When giving away the farm makes sense

Mike Bossy, CA, CFP, TEP, Canadian Association of Farm Advisors (CAFA), is president and founding partner of Bossy Nagy Geoffrey Chartered Accountants. His background in accounting gives him a broad range of knowledge in areas such as law and taxation. He’s been an advisor for more than 25 years, specializing in business and farm transition.

A dairy farm owner wanted to hand the operation to his son. But the two argued often, and dad wondered if they shared the same goals.

Enter Mike Bossy, president of Bossy Nagy Geoffrey Chartered Accountants, and an advisor for more than 25 years.

His goal is to help primary producers and agri-business owners, which make up 70% of his book (the rest are a blend of business owners, including manufacturing and retail), mitigate conflicts and make a smooth transition.

His decision to specialize in agriculture is no coincidence. Bossy grew up on a tobacco farm in Tillsonburg, Ont.—the city in which his firm now resides.

To gain insights about the father-and-son relationship, Bossy used the Kolbe Index A test, which includes 72 behavioural questions. After completing it, each received a score and was categorized. The test showed the son was more visual, while the father needed hard facts.

2006–2011

Between 2006 and 2011, the average Canadian farm increased 6.9% from 728 acres to 778 acres.

In 2011, there were 205,730 farms in Canada, a 10% drop from 2006.

It helped the parties understand what motivated each, and in turn changed their conversations.

Once they were able to better communicate, Bossy took them through the structural aspects of succession. The two did, in fact, have common goals: they wanted to double the size of the business from 200 cows to 400.

But analysis of the finances showed they weren’t yet ready to buy another farm, so they decided to grow organically for two years. They used cash-flow surplus to pay down debt, and the natural appreciation of land value built equity. When they were more financially stable, they went shopping for more land and livestock.

One of the greatest challenges

Agri-business owners face is finding employees—many are losing potential candidates to factories, says advisor Mike Bossy. “They say they can’t find anyone good to work for them. Well, I turn it around on them and ask, ‘Why would anyone good want to work for you?’ ” This tactic works. Many of his clients now offer healthcare and benefits, including dental.

During that time they also mapped out responsibilities. Dad was better at cropping, so he’d handle decisions like which fertilizers to use. Meanwhile, the son was good at breeding cattle.

When it came time to transfer wealth, Bossy ran the parents’ net worth through various scenarios.

If the business is sold to a third party, he subtracts taxes from their total net worth. He also considers any children who aren’t taking over the farm. Do they have to wait until death to receive their inheritances, or do they get them now?

Then he discussed the parents’ retirement needs, factoring in cash flow from the farm, redemption of shares, and repayment of loans.

Bossy established a purchase price for the farm and terms of repayment, and determined how much of any outstanding debt is forgiven at death and how much is left to surviving beneficiaries.

And he always adds an extra $25,000 annual cash-flow cushion to the transfer because parents often underestimate how much money they’ll need.

“The worst thing that can happen is the parents run out of money, come back to their kid for a raise, and he says no because he has no extra cash flow—or worse, says ‘No, you’re not working, so why should I give you more?’ ”

Bossy’s goal is to get agri-business owners to diversify their portfolios and park some cash outside the farm. Typically, clients keep 99% of their eggs inside that basket, preferring to buy more land, expand the herd, or upgrade equipment.

Since they’re novices with market investments, he steers them toward low-risk products (e.g. TFSAs, fixed-income, or blue-chip stocks that pay dividends). These are all “safer tools to build up net worth.”

Bossy stresses he’s “not a stock picker,” but does advise on the mix. For that, he refers clients to two peers: Larry Myny at CIBC Wood Gundy and Jason Webster at TD Waterhouse, both in London, Ont.

Myny, whom he’s known for 40 years, has a more conservative investment style. He gets Bossy’s cautious investors. And Webster, whom he’s known for 20 years, is more aggressive. He looks after the risk-takers.

Take-Away

If you’re dealing with a household of clients, understand what makes each person tick, and tailor your advice accordingly.

Growing referrals

So where does Bossy find these agri-business owners? Through referrals, of course, but not in the way you’d expect.

Bossy started off small, establishing accounting firm Thompson Fisher Bossy in 1983. Even though he practised as a CA, he was more drawn to the advisory side, so focused his efforts there. His only farmer clients were his father and father-in-law.

He learned some lenders used specific ratios when judging farm producers. These included:

• financial efficiency (how much it costs to produce each dollar of revenue);
• debt (per litre of milk produced, for instance); and
• debt-servicing surplus (how much money is left to pay principal and interest).

Bossy would put these details in his client’s financial statements. When he sent them to the bank, it saved lenders the hassle of having to call his clients for additional information.

And he told clients what lenders were looking for.

“We could be more aggressive with producers, showing them how they could borrow more money to extend their herds or buy more land,” he adds.

The result was referrals, twofold. Banks saw how well he understood farm producers so they’d send clients. And, the farmers he worked with had an easier time with loan approvals, so they’d refer fellow farmers.