There has been a move over the last ten years or so to promote the use of mediation in dealing with farm succession planning. Often, although the mediation is of itself successful in encouraging communication between the parties, more often than not it fails to secure any real change in terms of family farm succession.
Dealing with this is becoming increasingly critical for the survival of many family farming businesses particularly as the average age of farmers in the UK is approaching 60 years old. It is well documented that the older the average person gets, the more risk averse they become. The UK also has an inheritance tax regime that favours holding on to agricultural and business assets and thus we have businesses run by an older generation less willing to take risks and invest and who have an “asset protection” attitude. On top of this, farm businesses are facing serious, external challenges: the changing relationship of the UK with the EU, market volatility, climate change, an ageing rural demographic, changing government policy in relation to financial support, changes in consumer sentiment and habit, and changes in attitude to environmental restoration/protection, amongst other things. Each of these issues is complicated in its own right, but together they can look insurmountable.
Business planning often takes a back seat
Formal business planning is not something undertaken by all farms and, as a result, many farming businesses continue doing the same thing, year in year out, largely out of habit. Most farm businesses are also non-incorporated partnerships often because the partners in the business do not understand the benefits of incorporation. Concern that taking professional advice will prove costly, and an overreliance on the partnership accountant who is often more concerned with saving tax, means that often no one really understands who owns what or what cash is being generated by the business. Some farmers do not even open their accountant’s letter enclosing their annual accounts, much less try and understand them.
The reasons why this happens are many and various and are beyond the scope of this article, but the consequences are that many farm businesses are starved of investment, and many are unwilling to take on risk or make changes, such as more effective business planning (including the gradual transfer of business decision making and assets to the next generation). All of this is often referred to as “farm succession” planning.
This failure to plan for the future viability of the business often leads to a significant breakdown of both intra- and inter-generational relationships of those involved in the business. As a result, mediation has been increasingly promoted as a non-adversarial means of resolving these conflicts. However, despite the mediation often failing to secure a solution it is hailed a success just because it has encouraged the parties to talk to one another when they might not have been able to before. This is using mediation to treat the symptoms rather than provide a cure and thus is failing the parties.
Why is mediation failing farmers?
To understand why mediation is failing, we must ask two questions:
- What is the nature of the “dispute” that is being mediated?
- What is the form of mediation and how is it failing?
A dispute between the members of a farming business often originates from the tension between family and business ties, colliding in a financially pressured environment. The stress that many farmers experience is magnified by the fact that their “office/factory floor” is also their home. They work and play in the same environment and area and some weeks may not even leave the farm at all. They find it hard to escape and find space to think. At the same time, arguments between family members easily arise because, inevitably, there are fewer constraints and less objectivity than would exist between unrelated partners. As a result, tensions can simmer for a very long time and it is quite possible to find disputes between siblings, now in their 70’s, relate back to an event which occurred some 50 years previously.
Understanding the structure of the farming business
There can also be a fundamental lack of understanding about the business structure and its financial health as well as the identity of the assets of the business. The identity of a partnership stems from the identity of the partners in that partnership. Change the members of the partnership without taking appropriate care and you change the identity of the partnership business itself, effectively, bringing one business to an end and creating a new one.
Ownership of assets can also be very difficult to understand. Most farmers understand that the machinery, crops, animals etc. (i.e., everything used in the day-to-day farming) are owned by the business. However, it is often more difficult to ascertain the ownership of the more valuable assets, such as the farm itself. Many just equate ownership with their name being on the title deeds. In other words, being the paper owner of the land. What is often not understood is that the land can also be a partnership asset. Many farm businesses’ accounts show the farm on the balance sheet, because their accountant has advised that such a move is tax efficient, without having properly considered it as a partnership asset. Often farms do not have written partnership agreements and, even more often, accountants make changes to partnerships for tax reasons without considering the legal ramifications of doing so. This can include adding a further partner for income tax purposes without realising that it may also have the unintentional effect of transferring equity in the land between partners unknowingly. This often only becomes apparent when something goes wrong.
Farm accounts are also responsible for considerable misunderstanding. Few farms generate monthly management accounts; most will have their accounts prepared purely for their tax returns and pay little heed to them. Generally, the accounts use a simple partners’ current account system which incorporates both profit (and loss) as well as capital. This means that when (or if) the accounts are reviewed; the partners view their drawings against a multimillion-pound balance created by the value of the farm land. The accounts therefore look healthy. However, this disguises the fact that many farms have chronic cash flow issues.
Independent mediators are essential
Most farming families have heard scare stories about those who have lost their farm because of a lack of succession planning. This often prompts a review of their own business. Recognising that they have to make changes means they are often more receptive to anything that might help them achieve their aims, which may include mediation. However, mediation in farm succession planning does not have a good success record, rarely producing a discernible change to the status quo other than re-framing the question.
Introducing the concept of mediation, and the identity of the mediator, often falls to one of the individuals involved or, occasionally, by one of their spouses who themselves may not be involved in the farm. If the other partners agree to mediation, even if somewhat reluctantly, the odds are already tilted against success as the mediator may be perceived to be biased in favour of the person who proposed them. To avoid accusations of partisanship, a more sensible approach to mediation is to use a professional body, such as RICS, through which a mediator can be appointed with the agreement of all the parties involved.
Facilitative mediation popular for succession discussions
The facilitative method of mediation is often used in family farm succession discussions as its principal purpose is to facilitate productive communication between family members. As such it is often referred to as family mediation (not to be confused with mediation in divorce matters) and will often take place with all parties present in the same room. The downside of this approach is that confidential discussions between the mediator and an individual party are no longer possible. The mediator is unable to explore or test a party’s statements and perceptions or to help that party step outside the dispute and critically evaluate it from without.
What is more, the mediation will take place over a number of sessions with the parties encouraged to discuss matters with the mediator in between times. Where one person avails themselves of that opportunity more than the others, the perception of bias is magnified.
Lastly, the very purpose of a mediation is to assist parties to come to a solution of their choosing. That only works where a person understands their position, interests and needs which the mediator helps them explore. Often mediation occurs in the presence of, or at least with access to, legal advice which helps the individuals involved to understand the issues, book end the possible solutions, and actually ensure that the settlement is enforceable. Many farming families when they enter mediation have no idea, not only about either the business’s, or their own, finances, but also how to implement any agreement that they reach or in fact to understand the ramifications for themselves of that agreement.
This leads to each party coming to the mediation with their own concept of what is “right”. A neutral mediator, conducting a ‘normal’ mediation will encourage each side to see the other’s point of view in order to arrive at a deliverable solution of the parties’ choosing using either facilitative or evaluative mediation methods. The latter involves exploring a party’s position, interest and needs, testing the statements of the parties, but all done in private and without prejudice, enabling a free and frank discussion. Instead, too often, family farm succession planning is more a clash of ideas, personalities and, sometimes, misconceptions leading to frayed tempers and irresolvable arguments.
Facilitative mediation rarely leads to solutions
Facilitative mediation tends not to be solution-driven. Whilst many farm succession mediators claim first-hand experience of farm succession, this is mostly because they come from a farming background and have therefore encountered the arguments and discussions before. However, they may have little or no experience of actually re-structuring farming businesses or the effect of government policy and regulations on them. Therefore, bound by their chosen mediation system, they find it difficult to guide the parties towards appropriate solutions, not least because they often may not have the requisite knowledge to understand the benefits or pitfalls of any given outcome.
One might therefore conclude that, as it currently stands, family farming succession mediation is the antithesis of the norms of mediation. The mediator is perceived not to be neutral; there is no space for confidentiality; and the mediator is not in a position to carry out an evaluative mediation, nor to give any opinion without re-enforcing the perception of non-neutrality. Often the mediation will be held in isolation from the other professional advisers to the business. This can lead to some advisers, particularly the more traditional who have been advising the family for years, trying to obstruct the outcome of the mediation as it wasn’t ‘their idea’.
Neutral expert the only solution
If facilitative mediation is not the solution to farm succession planning then what is? In common with most people, farming families just want someone to give them a clear direction. A neutral third party with the requisite experience is the key to unlocking a succession planning impasse. That person needs the skills of an evaluative mediator to bridge the gaps between the parties. For that to happen the person will need to know the law relating to business structures (partnerships; LLPs; companies). In addition, they will need a detailed understanding of: individual and business taxation; the agriculture sector and its policy framework and of the direction of travel of both agricultural and environmental policy; issues surrounding capacity, wills and proprietary estoppel; business accounts; direct experience of farming and farming families; and lastly (and possibly most importantly) an imagination. They will also need the skills to rapidly develop an understanding of the business, and the individuals involved, and also to generate significant levels of rapport and trust with those individuals. This is a formidable set of skills and knowledge.
Such an individual, deploying the skills of an evaluative mediator, will be acting more as an independent expert. Having determined the issues for the family, they can arrive at one or more solutions and create a roadmap for the implementation of those solutions. It is the advice on what to do next that most farming businesses desperately crave and this is where most facilitative mediation fails.
In reality, simple facilitative mediation is the wrong process for family farm succession planning. The nature of the dispute is not adversarial; the parties have no understanding of the wrong they are trying to mediate. They just know they need to do something and hope that the mediator is going to tell them what to do. What is actually needed is a process that combines the skills of the mediator to bring the parties together, the force of presence of an expert determiner, and the inventiveness, knowledge, and understanding of a trusted adviser.