Agribusiness Perspectives Papers 1997/98

Paper 6/2
ISSN 1442-6951

Putting The Family Back Into The Family Farm

Paper 2 (of a series of 6 papers)

Geoff Tually
Senior Lecturer
Institute of Land and Food Resources,
The University of Melbourne
1997

[Paper: 1 | 2 | 3 | 4 | 5 | 6 ]

Every family farm business has the opportunity to provide business experience for farm family members and most farm family businesses will need to grow, if broad family goals (Paper 1) are to be achieved.

This paper looks at the following three (3) aspects:

• Exploiting the opportunity to teach farm family members business skills;
• The level or type of opportunities to involve family members in the farm family business;
• Using the expertise of farm service providers.

1. Exploiting the opportunity to teach farm family members business skills

Children are taught at school and tertiary institutions by employees, who specialise in an interest area. There is little or no opportunity to gain knowledge and experience in how businesses operate and students leave with an employee focus.

Families, who own or run a business have the opportunity to teach all their children, both their business operation and necessary business operating skills.

Providing a farm family business focus, as opposed to only a farm focus, should widen opportunities for the children. I asked an external student of mine why he sought to split up the family farm with his 4 brothers and sisters and why not use the farm to start five (5) businesses. The reply "I had not thought of that". You should build on what you have and not divide it up.

Two (2) advantages.

i) Children having business skills will always have a fall back position, if off farm careers experience difficulties.

ii) Children having appropriate (for their age) overall understanding and involvement, should be less likely to be involved in family disputes based on lack of knowledge of the farm family business.

To gain the greatest potential for farm family business growth, children need to learn business operating skills and be involved (as appropriate) in the business in their 20’s.

2. The level or type of opportunities to involve family members in the farm family business.

i) The effect of size of the farm family business. The ability to directly involve children in the farm family business will depend on the cash available for family needs.

l $30,000 is considered necessary to satisfy the cash needs of one family (figure 2, paper 1). This amount needs to be increased to allow for inflation, private school education and larger number of children (recently the parents of a farm family of six (6) children, estimated their peak cash needs to be closer to $50,000/year).

l $50,000 to involve one child (after completing school) full time in the farm family business. When the child marries this amount would increase. This amount would increase where there were a number of children in the family, etc.

For those families unable to expand the family farm business to produce the added income needed, then the farm could be used as a base for developing an off farm business,e.g., fencing/harvesting contractor, etc.

ii) The type of involvement of family members. There is a range of involvement possibilities, depending on the farm family goals.

a) Gifting a share of the farm family business. This is not (generally) a viable proposition, both from a business or legal position. Businesses need to grow and gifting only divides the present business. Once gifted, the recipient can withdraw their legal share from the business at any time, e.g., where a partner (son or daughter) is killed and spouse wants to leave, or divorce. Apart from the effects on other family members (inequitable involvement), the farm may have to be sold.

b) Children buy into the farm family business (land and business) setting up a unit trust (or company) allows for children to buy into the family business. Buying provides the following benefits.

l increases the equity capital of the farm family business. All children can buy in, including those with off farm careers;
l children will value their interest in the business and changes the focus to business and away from an inheritance focus;
l children develop their own assets;
l reduces potential family conflict due to parents inability to divide the family business equitably between their children;
l children learn business and investment skills;
l reduces the impact of family dissension, e.g., divorce, on the business (you get what you put in).

c) Separate the land from the business. The farm business uses the land. By separating the land from the business achieves the following family benefits.

l provides a specific business focus for children;
l provides for parents security as land ownership remains with them;
l easier for children to buy a bigger share of the family business, quicker;
l parents providing an appropriate lease of the land to the business, provides security to the business;
l family members wishing to withdraw from the business can sell their units to other family members, e.g., when parents retire.

Through using the above suggestions, (or similar) broad family goals should be easier to achieve.

3. Using the expertise of farm service providers to assist with ON farm planning (Business Plan area)

Farm Managers are generalists. They look at how all ON farm resources need to be combined to achieve farm family goals overtime.

Service providers are specialists. Tertiary education trains specialists, who on graduation are employed in their specialist field, i.e., as agronomists, livestock advisors, accountants, lawyers, finance advisors, livestock agents, etc. Each tends to focus on their area of specialisation and their advice is given in that context.

With any business you need to look at ALL the aspects of the business. Concentrating on specific parts of the business will not compensate for little (in some cases, no) attention to other parts of the business. Imbalances can occur where an overall perspective is not followed e.g.,

l using contour banks to reduce water run off may reduce quantity of water to fill dams.
l spending large quantities of cash towards the end of the financial year to reduce tax liability, could well effect the whole business and is not generally cash use effective.

The following planning frame may assist with

l looking at the relationship of the components of the farm business and placing into context, advice sought from specialist service (farm and business) providers;
l developing a plan of how to involve family members in the farm business;
l developing a business plan;
l basis for a family conference/regular discussion.

Using the planning frame

The planning frame uses seven (7) very separate areas of an ON farm business. Not all areas will be involved with every farm, e.g., with cropping only farms, the livestock areas will be deleted, etc. All areas interact and by working through the planning frame weak areas are highlighted and needed advice and/or skills sought.

Example (broad overview only, far more detail would be needed, e.g., a separate page for each entry).

[Paper: 1 | 2 | 3 | 4 | 5 | 6 ]