We are family...of course we see things the same way.
Written for Farm Futures and published in the February 2024 issue.
Most families get along great and, on most days, enjoy working together. This can lead the family to believe they are in alignment on essential issues. But, often, there is enough differences between some fundamental principles that someday will cause friction.
Alignment around these principles falls under an underused area of transition planning called family governance.
They are critical in keeping the peace and creating a strong family farm.
So, what areas of alignment are important when family farms are at their best? Below are three common areas we see addressed during well-implemented transition plans. This is not an exhaustive list, but each one of these areas has a simple and written agreement that all parties sign.
Good Governance Addresses these 3 Areas.
Compensation –
Who gets paid what? How is it determined? Are we being paid rent? Are we paid part of the farm profits as owners?
When family farms are small, maybe just a single owner growing the farm and family, drawing from the farm checkbook is easy and fast. This compensation method seldom works past one generation.
The most successful family farms have a compensation system that rewards those who bring value to the farm, either in capital or skill. Many of these agreements do not treat everyone equally, but they are fair.
Perks –
This agreement is a close cousin of compensation and defines all the perks of operating a farm. These include using farm equipment for personal use, building the off-road Jeep in the farm shop and taking up space, farm purchase of vehicles, filling up the suburban at the bulk gas tank, food allowance, etc.
A mind-boggling array of perfectly legal and tax-efficient ways to use farm assets exists. However, suppose there aren’t some parameters around what is acceptable to all. In that case, there is a real chance some of the family will feel taken advantage of.
On a side note, as farms become larger, many families conclude that perks must be limited and keep business more separate from personal life.
Ownership –
Here is an altogether common occurrence.
One partner transfers his shares of the farm corporation (or land) to his kids at a young age. Some of these kids work on the farm, and some will never.
The second partner looks at this and does not like the idea of being in business with a younger generation based on bloodlines. He believes ownership should be based on merit, and this merit is proven over time by work.
Neither one of them is wrong. People have different ideas all the time about transferring wealth. However, it seldom ends well when one family spreads ownership one way, and the other family spreads ownership another way.
How the next generation joins the business, when they join it, and what’s expected of owners must be aligned with all parties. While many documents supporting family governance are not legal, per se, this document could have some legal attributes of a buy/sell. You should probably get legal blessings before it’s signed.
Conclusion
Some of the strongest family farms we have the pleasure of working with don’t assume much if anything. They talk through potential issues before they are a problem and document their key principles for operating. Is it easy to bring this up? No, it isn’t because invariably, someone will feel that just talking about it means people don’t trust each other. But trust, alignment, and transparency all link arms together to form a tight family and business bond that will help your farm and family avoid the issues that tear misaligned families and businesses apart.