) and no surprises. Any difficult subjects could be put on an agenda with some rules around scope.
He concluded that most of the Next Generation would have family at home and would be starting on the reflection phase of their lives, thinking of more than just their futures. Now was an ideal time to broach the conversation.
If anything such as illness or a career change had altered the timing or relevance of the discussion, this could provide an entry point to the conversation.
If there are other younger family, teenagers particularly, that is the time to start talking, he said.
“Kids enjoy being encouraged on that ride and they quickly spot the important things and the challenging issues. Difficult conversations often occur because the family members that really should have been involved, weren’t.”
Good planning is everything
Hammington said the trauma around a sudden death and the need to get things sorted under huge pressure suggests that the conversation should start as early as possible.
His advice: Start the conversation and slowly pick up the direction and detail in pace with the family’s understanding. It doesn’t have to be delivered in one session, nor as a fait accompli.
Vision: what are we building?
- Clear and simple so it’s easy to write down and review.
- Focus on where your business might be in 5 years’ time. Ideally you should be able to describe that in a short simple statement to a stranger, so they understand exactly where you are going and what you intend to do.
And some other pointers…
- In business, typically you embrace three interlinked roles (investor, manager and entrepreneur). Consider the functions of each in terms of vision and assets.
- Dairying has a clear progression pathway, much more than the drystock industries, but the principles are similar. With farm succession, the steps progress at different rates in different parts of a diverse business.
- Equity partnerships in deer farming were a successful model in the early days of the industry. They are not common now but the principles remain and are valid, especially as the industry’s future is consolidating and has become less volatile with valuations of stock based on actual productive potential, not speculation or tax incentives.
- The young Next Generation audience is as much about growth in a farming career as being an entrepreneur. Hammington said they have youth and enthusiasm on their side and are valuable because they have skills, capability, relative scarcity, specialised experience, knowledge of increasing compliance requirements, stock sense, a work ethic and established reputation.
- This is a time of opportunity. The average age of farm owners today is 54. That means fifty percent are older and often significantly older than this. We have an increasing reliance on imported labour in the dairy industry with a growing demand for livestock management skills and interest in the drystock sector.
- Take the time to understand the skills required in the drystock sector. Passion for this style of farming should be tempered with the realisation that it’s still about profitability, and understanding the real demands of farming and the need to achieve good outcomes.
Tony Hammington said too many conversations are framed negatively and are all about “how do we cut up the pie?”
If it is about the positives – energy, vision experience, passion – you can initiate or participate in the conversation and define your values and things you won’t compromise on. Grant Charteris commented that working with a business coach he’d learned the importance of articulating real and honest individual values that align with your goals.
Crucial conversations: Succession planning and family dynamics
The future for all is a high stakes game and for some family members this might be the first time they’ve seen the business balance sheet.
- Everyone will be looking at the outcome from their own point of view.
- It can be emotional and not all will see it as fair.
- The conversation requires access to facts and clarity of purpose.
- The discussion needs to agree a defined purpose in case the conversation gets off track.
- Try and create a formal, neutral environment for discussion.
- Agree on it and write it down; talk about it with others.
- Change the dynamics so it’s an “all-adult” conversation, not parents and children.
- Be well prepared and spring no surprises.
- Responses and questions should be measured and rational.
- If things get too emotional step back and ask a question that requires the thinking part of the brain.
- Further reading: Crucial Conversations: Tools for talking when stakes are high, by Kerry Patterson, Joseph Grenny, Ron McMillan and Al Switzler. McGraw-Hill (2011)