Succession Planning: Part Four – Becoming partners on the family farm
Last month we discussed the vendor financing option for those farmers transferring their farms onto their children and allowing their children to pay off the price over time.
If a straight up sale doesn’t suit your family, another option is to have the younger generation gradually buy-in and become ‘business partners’ on the family farm.
What are the advantages of a gradual buy-in?
A gradual buy-in allows:
- The younger generation to ‘get their foot in the door’ to the farming business without going into a large debt;
- The older generation can wind down their responsibilities and time commitments on the farm without having to retire completely before they are ready;
- The older generation can structure the buy-in so that they can retain control over the business decisions until the younger generation are experienced enough to make decisions about the farm themselves;
- The younger generation can gain experience from working alongside the older generation while having a stake in the business.
Are there any risks?
Definitely! A partnership can have a range of risks if not set up correctly, including having to deal with the following situations:
- If there is a disagreement between the partners – how is it resolved?
- If a partner dies – what happens to the farm? It may end up in the hand of the spouse who you don’t want to be in partnership with.
- If a partner falls ill – how is the farm run?
- If a partner wants out of the partnership and the other has no money to buy him/her out or they can’t agree on a price – then what?
- If a partner gets separated from their spouse? Will it affect the farm in any way?
- If a partner wants to buy a bigger share of the partnership and the other refuses or they can’t agree on a price – what happens then?
- If a partner stops pulling their weight in the day to day running of the farm and leaves it up to the other to do – does the other partner have to put up with this?
- If a partner takes out loans against the farm without the other’s consent – is the partner who has no knowledge liable for the debt as well?
- If a partner gets into debt and files for bankruptcy – what happens to the farm?
All of these scenarios can have a massive impact on a farming business and can lead it to its ruin if there is no effective written Partnership Agreement in place.
How can you protect yourself?
Before going into partnership with anyone (family or not), talk to your solicitor and get a Partnership Agreement.
A Partnership Agreement can create guidelines between all partners on what is to occur if any of the above situations arise (among others). When preparing a Partnership Agreement, all business partners must mutually agree on what processes they are to follow for each particular situation. The best time to prepare a Partnership Agreement is at the start and while the relationship between the business partners is still good.
A good Partnership Agreement will cover things such as:
- What contribution each partner will make in terms of time, money, land, goods or services;
- What everyone expects to get out of the venture;
- How decisions are made;
- How disputes arising between the parties may be resolved,
- What is to occur when someone dies/loses capacity or wants to exit the venture etc.
There is no way to avoid disputes but you can avoid unnecessary legal and other costs by agreeing in advance on what is to occur if certain foreseeable events occur.
You can also include in your Partnership Agreement a mechanism to resolve unforeseen disputes. If a dispute cannot be resolved then ultimately there should be an exit strategy set out in the Partnership Agreement. An example of this is someone buys the other out or the partnership is wound up (after the sale of the business and farming assets).
A good exit strategy in a Partnership Agreement needs to include:
- The trigger events that would cause the exit strategy (ie. death, illness, bankruptcy, marital breakdown, etc);
- How the exiting partners’ share in the farm is valued (ie. current market value or a set formula);
- When and how the sale price is paid (ie. up front payment or vendor financing arrangement);
- What is to happen to any joint loans over the farm (ie. refinancing or each party be liable for a portion of the debt).
If you are at the stage of thinking of entering into a partnership with your family to run the family farm, it is best to talk to your solicitor about entering into a Partnership Agreement.
At McKays, we have experienced commercial lawyers with farming knowledge that can assist you with drafting your Partnership Agreement and can give you expert guidance that will work in practice for your farming business.
If you have any questions or would like to know more about Partnership Agreements, please contact our office.