Want a smooth transition? Understand your farm business structure
Before deciding how to structure your farm business, it’s important to gather background information.
Should you join an existing farm business or create one of your own? Should it be a corporation? Will you have a business partner? Should you personally purchase assets, or should the company do so?
Such questions can be daunting when getting established in both new and existing farm businesses. Before addressing them, however, it’s important to gather background information – and address even higher-level considerations.
Gather information - account for value
When an existing farm enterprise is already in play – the family farm, for example – it’s important to start by generating a clear picture of the current business, says Patti Durand, an FCC business advisor.
Consider the following:
- How is the business structured?
- Who is involved?
- Who owns which assets?
- How are income and expenses recorded?
- What’s the overall cost of production?
Many start their involvement with farm businesses in one of two ways: as an employee — often receiving informal or below market-value compensation — or in a labour-equipment exchange arrangement. Work commitments and the value of equipment used are often not documented. The intention is to eventually hand the business to the individual or group of individuals as the senior partner exits.
While both strategies can work, the crucial cost of production and operational information may not be transferred or fully understood.
“The result is successors may not actually know what full cost of production is. They may make decisions based on lower expenses because they’re not seeing the full costs,” Durand says.
“You don’t have to charge for everything. The missing piece is the communication on how generous the senior partner is being and what the true costs are.”
One enterprise, or multiple?
Understanding cost of production and profitability gets more complex when more than one enterprise is present within a single business. For example, if a farm consists of a grain and beef cattle enterprise, both should be individually analyzed.
If each enterprise is feasible on its own, the younger generation should then carefully consider if they prefer one enterprise over the other. If so, involvement and planning could shape around the preferred enterprise. Developing a plan for a new enterprise — or a separate business altogether — is also possible.
“It’s about figuring out the best fit for your family and business. Part of your process should be to poke holes in the plan. If you can’t do it, find someone who will,” Durand says. “That’s why advisors are so important. Ask them to debate and look at it with a critical eye. No option is perfect – there will be upsides and downsides.”
What do you really want?
The key to any planning process is knowing whether the stakeholders truly want to be involved in farming.
While this might sound obvious, Durand says it can take considerable time and experience before a given individual really knows. Develop a plan where the younger generation has a few years to work and assess what they would like to do before making financial or legal commitments. The time can also be used to transfer more vital business knowledge.
“Early ownership and commitments create the risk of expectations and obligations before they know if they want it,” says Durand.
“Consider creating an employment contract with the junior generation, with a timeline, such as two, three, or five years. It can give everyone space to try out both the business and the working relationships,” Durand says. “Then, based on that experience, it will be more clear what works — or doesn’t — and what business structure will suit the situation best.”
Questions to ask before moving forward:
- When does the senior partner want to step back?
- Do the new partners get along?
- Is a new enterprise altogether preferable?
Business planning resources
For more information on planning your farm business structure, check out:
Article by: Matt McIntosh