Everything is so inter-related in succession planning that it can be difficult to know what financing option will be the best fit. So consult the experts so you know the specific pros and cons of each option available.
If you haven’t already, bring an accountant and lawyer into your conversation on financing options so you can consider the impacts of your options on taxes, business structure and other related areas.
Here are some of the things you need to think, and talk, about when looking at your financing options:
What are the financial needs of the current owners now, in the short-term, and in the long-term?
This question helps determine when/if owners need a lump sum payout and when/if they could live comfortably with a regular flow of income instead.
What are the financial needs of the successor, both for personal living needs and for the development of the farm?
Have a look at your past work on successor lifestyle needs in section Lifestyle Needs for Successors and Others in Step 3, and your goals and action plan for the farm in section Establishing Goals and Objectives for the Farm in Step 4. This question helps determine when the successor needs cash flow and decision-making authority.
How well can the business support outside debt?
Have a look at your previous work on your farm’s ability to create surplus cash flow with which to pay debt and owners in the section Making the Retirement Plan Happen Financially in Step 2. This helps identify specific risks related to adding more external debt to the farm’s books.
Are the retirees healthy and do they want to stay involved in farm as a laborer or manager?
Review your work on the successor’s development plan in section A Successor's Development Plan in Step 4. This helps map out when lump sum payments or salaries might be more appropriate for retirees.
How ready is the successor to fully manage the operation and ownership responsibilities?
This question helps chart the retiree’s active participation in the business which can impact the flexibility of financing options open to you.
How will non-farming children be treated?
Look over your decision on how you want non-farming children to be treated in the succession in section Find the Right Balance in Step 3. Your plans will impact when you’ll want to have cash and/or assets available for distribution to non-farming children.
What are the hidden requirements/costs in our financing?
Often clients don’t anticipate certain items and costs inherent in financing. Sometimes title insurance, a survey, or environmental assessments are required. Talk about estimated fees up front. Financing can often cost more than people expect because certain due diligence steps are required by the lender and those take a professional’s time to complete.
How long will this take?
The process often takes longer than you think, often a few weeks.
What do we have to do before the mortgage is put in place?
Land has to be migrated into the Land Registry before mortgaging.
We’re ready to look at our own circumstances and narrow down the options