Q: I'm 46 years old, and I just took over the farming operation from my father. My sons are both in their early 20s and want a career in the family business. I think it may be too early to consider giving them an ownership interest. Do I need a succession plan now?
A: The foundation of a business should be built on a comprehensive succession plan. Therefore, it is never too soon to implement a strategy designed to achieve your objectives. In an existing operation, like yours, implementing a plan strengthens the structure of the business; it identifies the who, what, when, where and how of the operation.
Many people often compare succession planning to estate planning or passing down the farm. They hesitate to establish a plan and wait to start the process as if it is a precursor to retirement. However, financial stability, leadership development and a viable business model will give your business stability and lasting strength.
Q: My daughter does not work in the farming operation. She is a stay-at-home mom for our three granddaughters. Her husband works with me and cares for the farm and the equipment as if it were his own. As I work through my succession plan, I'd like to give him an ownership interest. Is that a good idea?
A: I assume from the manner of your question, that you anticipate a cautionary response. If so, you're right. It seems as though you have a mutually respectful working relationship with your son-in-law; you value the quality of his work and appreciate his personal interest in your family.
But, the in-law relationship is not the same as family lineage. Your concerns revolve around the "what ifs” of the situation. What if he leaves your daughter for reasons only they understand? What if he decides to change careers or makes a seriously libelous mistake that financially jeopardizes the farm operation? What if, in a fit of frustration, he sells his interest? You can't control people, but you may be able to sidestep the potential for problems by maintaining family ownership.
Assuming your goal is a multigenerational legacy, why not pass the ownership to your daughter with a buy/sell agreement that limits ownership? With this arrangement, you may be assured that the farm will remain in your family for the eventual benefit of your grandchildren.
Q: My attorney has mentioned that there are two formats of a buy/sell agreement. What are they, and how do I decide which format is the best for my situation?
A: A buy/sell agreement serves as the basis for almost any buying or selling transaction. Whether increasing the interest of an associate or acquiring a partner's shares, a detailed agreement created in advance will specify the conditions of a transaction. It identifies who can buy, how to value the interest, what constitutes an offer and when one can be made.
Death, disability and retirement are the three events that may trigger a buy/sell transaction. Others include divorce, personal bankruptcy by a partner or conviction of a crime.
Both cross purchase agreements and entity purchase agreements have tax and economic consequences. A cross purchase agreement involves all owners of the business agreeing to purchase a proportionate share of the other owner's interest. This type of agreement can be cumbersome when owners number more than a few.
An entity purchase is just as it sounds—the business agrees to purchase, or in the case of a corporation redeem, shares of the business.