Know partners’ expectations
Statistically, nearly 50% of marriages end in divorce. One primary reason a marriage may not succeed is that the couple failed to discuss, prior to the marriage, their expectations of their long-term commitment to one another. For example, engaged couples often do not talk about how money will be spent, how careers will change or not change, how children should be disciplined or how to deal with annoying in-laws.
Statistics show that nearly 60% of all business partnerships cease operating after the first five years of being formed. There are many reasons for this. However, my experience is that the primary reason business partnerships break up is that the partners do not openly discuss their expectations before the business starts.
Traditional family farms are operated as partnerships. For example, husbands and wives or parents and grown children operating farms are partners. However, more than ever, unrelated individuals, as either employee-owners or investor-owners, own and operate farms. In this type of arrangement, it is especially important that expectations be discussed and clearly expressed in writing before the partnership begins.
The following issues should be discussed when forming a non-traditional type of farm partnership:
• the contributions (cash, property, labor, etc.) the owners must make in order to become owners
• whether owners are required to make additional contributions or loans to the farm if the farm requires additional capital, and the procedure if some owners are unable to make additional capital contributions or loans
• whether all owners are required to guarantee bank loans
• the services the owners must provide to the farm partnership as employees and/or owners and the compensation for such services
• whether owners may be removed from the farm partnership as an employee and/or owner for any reason or in specified situations
• whether owners may withdraw from the farm partnership for any reason or in specified situations
• whether an owner’s employment with the farm partnership may be terminated for any reason
• the number of votes required to approve specific matters, such as those relating to the farm’s daily business, withdrawal or removal of owners, and amendment of formation documents
• whether owners must disclose business opportunities to the farm partnership (such as a “good deal” on land or cattle, free trips from vendors, etc.)
• whether owners are allowed to transfer their ownership interests whenever and to whomever they wish
• whether the remaining owners have the option to buy or must buy when certain transfer events occur, such as an owner’s death, disability, withdrawal or removal
• how the value of the farm will be determined upon a buyout of a partner, such as by fixed price, appraised price or other valuation method
• whether, upon death of an owner, excess life insurance proceeds will be paid to the remaining partners or paid to the deceased partner’s heirs
• how a partner buyout will be paid, such as by cash, cash and/or note, life insurance, or some other payment method
Farm partnerships with non-family owners require a great deal of planning and discussion while being formed. Often, owners are more concerned about the new facilities being built than the business entity being formed. Business entity documents are drafted as quickly as possible so the bank can loan the money as quickly as possible for the new project. However, to avoid a future “divorce,” business partners should take the time to discuss their expectations for the farming business.
Schneider is a partner in Twohig, Rietbrock, Schneider and Halbach S.C. in Chilton. The firm specializes in ag law.
This article published in the May, 2010 edition of WISCONSIN AGRICULTURIST.
All rights reserved. Copyright Farm Progress Cos. 2010.