Generations united: Revitalizing a family farm’s future

The following fictional case study was created by BDO.

Over three generations, the McIntyre family farm had evolved to where most of the revenue was coming from one niche crop that relied heavily on export markets, primarily into the Middle East and Pacific Rim. They were one of the few farms that concentrated on this challenging crop and over 15 years, they became very proficient at growing and selling it.

However, due to a series of geo-political events, changes in trade rules and oversupply, the market took a nosedive and the price dropped.

Then, a drought severely impacted yields and the family found themselves near bankruptcy. The operation survived, but all three generations were determined not to be vulnerable like that again.

Adapting to market shifts

At a family meeting, the first generation expressed their desire to return to commodity crops and abandon the niche enterprise. The second generation wanted to keep the niche crop but felt it shouldn’t be the primary source of revenue. The third generation, now in their late twenties, wanted to vertically integrate and go full-steam ahead with the niche crop. But instead of relying on exports through intermediaries, they suggested processing the crop themselves to add value rather than selling the raw product.

Embracing vertical integration

The youngsters, Spencer, James and Marie, had a tough sell – their parents and grandparents didn’t want to risk the farm’s future on a risky venture. The kids argued that vertical integration reduced risk. They felt they had the potential to be leaders in processing and marketing, especially since the domestic market was shifting as new Canadians sought food they enjoyed before coming to Canada.

Finding common ground

They reached a compromise – if the kids could come up with a way to start the processing venture without risking the farm’s future, the two older generations would support it. They sat down with their lawyer and accountant to hash out a plan.

They settled on a structure that would have the new processing venture in a separate corporation. It would be owned 100% by the third generation. Their lawyer urged them to segregate the potential risks the new venture might pose.

Their accountant advised them of another reason to separate the processing business from the farm. Even though it was an agricultural venture, the Canadian Revenue Agency may not view the processing business as a family farm operation. If they ran the processing business as part of the core farm, and if there were significant and growing non-farm assets in the current farm corporation, they could lose some of the favourable tax benefits available to family farming businesses.

This structure made the third generation accountable for the success or failure of the venture. They would also have full control of the business, which was a big motivator. A separate entity also forced a formalization of financial reporting and bookkeeping. There would be a transparent view of the financial performance of the venture, with no expenses hidden in the farm business.

Securing financing

Securing financing proved to be a challenge. Not surprisingly, some of the farm real estate was required as security for the new venture, and personal guarantees were needed from all three generations. Also, to help compel lenders, a pre-determined amount of seed capital would come from the existing farm operation.

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