No subject seems to trouble families more than splitting a partnership apart. One brother I know agonized for years about ending a business relationship with his alcoholic sibling. He felt obligated to be his brother's keeper. Another felt he was carrying the weight of brothers who weren't as ambitious about growing the farm, but he didn't want to disappoint his father. It ruined many Thanksgiving dinners for him. DTN's family business adviser, Lance Woodbury with Ag Progress in Garden City, Kansas, tackles this subject in his current DTN column. So I asked him to share more details on how to make a break, but not bust the family.
Marcia Taylor, DTN: Lance, you tackled a tough issue in your last column by talking about splitting up the family farm business. Why is a partnership split so hard?
Lance Woodbury: The statistics for family businesses in general suggest that holding the enterprise together is indeed difficult – somewhere less than 10% make it on to the fourth generation. So there will undoubtedly be breakups and buyouts along the way, which is why it is important to think about the process you use to split up.
Unfortunately, choosing to bring an end to the current business partnership is framed by most as a failure. But if getting out of business together is the right answer, and if you do it well, why isn’t that considered a success? I prefer to think about splitting up as really just one of several “succession alternatives” faced by the family business.
I know several families that have gotten out of their agriculture businesses and it was the right move – they did it at the top of the market, and in many ways succeeded. My point is that success or failure in a family business is more nuanced and contextual than absolute.
Marcia Taylor, DTN: You mentioned the importance of communication and collaboration between professional advisers. Why is that so critical?
Lance Woodbury: There are lots of moving parts in a family business, especially in agriculture where so much capital is at work. There are significant tax issues associated with selling or distributing operating assets like grain and equipment, partly due to how much flexibility farmers have had with income deferrals and bonus depreciation. And with relatively expensive farm and ranch land, the associated improvements, and debt tied to the land, there are often banking issues that take some time and strategic thinking to sort out. There are also legal details, often tied to buy-sell agreements, financing, land leases and even environmental liability. Finally, the emotional attachment to land and multi-generational farming and ranching businesses warrants consideration when thinking about how to communicate.
If you stack up these legal, tax, financing and emotional issues, one professional can’t do it all. But the professionals are all doing work that ties together, and therefore they need to be working together.
Marcia Taylor, DTN: You also suggested people talk about “what if” scenarios when considering a break-up. How do you do that?
Lance Woodbury: Many times, the fear of splitting and the assumptions about consequences keeps people from productive discussions. To counter, I simply put a hypothetical situation on the flipchart – usually with their accountant or other advisers in the room – and we start working through the pros and cons of that solution. I tell people that we aren’t making a decision today, we’re just trying to gather information.
As we sort through details, people usually become more comfortable with the idea of major change, and it either becomes clear that splitting is not as scary as it once seemed, or that the consequences of splitting make it worth exploring a different solution. We can always explore other solutions, right up until the paperwork is signed. The act of talking about it is not the same as doing it. Talking about it helps people figure out what they want to do.
Remember that family businesses have several metrics of success. Financial success is important, but so are relationships between family members. While you may give up the economies of scale that go with holding wealth together, sometimes a division or sale of the business creates more financial flexibility, greater certainty and improved relationships. And those are metrics worth considering right along with longevity.
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