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Family Business Matters       07/01 10:26

   The Importance of Structure

   Spend time on one of the variables in the operation over which you have 
control.

By Lance Woodbury
DTN Farm Business Adviser

   During the course of working day in and day out with family farms and 
ranches in transitions, we spend significant time talking about structure and 
strategy. Structure has to do with the way the farm or ranchland, the 
equipment, livestock and other assets are owned today and how they might be 
owned tomorrow. Strategy has more to do with how we might improve or grow the 
business so that it remains viable for the future. Both topics are critical to 
the success of the family business but need to be addressed in a certain order. 
Here, I will focus on business structure, while in the future, I will focus on 
business strategy.

   THE CHALLENGES

   The ownership structure is important to get right for several reasons. 
First, agriculture businesses are capital intensive. If assets are not placed 
in the right type of entity or are not owned by people who make good partners, 
money can end up trapped in the business, used on tax payments or, ultimately, 
used on partner buyouts instead of improving or growing the enterprise.

   Second, agriculture -- and land in particular -- is for many a generational 
business. Unlike a publicly traded stock or other liquid assets, people often 
intend to own land over decades or even centuries. Parents often gift land to 
their children or grandchildren. Several families jokingly tell me that the 
words "sell land" are never to be spoken in their presence. My point is that if 
you don't have a thoughtful, long-term approach to the ownership structure of 
your land, you may end up spending hard-earned money on dismantling what took 
several decades and generations to build.

   Third, agriculture businesses can be complicated. Utilizing government 
programs like crop price subsidies, crop insurance, disaster aid and 
conservation programs require a sound business structure with documented 
participation by owners. Tax strategies involving various expense deductions, 
income deferrals and depreciation strategies can make it challenging to know 
where you stand regarding your financial performance. In short, a structure 
that doesn't address and make sense of these unique dynamics can put the 
business, and its owners, at risk.

   A WAY FORWARD

   One way to approach structure is to first recognize the benefits and costs 
of what you have in place. Sitting down with your accountant and an attorney 
together and understanding your structure and its pros and cons may take an 
investment of several hundred dollars or more, but the return can be far 
greater in terms of saving or protecting capital for the future. 

   As you discuss your structure, there may also be an opportunity to 
understand your family's or partners' expectations about the future. Does 
everyone want to own the business in the future? Does anyone want to exit? What 
financial expectations does everyone have? Do partners expect dividends or 
distributions? Are people planning to gift their ownership to their children? 
These kinds of questions foster long-term discussion and planning that can help 
the family prevent future conflict.

   When you combine a working knowledge of your current structure with your 
family members' or partners' thoughts and goals for the future, you end up with 
a chance to make deliberate and thoughtful changes or modifications. Too often, 
these questions are asked after a taxable event or a tragic accident, or under 
the gun of a government deadline, and opportunities to improve or capture more 
benefits are missed. 

   Find the time to understand and manage your structure, which is among a few 
variables over which family agriculture businesses have some control. 
Structuring your business properly and occasionally reevaluating your approach 
can contribute significantly to achieving your family business goals.

   **

   Editor's Note: Write Lance Woodbury at Family Business Matters, 2204 
Lakeshore Dr., Suite 415, Birmingham, AL 35209, or email lance@agprogress.com. 


(AG)

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