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Family farming enterprises make a significant contribution to South Africa’s economy and food security. Therefore, it is crucial to ensure the survival of farming enterprises in South Africa. Statistics show that most family farms cannot survive for three generations. The reason for this is often that the rules and regulations for the transfer of the family farms from one generation to the next are not adequately planned and documented.
The Family Constitution is an essential foundation for building any successful family farming enterprise. The Family Constitution is critical if the family farming enterprise wants to ensure its survival across multiple generational transitions.
The three-subsystem model indicates the dynamics between active and non-active members in a family farming enterprise on three levels – (1) the family, (2) ownership, and (3) the farming business. Regulating these relationships and defining the rights and obligations of all parties remains an unfinished task without a proper Family Constitution.
There are ten pillars that must be built in this Family Constitution foundation to ensure that the family farming enterprise can be passed down through generations:
1. Succession Plan
As the older generation approaches the “handover,” planning for this emotional process becomes increasingly important. The succession plan in the Family Constitution includes both personal financial elements (how will I financially enjoy my retirement) and business elements (what are my responsibilities).
The better this handover process is planned, the greater the chance of success for the family farming enterprise, ultimately benefiting everyone involved!
2. Management Succession
Each family farming enterprise has a unique management philosophy. It is important that this management philosophy is clearly articulated in the Family Constitution and aligned with the family farming business’ farm’s vision.
Questions such as how day-to-day decisions of the family farming enterprise are made and who makes them need to be discussed, and thorough policies need to be prepared.
Thorough planning should also determine who the successors in the family farming enterprise will be. Are the successors family members, and when will the “baton” be passed on?
3. Estate Planning and Wills
The starting point for any Will is the endpoint! What will the costs be when the farmer passes away? There are two certainties in life, death and taxes!
The farmer’s estate plan provides for all the taxes, expenses, and costs that must be paid when the farmer passes away. Estate Duty, capital gains tax, and executor fees are just a few of these expenses and costs that must be settled when the farmer dies.
It is essential to calculate the liquidity of the family farming enterprise upon the farmer’s death to ensure there is no cash shortfall. Any cash shortfall can, of course, be supplemented with life insurance.
The farmer’s Will should also coordinate with all the other trust and company statutory documents in the family farming enterprise.
4. Ownership Succession and Asset Transfer
Family farming enterprises have valuable assets that can mainly be divided into three categories – (1) farm land, (2) farming equipment, livestock, and/or game, and (3) farming businesses shares or interests.
The transfer of these assets from one generation to the next must be well understood and planned. There are different ownership models that the family farming enterprise must analyze, understand, and implement.
Do family members acquire rights to certain of these assets? How are the assets divided? Or should no one acquire any rights to the assets? These difficult questions must be asked to plan the succession and transfer of assets.
Each family farming enterprise is unique, and it doesn’t fit into a single model. Therefore, it is essential to analyze the ownership models and to write a unique model for the family farming enterprise in the Family Constitution.
5. Review of Financial Facilities and Sureties
The vast majority of agricultural businesses use external financing, and each of these facilities has terms and conditions. The analysis is to ensure that everyone understands the terms and conditions but also to see if these are optimally structured for each specific family farming enterprise.
Some elements to consider are making sure that some assets (especially land) are not offered as security, to look in detail at individual sureties with the aim of releasing some of them, and to ensure optimal structuring of the facilities.
A Family Constitution can provide peace of mind to financiers, illustrating that this is a family farming enterprise that can survive for generations, so that facilities do not need to be withdrawn or revised when the farmer passes away.
6. International Investment Diversification
It remains a healthy investment practice to diversify your assets and not to put “all your eggs in one basket.” Also, keep in mind that the agricultural sector and land ownership can be volatile and subject to political influences.
The core principle is to invest a portion of your assets outside of South African political and economic risks in a friendly jurisdiction. Remember that South Africa and the JSE represent less than 1% of the world economy. When it comes to investing your surplus capital, position yourself as a global citizen!
The family farming enterprise’s international diversification strategy should be described in the Family Constitution.
7. Tax Planning
Most family farming enterprises operate in multiple companies and trusts. Tax planning for the family farming enterprise within these companies and trusts is essential!
This involves analyzing the financial statements and meeting with the auditor to ensure that all taxes are minimised within the framework of the relevant legislation.
8. Life Insurance
Life insurance often plays a crucial role in family farming enterprises. However, it should be remembered that life insurance is an insurance product and not the ideal product for creating wealth.
The liquidity of the family farming enterprise should be calculated through a comprehensive estate plan to ensure that any cash shortfalls are supplemented upon the farmer’s death. This ensures that the family farming enterprise’s liquidity is in place when the farmer passes away. Cash shortages should not need to be supplemented by selling certain farming assets.
A healthy balance is needed between the amount of life insurance and wealth savings outside the family farming enterprise. Life insurance is not part of retirement planning and can often be unaffordable when the farmer reaches old age.
9. Retirement Planning
We all need to plan for our old age. The sooner and more structured you do this planning, the better your chances of success. Each family member should have their financial plan that ensures everyone achieves their specific financial goals.
This unique plan should be updated every year to ensure the plan is still on track and adjusted to any changes in your personal circumstances. Financial retirement plans should also align with the goals of the Family Constitution.
10. Different Structures – Trusts and Companies
Good corporate governance of trusts and companies is critical in all family farming enterprises. The family farming enterprise does not receive the necessary protection and tax savings if the management of these entities does not take place within the framework of legislation and court cases. The role of the independent trustee(s) is/are essential to ensure good corporate governance.
The statutory documents of these structures must be reviewed regularly to ensure they are in line with the latest legislation. Director succession in companies and trustee and beneficiary succession in trusts should be thoroughly incorporated into the relevant statutory documents.
The directors and trustees of the various companies and trusts should also adopt and agree to the Family Constitution.
