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Avoid the pitfalls of a business breakup

TAGS: Management
StockSeller_ukr/Getty Images farmers shaking hands
KEEP IT PROFESSIONAL: Breakups happen, even in business. The key is to keep everything professional, even if you’re dealing with a family member who wants to leave the business.
Have a solid buy-sell agreement in place, and separate business from personal issues.

There’s nothing pleasant about a breakup or divorce, but sometimes they happen. The same goes for breakups in farm business partnerships. They’re aren’t pleasant, but sometimes they happen.

You can’t plan for everything five or 10 years down the road, but there are things you can do to soften the blow of a partner who wants to leave the business, or the sudden death of a farm partner.

In some cases, a partnership split is better than staying together.

“It can actually lead to a much better quality of life for the partners if they're looking to exit,” said Mike Peachey of Acuity Advisors and CPAs LLP.

Speaking during the virtual Pennsylvania Dairy Summit, Peachey talked about a business arrangement he was involved with 20 years ago where two brothers decided to end their business agreement and go their separate ways. One cashed out, and the other decided to keep operating the dairy farm. They both did well for themselves.

“That turned out well for everyone," Peachey said. "There were two ingredients in that — there was adequate profitability for the surviving partner to buy out the other. The other, they both had the desire to move on, which was stronger than pride to prove the other was wrong.

"I think a foundation of trust and a foundation of communication really carries the day toward a quality business relationship. If those things are in place, the economic and financial pieces are easier to deal with.”

Mike Hosterman, a business consultant with AgChoice Farm Credit, said communication is key, but so is separating business from personal relationships.

In most cases, the buy-sell agreement is crucial, he said. A buy-sell agreement is a legal contract that stipulates how a partner's share of a business may be reassigned if they die or leave the business. 

“You don't have to do them as a start, but things change,” Hosterman said. “Look at buy-sell agreements on a regular basis, every couple of years, things like that.”

Hosterman talked about a situation he was involved in where two cousins in a partnership decided to end it. Hosterman said the two had a well-thought-out buy-sell agreement, which made clear what the value of the business was and how the assets would be divided. One of the partners ended up buying out the other via a 10-year buyout.

But he’s also seen families fighting it out over the future of the business. One situation he talked about involved a dairy farm where a milk check sat at the post office for over a year because the family couldn’t agree on anything, and there was no good documentation to back up any claims. The family ended up going to court over it.

“The business is still here, but it came at a high cost,” Hosterman said.

Peachey said the buy-sell agreement is your default, something to fall back on.

“It’s what you signed up for. It also means you can do something else, if you wanted to,” Peachey said.

Mistakes to avoid

Hosterman said that one of the biggest things he sees are disagreements over how much each person’s share is in the business. So, checking the buy-sell agreement and possibly updating it is important, he said.

In terms of a buyout, Peachey said that if the value has outpaced the number of years it can be paid off, a revision to the agreement might be necessary. Getting someone else to do an independent financial valuation might help in this case.

If you’re partners with a family member, Hosterman said it’s important to keep business and personal issues separate, especially if something happens to one of the partners.

“If the business is set up well, you’ll know how the family will be taken care of,” he said.

And don’t be afraid to spend money on drafting paperwork. If that means hiring a consultant or attorney to help draft a buy-sell agreement, go for it, Hosterman said. Don’t just print something generic from the internet and fill it out.

“Make sure the agreement builds around the goals, and get it right on paper,” he said. “Spending the time upfront and the extra money to get it done right is the key.”

You should also make sure that the buyout is good for the business, Peachey said, because when a partner decides to go, their interest essentially turns into a debt service against the farm’s books.

If a buyout isn’t the right way to go, some good business counseling or consulting might be better.

“Or look at it like vehicle maintenance. Talk regularly about these things, just like fixing your equipment,” Peachey said.

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