Family partnerships are really common in ag. Sometimes they are structured as partnerships but companies, family trusts or even as employer/employee relationships are also common. Regardless of structure we often have siblings working together, and parents and adult children working together in farming businesses.
One thing that has come up a few times in discussions with our Farm Office Plus group and face to face workshops recently is the issues of inequity in these multi household family businesses.
Now often this is about the big stuff – how land and wealth are divided, however there are a lot of professionals out there that will help with that job. What I want to talk about, and what I tend to get queries about, are the equity issues around work, pay, and household expenses leading up to and after transition has occurred.
I guess the question is, how can the ongoing operation and the finances of the family business recognise the needs of different families at different life stages. How do we happily work together?
Putting some thought into what you are doing, why you are doing it and how you are going about it is a good start. Hopefully you come up with something like this – a common understanding.
“We like working together, we have different strengths and skills and our business is more successful because of these differences. We know that pooling capital into one business gives us advantages of scale and reduces risk. We try our best to keep things fair.”
With that as a guiding principle, let’s deep dive with a bit of Q & A.
What do we do when someone works more than someone else?
In the non farming world, wages are a payment for time and profit is a return for investment. In farm businesses it’s murky. There may not be a profit every year and it’s not often strongly correlated with hours worked.
The businesses that struggle with this the most are those with siblings at different life stages. These stages can be loosely divided into the party stage, the work all the hours God gives stage, the busy with family stage and the getting a bit worn out stage. Sometimes there is a bit of overlap between the stages and some people don’t go through all of them.
There are a couple of ways to deal with this and you might use one or both.
1. It’s swings and roundabouts – We just accept it won’t be exactly the same. Unless you are clocking on and off each day at the same time all year it’s impossible to get working hours equal. It’s easy to assume someone is working more or less than they are when you don’t see them all the time. Sometimes you might be working more then a health or family issue comes from nowhere and you are the weak link for a bit. I have to fly the flag for the people in the office too. The management and admin side of the farm is important and should not have to be squeezed in at night or into what would otherwise be family time.
2. Pay a bonus or an hourly rate – If someone is clearly doing more, every week, month and year in a co-owned business where there is an expectation of equality in labour contribution, moving to an hourly rate or paying a bonus for the person working additional hours might be the fairest and most equitable thing to do.
How we split expenses associated with education of children?
This is a really common one. In some family businesses, educational costs of children, particularly boarding school costs, are paid from out of the farm bank account. When a family business consists of one couple with children this makes perfect sense. It gets a bit tricky when there is more than one family or step kids, especially because the likelihood of identical numbers of children, ages, stages and education costs is almost impossible.
One option is to allocate the same amount of money per family for total drawings and educational costs are paid out of that. One family with less expensive needs at a particular time may reinvest in the farming business to draw down again on later, or take to use for another off farm or family opportunity. A similar strategy might be appropriate for housing and renovations.
What do we do when one household costs more to run than another?
Someone’s phone bill is higher, someone burns more power, someone is always booking stuff up at the co-op that is really a personal expense, someone else uses more water, someone is always running into town.
Perhaps it’s always the same someone.
It might not be household costs in your family, it might be an expensive campdrafting addiction or a kid who keeps blowing up motorbikes 😏. What ever it is, it’s nonsensical to think things can be kept equal.
There are three ways to deal with this and you may use one or two, or a bit of all three.
1. Don’t sweat the small stuff – In the scheme of things does it really matter? Are outdated ideas of the virtue of a household run on a shoe string over inflating the importance of these expenses. When compared to the total turnover of the business, are these amounts significant? Is keeping track of or focusing on this issue distracting us from other business issues that will have more impact on productivity or profitability?
2. Develop a policy – Sometimes the foundation of some of these issues is a lack of understanding about who pays for what. Making it clear what gets paid out of the farm account, putting it in writing and revisiting it each year is a great idea. Going over it with a new family member or as adult children come back into the business is also necessary. Keeping personal expenses out of farm accounts keeps things private and is a straightforward way to deal with anything that is not tax deductible.
3. Keep track of it – If the expenses and discrepancies are large and significant it may be a good idea to keep a track of it. A spreadsheet, a common written record or an app like Splitwise might be worth considering.
What do we do when some kids work more than others?
I had an interesting chat to someone years ago who had recently wound up a three sibling family partnership. She said she wished she spoke up for her son who happily worked unpaid every weekend and holiday through his high school years for nothing. His siblings and cousins helped too, but only some of them and then only when it was a busy day of livestock work. There is no better way to reward time and effort than with payment. It’s ok for parents to handle pocket money for the little things primary school aged children do from their own pockets, however there are many advantages to wages being paid to high-school aged children from the farming business.
What to we do when some wives or partners work in the business?
This is similar to the kid one isn’t it. The idea that we pay kids might take some people a little bit to get their head around. The idea that we pay a woman to do the things that women were born to do 😜 (cook, clean, office work) is an abomination to some people. I could and possibly will write a whole article on this one. To keep it short, women working in family farming businesses, including ones they have an equity stake in, should be paid for the work they do, in the house or in the paddock, that is necessary for the operation of the farming business.
Sorry I have ignored the blokes, but generally speaking, they are more likely to get paid, if they are not, they should be too.
What do we do when someone puts money into the business to get through a tough spot?
Farms are capital hungry businesses, particularly in tough years or when growth is a priority. If money coming out of personal accounts into business accounts for any length of time this can be formalised with a loan agreement and interest paid. Set an interest rate based on the rate the business pays to the bank for transparency.
Some of these issues have tax and accounting implications that I can’t comment on. There may be better or worse ways to structure recognition of contributions of time or money into a business from a legal perspective. I really suggest that if these are issues in your family, now or moving forward that you talk to your accountant about them. I am happy for you to forward this article on to start the discussion.
Share the love
[Sassy_Social_Share]
