Business Clinic: Which enterprise to prioritise for investment?
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Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.
Mark Charter, head of estate management at Carter Jonas, and Gavin Smith, of the private client team at Thrings, offer advice on succession planning.
See also: Business Clinic: What are the legal and tax issues on gifted barn?
Q. Our family owns and runs an arable and dairy farm of 450ha in an equal shares partnership between myself, my husband and our two daughters. We all believe in keeping it as a mixed farm.
Our daughters have been running the business for some time now, with one managing the arable side and the other the 300-cow dairy.
While this works well day to day, the business needs investment and each of our daughters is championing her enterprise.
This presents a dilemma as to whether to prioritise grain storage, drying and handling or a new dairy. Since the future of the business lies more in their hands than in ours, my husband and I don’t want to impose our views.
Please can you advise us on approaches and strategies to help us arrive at a sensible joint decision.
Mark Charter, Partner, head of estate management, Carter Jonas
A. Treading the thin line between encouraging your children, but not dictating to them can be difficult, but that shouldn’t mean you absent yourselves from the process. As equal partners with a 50% share in the business, you still need to remain active and involved in its management, particularly from a tax perspective.
This is a valid dilemma – the viability of each part of the business requires reliable equipment and therefore both investments can be justified.
Formalise decision making
To arrive at the right decision for the partnership, I would advise formalising matters to a certain degree; family disputes in scenarios such as these tend to develop because arrangements have become very informal and loose.
When there are big decisions and big investments to be made, bringing some formality to the partnership by having, for example, quarterly meetings which discuss strategy and objectives for the business are advisable.
This brings some discipline to the process and would allow each of your daughters to present their business case.
Over a series of meetings, the partners can consider each case and eventually decide on the right outcome for the business.
You can play your part as facilitators to the discussion because together you have created an official forum.
Debate and discussion is healthy, but it is crucial that when partners leave the room having made a decision, everyone fully commits to it.
Discuss the issue, put everything on the table, come to a decision and then unite behind it.
Neutral party may help
In order to achieve this, asking a neutral party such as a land agent or consultant to assist is wise when there are big decisions to be made.
In the same way that having a non-family member at the Christmas table can prevent a falling out, giving someone external a seat at the table can diffuse tension.
This person can chair partnership meetings or help review the merits of each case, assisting the group as they come to a joint decision on the best route forward, and stripping emotion from the process.
In a case such as this, there is no ‘right’ answer. What’s key is helping you find the right way to make the right decision while never forgetting that you are a family before, during and after the decision is made.
Gavin Smith, senior associate – private client team, Thrings
A. You are taking a very measured and scrupulously fair approach to a problem that can often be complex.
You have two goals here – to create conditions that will support the long-term future of your farming business, and to protect the harmonious relationships in the family.
Together, you have already made some of the most important decisions – to keep the business as a mixed farm, to keep it in the family with clear responsibilities for each daughter, and to support both in their enterprises as equals.
Your most immediate dilemma is how best to use the proposed investment, and the most efficient ways of doing this.
There are several factors at play here and it’s important that, as a family, you agree on the priorities for investment, and their urgency.
For example, you may all agree that one side of the business is in more need of maintenance or a cash injection, while the other could wait.
In this case a gift of cash or assets during your lifetime could be made to the first daughter while the second could then receive more under your wills to balance things up.
Tax implications
Consider also that generally speaking, investment in agricultural business and assets are likely to benefit from agricultural property relief or business property relief for inheritance tax purposes.
It is wise to keep the ownership of any buildings, land or assets within the business rather than in personal ownership, which protects them if, for example, either daughter were to divorce.
Another question is what may happen if either daughter’s enterprise fails, or if she wishes to leave the family business.
Ensure also that any partnership agreements – whether equally split between you as a couple and your daughters or weighted differently – are well structured and clearly define how your share of the business will be handed down either during your lifetime or after death.
Also, ensure wills are up to date once those decisions and agreements are made.
With so many factors and family dynamics in play, yours is as much a practical dilemma as it is a legal one.
Good communication will be essential to understand what each party would like to achieve now and in the future.
Taking advice from succession, tax and agricultural business advisors at this point will avoid problems down the line.
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