We humans have many kinds of partnerships in life. Some are romantic, others civic or social in nature and sometimes business in nature. My years in lending to farmers taught me some lessons on what to consider when working with partnerships or developing a partnership.
Breaking up can be painful for many that are at the end of a partnership. Sometimes the losses can be painful for all that are involved. Sometimes there are winners with the breakup of a partnership and sometimes it appears as if all parties involved have lost and will suffer great pains. I often hear that business is business, but many times there is great emotion in business decisions, and emotions can override facts and figures.
When stepping into a relationship, it is best to think long term and know that things will be personal down the line. Never go into a business partnership without putting some thought into it. I would also suggest discussing the partnership with legal advisers. I often find that a farm LLC or farm partnership was put together informally or with just the advice of one legal adviser.
If you are a minority partner or member, it is best to have your own legal adviser as too often the minor partner’s interest is just a side bar or not even considered. A poorly thought out exit strategy can lead to great legal expenses down the road and some very expensive emotional expenses too. This advice goes for partnerships that include family and/or non-family partners.
I often hear the word trust when I suggest getting a pre-exit agreement in place. Actually, I do believe in trust, but trust needs to be verified by a formal written agreement. Too often I hear comments that one of the parties does not trust the other partners(s), spouse, work ethic, or commitment to the success of a partnership. In lending I learned that sometimes it is best to walk away from a lending relationship rather than get tied up in the middle of a partnership breakup down the road. It is also important for lenders to review operating agreements before fully moving into a lending relationship with a business.
I have often have suggested that potential business partners work at a short-term trial (2 to 5 years) to see if the partnership can grow and develop into a full business partnership. One example is in having a son or daughter return to a dairy farm. Perhaps it is best to have the potential next generation partner take out a loan with FSA to purchase some cows and use a shared facilities agreement to house and milk cows with the potential parent partners.
Paying one’s expenses and loan payments can be a great teaching tool and a great way to allow for learning, earning, and the willingness to take on risk and rewards in the business climate. If things do not work out, the cows move out and the rental agreement ends.
Yes, there may be some hard lessons learned and some emotional damage, but a formal partnership was not created or destroyed. This testing step is also a good step with non-family members in a dairy farm business setting. If things work out during this test phase, then additional steps can be taken to move forward towards a formal business partnership.
In many dairy farm family settings, the formal LLC business structure approach works great and many have success with gifting shares of the LLC to the next generation moving into farm ownership and business management. I also have learned from many a kitchen table discussion or long hours on the phone that some families have not experienced success with the LLC structure and gifting of shares.
Again, many issues can come about that impact what was planned as a perfect farm business structure and family plan. Too often health issues, divorce, and the entry of additional family members to the mix can cause a major disruption in the hopes, dreams, and business plans. Sometimes partners just do not want to continue down the previous planned path. It is much less expensive to get legal advice from the start, and that is by engaging an experienced agricultural law team early in your plans.