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Making a family business work

Family members working together in a farm business can be successful, but there have also been classic failures.

In my work as a finance consultant in the farming industry, I often see sons brought into family businesses far too young. They do not have the emotional stability or the experience. Additionally, they may not have worked for other farmers who have different viewpoints.

Younger farmers today often have different expectations than their older dads. They appear to be more into instant gratification, expect everything to be up to a higher standard, whereas their dads may have been very careful with their money, e.g. driving old tractors and making do with old gear.

Managing conflict between family members and the business requirements is often difficult and existing relationships can be aggravated. The upside of course is as the economy hardens and as labour becomes more difficult to get on the farm, then the demand for family labour and family involvement in the business is going to increase.

It is interesting to note that in New Zealand statistics show only 26% of New Zealand children end up working in their family businesses, compared with 90% in the UK and 48% in Australia. This does not particularly relate to farming businesses, but in businesses overall.

Some years ago there was an international survey completed by the University of Canterbury, which identified the following issues in New Zealand relative to family labour:
  • Many people believe that a business is strengthened when family members are involved in it. The Indian family who runs the corner dairy are a classic example. I am sure that they have very clear lines of communication regarding who is responsible for what. It also appears that everyone is prepared to accept very realistic incomes from the business.
  • In farming, family in the business works very well where farm succession is involved. The farm may have been in the family for a number of generations, and this can continue, but it requires a lot of detail, a lot of focus and the right structures.
  • Children should only go into the farming business if they want to.
  • Prior to involving children in the family business, it is imperative that they gain experience by working elsewhere first.
If you are thinking of bringing family into your farming business, treat it as a business decision. Insist that suitable experience be acquired off farm by those involved, prior to joining the family business. Employment contracts, job descriptions etc. should be produced for members of the family just as you would your other staff.

Once family are working in the business, hold family meetings with them regularly to identify the key issues and review their progress. A good consultant can help here to provide an independent view and help take emotion out of decision making.

Sometimes there are issues within the parents' relationship which can cause problems for the family business. For example, the mother and son have a very close bond: she feels the son can do no wrong, but the husband feels that the son needs to pull his weight more.
It is important that each member of the family take full responsibility for their part of the business and be held accountable. It is all too easy for dad to hand over a simple, soft system, find that the family member is not performing and then have great difficulty in rectifying the problem. If things don't work out, then it may be difficult to extricate yourself from the situation and may even preclude the farm remaining in the family long term, therefore it is crucial to get it right.

Another important consideration is to set really clear boundaries. Clear boundaries can be set with ownership structures and one of the best examples of this is 50/50 sharemilking. In this case the son owns the stock and the plant and receives half the income from the parents and sets very clear boundaries. The 50/50 sharemilking model still works, but often the division of income is too great for the smaller farms.

Family trusts are another very good vehicle for getting clear definition for families. If the family trust is formed with your son having one-third share, then you can explain to him quite easily that under the family trust, on your demise he will own a one-third share. If your son buys the cows and leases the farm from the family trust of which he has a one-third share, then once again he can see clearly where his future lies.

Younger people need to be able to see the future and the process to get there; they need to see how they are going to be financially benefited from working in the family business.

Family businesses can also bring a lot of unhappiness and distress and it is important to get the structures right. Poorly constructed wills and succession plans can also cause substantial stress and unhappiness, but that's another day.

In summary, bringing members of family into your business can be a good thing. It can strengthen up your labour pool and give you good succession. The downside is that often it doesn't work, everybody has different expectations, there are no meetings, there are no controls and everybody gets bent out of shape. This is likely to result in unhappiness and strain within the family.

When bringing in your younger family members into your farming business, remember that they may get married, or get into relationships, then what are the issues and how is your succession looking then? Treat the whole procedure in a business-like manner and set boundaries right from the start. Doing these things can only work to your advantage.

Remember, if you do have long term plans, family trusts are excellent vehicles for protecting your investment from predators.


 

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