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Managing profit: Have a talk before you add new business ventures

Getty/iStockphoto/Jevtic dad and daughter shaking hands in corn field
Multi-generational partnerships that don’t first agree on a diversification strategy often run into trouble.

In my most recent blog, I discussed ways to set farm policy when farms show higher-than-usual profits, such as in 2021. That reality has also prompted discussions of how I personally or we collectively should invest inside and outside of our business. 

When I polled a gathering of eight producers recently about what percentage of their net worth was tied up in the business and farmland versus other investments (stocks and bonds, other businesses, non-farm real estate, etc.), the answers ranged widely. And opinions on what is ideal range widely, too. 

I’m not a financial advisor, and diversification as a risk management strategy is another discussion. But in my work, I see how this question impacts partnership decisions in a couple of ways. 

First, your diversification goals impact how important distributions beyond living needs are. Which sometimes leads to conflict over distributions (see prior blog). Second, it impacts how the business must prepare for the exit of a partner.

Making the decision early on to plow everything back into the business suggests the business will have to provide an income stream to retiring partners, even if they wish to eventually gift the assets. You’ll want to plan well ahead of time for that. Or, if your retirement plan is to have significant savings outside the business, you must make sure the distribution policy supports that.

Furthermore, you want to have confidence that your partners are investing likewise if that’s the plan. I see multi-generational partnerships that don’t explicitly discuss and execute a strategy on this topic run into trouble. 

I’m also hearing partners talk about whether they want to diversify their collective investments within their shared asset pool. That obviously requires agreement on the investment strategy. 

Bottom line: it’s worth a conversation to confirm alignment and consider others’ knowledge and desires on the topic. 

This is part two in a series. Read part one: Managing profit: Avoid tension with this farm policy

Davon Cook is a family business consultant at K Coe Isom. Reach Davon at [email protected].

The opinions of the author are not necessarily those of Farm Futures or Farm Progress.  

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