In our features series looking at core business issues for new and existing farmers, Ben Pike takes a look at the issue of farming partnerships. Part one focuses on the top tips you should keep in mind when considering a farming partnership.
Partnership agreements have been popular with farmers for decades.
Their flexible, does-what-it-says-on-the-tin nature reduces the administrative burden, allows scope for growth and suits the family structure at the centre of many agricultural businesses.
They can also be a useful tool for new entrants who don’t have land or capital.
Agreements are commonly struck between parents and their children as a way of giving their son or daughter a stake and a responsibility in an existing business.
But any number of individuals with assets or skills which complement each other can also pool resources.
Farmers Guardian took a look at some of the key considerations for new entrants wanting to use a partnership agreement to get a start in farming.
John Rouse, farms and estates partner at Wright Hassall.
While the simplicity of a partnership agreement appeals to new entrants, the cost of bringing in professionals to help draft a document can mean some farmers never get something on paper.
Similarly, existing partnership agreements can run for decades without being updated to accurately reflect the current state of the farm.
The result can be messy, particularly at times of retirement, dispute, death or divorce.
John Rouse, farms and estates partner at Wright Hassall, says: “Partnership agreements need to be done properly and reviewed every time major decisions are made about the farm.”
Often used as a tool to aid succession planning, John says a badly-drafted or outdated agreement could actually work against the will of a family member.
“A common issue is people put the value of land in the balance sheet. If it is an old agreement there is often a term stating if one partner dies then the land passes to the other partners, rather than family members in the will.”
He encourages family partnerships to not be scared of bringing their son or daughter into the business, adding there is a misconception an agreement must give the new partner a share in the existing capital or assets – something which could become vulnerable if there was a family dispute.
“Often younger farmers are living and working on the family farm for a wage, but with no partnership stake in the business.
“Most people say they are worried about divorce which could lead to a payout of the farm’s assets to an ex-spouse, but when you bring a partner in you don’t have to give them any capital. Mum and dad will have built up the business and can still retain the value of the assets.”
Depending on the complexity of an agreement, costs start in the region of £1,200 plus VAT.
“Working with minimal capital can mean it may appear to not be cost-effective, but as the business develops and builds up it can be a vital tool so it’s worth doing properly from the outset.”
1. What each party is bringing to the table
Every member of the partnership should have details of what they are providing. Examples include land, capital, machinery or labour.
2. A capital share and profit breakdown
What capital does each member of the partnership have and who is entitled to what when profits are shared out?
3. Who is allowed to be involved in outside activities
If parties are allowed to have other business interests, what are they permitted to be involved in? Some partnerships do not allow partners to have any competing businesses and some exclude other business interests entirely.
4. How death and partnership break-ups will be dealt with
An agreement should be structured to set out what happens if someone leaves the partnership. In the event of death, a partnership agreement becomes a legal referral document and becomes extremely important.
5. Consequences of breaching the agreement
In certain situations, partners can be expelled if they do not fulfill their duties in the partnership, breaching the terms of the agreement.
6. Dictate the banking mandates
Decisions need to be made as to the amount of money an individual partner sign off, relating to invoices and other business costs. Who can sign contracts and to what value should also be discussed.
7. How decisions will be made
As with any business, matters which need resolving will have to be discussed and actions taken. You may want certain issues to require unanimous agreement in the partnership, while on other matters a majority could suffice.
As part of the Business of Farming series, Farmers Guardian has teamed up with FarmCare to launch the Business of Farming conference, which takes place on December 6 at Wootton Park, Warwickshire.
The free one-day event has been researched with farmers across the UK and will look at the core issues affecting businesses.
Farmers can expect access to a range of motivational speakers offering take-home solutions which will serve to benefit, and protect, farming in the future.