Brothers finalize buy-sell agreements.
Nothing moves at warp speed when you’re dealing with intricate, often emotional, contracts between family farm partners. But Greg and Jim Moes are making steady progress updating the buy-sell agreement for their 1,800-cow MoDak Dairy and land they hold in partnership.
The Goodwin, S.D., brothers are part of Farm Journal’s Legacy Project, which helps farmers transition their business to the succeeding generation. Before they can do that, the Moeses have to get their business plans updated.
The previous agreement required each brother to buy out the other’s interest within 60 days of death or exit from the business. That’s an incredibly short time, says Josh Sylvester, Certified Financial Planner and a Legacy Project team member. Simply getting a death certificate can take a month, and then it takes even more time to execute a life insurance claim. The new agreements stipulate closings within six months of a “triggering event” such as death, divorce, legal separation or insolvency.
To simplify things, the Moeses’ attorney, Tom Linngren, drew up separate agreements for the land and the dairy.
In the land agreement, Greg and Jim agree not to sell, assign or encumber their interest to anyone without first obtaining the consent of their brother. The exception is that they can sell or assign their land interest to a spouse, lineal descendant or trust established for a spouse or lineal descendants.
The other key component is determination of value. The agreement says value shall be fixed annually or more often by unanimous consent of Greg and Jim. If more than two years pass without an update, either party can get an independent appraisal.
Payment for the land will be amortized over 10 years in the event of the death of one of the brothers. A 20-year payout was agreed to for all other triggering events. Interest is set at 1% over prime rate.
For MoDak Dairy, each brother owns half the shares. The agreement stipulates that if one partner leaves, the last share of stock will be transferred to the remaining brother for $1. That will allow the remaining brother to have majority voting control if the other brother transfers his stock to family members.
If one of the brothers is no longer actively involved in the business (defined as “devoting as least 40 hours per week to the operations”) and does not sell stock to his spouse or lineal descendants, that will trigger a sale to the remaining brother.
Value of the stock is set at 75% of book value based on the last quarterly balance sheet of the corporation. Buyouts are based on a 10-year payout.
The agreements are fail-safe mechanisms, Linngren says. “Five years down the road, they can agree to ignore these agreements if they want to transfer ownership in some other way. But if one does and one doesn’t, these agreements will be the rule.”
- April 2012