NON-FAMILY SUCCESSION PLANNING

Being patient and doing research are critical to a smooth transition

By Treena Hein CONTRIBUTOR

It’s an increasingly common scenario in Canadian farming—what happens when none of the children want to take over the farm? In some instances, a farmer may have no children. In other cases, a niece, nephew or grandchild might want to take over the farm, but some provincial regulations—at least in the past—can make that impossible to accomplish in a financially-feasible manner.

Darren Kish, a dairy farmer in Abbotsford, B.C., was in this position. About 15 years ago, he decided he wanted to pursue succession with his long-term farm manager, Derrick Epp. At that point, only a spouse or a child were exempt from capital gains tax ramifications and other aspects of a quota transfer. Kish’s grandparents and parents had been dairy farmers but sold their cows and quota in the 1970s. When Kish graduated from high school, he grew hay and raised Holstein heifers and beef cattle alongside his parents.

In 1986, a couple he knew purchased quota at an older farm about 40 minutes away from him. Three years later, when the couple wanted to get out of dairy farming, Kish entered into an agreement to buy some of the cows, run the dairy and eventually buy the quota. In those days in B.C., producers had to keep quota for 15 years before they could sell it. “In October 1990, I built a parlour at my family farm and moved the cows there,” Kish explains. “In 2003, I was able to get the quota transferred to my name.” By 2005, because many B.C. dairy farmers were swapping and leasing quota, the B.C. Milk Marketing Board (BCMMB) brought in rules, which would have made transferring quota in that manner impossible.

Around that time, Epp started working on the farm, and Kish had known the Epp family for a while. “I knew Derrick’s grandfather Jake,” Kish says. “Derrick had been working as a milker for another fellow before he moved away. Derrick heard I might like a bit of help. He started doing some hay here and then milking. He later did most of the milking and other tasks.” When Kish looked forward to his future, he realized he wanted to give Epp the same opportunity to get into dairy farming that he had as a youth. “I brought it up first,” he recalls. “I knew Derrick had the interest and we got along well. I suggested that down the line, we could do a deal where he buys a stake and eventually would buy me out.” Epp was quite excited and agreed, but it wouldn’t be as easy as either of them hoped.

MAKING THEIR MOVE

Epp continued to grow his management skills on the farm—both with the dairy and the cropping—and by 2011, Kish asked his lawyer to transfer some of farm corporation shares to Epp, making him a shareholder. “We should have checked (with BCMMB) because there was a rule that a sale of shares is deemed a sale of quota,” Kish says. “I wrote a letter of apology (to BCMMB, and) they applied an assessment fee, which amounted to two kilograms of quota. At the time, B.C. had the highest-priced quota in Canada—$42,000/kg. So, it was an $84,000 hit, and with legal and accounting fees, about $100,000.”

Kish and Epp then looked at other options to transition the farm ownership. A sale of the farm as a going concern wouldn’t work because it would have to include land, and Kish didn’t want to sell any land. Epp says they also looked at buying land and moving the farm, but it was too costly. “Darren spent a lot of time calling different people and saying the situation needed to change,” he says. “He wasn’t going to give up.”

PROVINCIAL CHANGES

Meanwhile in 2016, Ben Janzen became the current BCMMB chair. Before that, he served on the board for 16 years. Kish recalls Janzen as being sympathetic to their situation.

By October 2019, BCMMB had broadened the exemption for quota transfer to include non-related long-term farm employees. “There were a number of requests from large and small dairy farms to do this, where an employee had been working in a senior position on the farm for years and the farmer doesn’t have a family member who wants to take over,” Janzen explains. “We definitely see this as a positive step for the industry. It allows for non-family succession with all applications needing to meet all requirements and gain BCMMB approval, which is a normal business practice.”

Janzen says it also prevents industry consolidation and reduces a barrier to entry into dairy farming for young people. “There’s a good likelihood when a dairy farm is sold in B.C., particularly in the Fraser Valley where demand for land is so high, the farm is converted to some other type of farming or some other use entirely,” he says.

Epp now has a 20 per cent stake in the farm. “I’m working off a loan from Darren for this,” he says. “We aren’t sure at this point about how we will finish the transition, but we continue to discuss it.”

In terms of advice for those in a non-family farm succession, Kish recommends working closely with a lawyer and tax accountant. He also recommends working with a succession planning expert, especially for bigger farms. Epp echoes those thoughts. “You want to make sure things are done legally and there won’t be any tax implications or issues in the future,” he says. “There’s a lot at stake, and it needs to be done right for both parties.”

In terms of other advice for non-family farm succession, Epp advises having ongoing and excellent communication. Both parties need to be aware of what they want and what they are hoping for, and they need to make the other party aware. He says it doesn’t work if someone is unhappy or feels they’re not being heard.

REFLECTIONS ON THE JOURNEY

“I think the (succession) process has been easier for us than it is for some because we’re not family,” Epp says. “We also respect each other and how the other person works.”

Kish says Epp is being rewarded for his hard work. “He’s got a stake, and he’s protected. I think for both of us, it’s been stressful. We’ve both had sleepless nights, but it’s been worth it.”

Epp says dairy farming is something he always wanted to do, and it feels good to be at this point. “It’s a lot of fun,” he says. “My wife, Colleen, and our kids really enjoy helping.”

Both Epp and Kish are also pleased Epp, Colleen and their children will soon be living on the farm. “He’s been renovating a building into a home and it’ll be very nice for him not to have to commute,” Kish says. “He’s doing a good job with the cows and crops, and I get to enjoy going on trips. It’s really a win-win.”

EXPERT ADVICE

It can be a source of grief for farmers when none of their children, nieces, nephews or other family members are interested in taking over the farm, but well-known farm business succession expert Elaine Froese tells those in this position there is light at the end of the tunnel. If they are patient and open-minded, Froese believes they will find a successor they are happy with.

Froese hopes at this point, farmers in the position of handling non-family succession understand they don’t have to simply sell the farm—they can do succession in stages and remain actively farming for a long time to come.

“There are many ways of organizing the succession. You will need to do assessments of yourself,” she says. “Know your own values, and carefully think about whether you want to be a co-manager, how much involvement you want to have at various points in the future and whether you’d like to walk away at a certain age.”

In selecting non-family successors, Froese recommends a long process where both parties get to know each other, engage in assessments and share results, forming a mentor-mentee relationship where the farmer can get a clear sense of the potential successor’s work ethic.

They should create an operating agreement during this probationary period that can be discussed and adjusted before the two parties make the decision to enter into an official business relationship. “Discover everyone’s skill sets and always practise total transparency,” she adds. “Turn to a succession expert, lawyers, accountants or other farmers for help.”

“We have to remember not everyone wants to carry on the family farm or business legacy,” Froese says. “Where is it written that because we share DNA with our children, they will have the desire to continue to operate the family farm? If you don’t have a younger family member who is passionate, find a passionate person or couple from outside.”

She says producers need to be open and not judge the outcome—they will find the successor they want and need.

“In one recent instance I know of from the Canadian Prairies, the dairy farmer noticed how passionate his 15-year-old farm worker was about dairy farming,” she says. “That young man became the farm’s successor. The person you’re looking for may be under your nose or you may need to do some searching, but you will find the right person or couple.”