A crisis can seemingly jump out of nowhere and threaten any business’s operations, especially for business owners like farmers or ranchers. Having a crisis plan in place to deal with such an emergency can help maintain your business’s operations, and also ensure its longevity.
Take for example the case of the Doe family. This is a real family. It’s a family that asked me to work with them, and although I’ve changed their names for the purposes of this column, their struggle and their disappointment are also very real.
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The Doe family owned a large cattle ranch comprised of 600 cows, selling yearlings at approximately 18 months of age for finishing. The operation was a family-run affair with Mom and Dad at the helm and three of their four adult children — all well into their 40s — involved in the business on a full-time basis. (One of the children was previously involved full-time but eventually opted to walk away from the business.)
It was clear that the parents were in charge and that the children were employees with little say in the decision-making process. The parents managed the weaning and backgrounding process out of the family home with help from two of the family members, while the remaining family member was responsible for managing the cow herd at a secondary location.
Then, out of the blue, the crisis hit. Dad was found to be terminally ill and was told he had only six months to live.
As the family’s accounting advisors, we suggested a family meeting. We also stressed the importance of immediately implementing a succession plan.
After much discussion, we realized that Dad had two major concerns:
that Mom be taken care of financially; and
that the farm remain intact and NOT be sold.
Initially, Dad wanted to build the succession plan around a company that he had incorporated years ago but had left inactive. He felt this would compel the family to work together and keep the business intact.
A plan gradually evolved after a series of meetings which involved me as well as the family’s lawyer and a family counsellor to discuss family dynamics and the role each member would retain in the future.
Discussions about the varying legal implications of the different options for keeping the business moving forward led us to an important realization: if the entire family was to be involved in the operation, they would be unlikely to operate together in the long run.
We had to provide a way for the Doe family to transfer the operations intact, and also provide a method of splitting the operation without incurring an income tax liability.
For this exact reason, we decided against using a corporation; it would be too difficult and expensive to separate.
We agreed that the best course of action would be to roll the entire operation into a partnership. Dad would retain 40 per cent and each of the siblings would receive various percentages based on Dad’s perceptions of their contribution and active participation. Then, when Dad passed on, his partnership interest would transfer to Mom.
Choosing a partnership over a corporation allowed the family members to use up the balance of Dad’s capital gains deduction. It ensured that depreciable assets and inventories could be transferred at their tax cost — which in this case was considerable — and most importantly, the partnership would have the ability to unwind without incurring a tax liability.
The partners (in this case the siblings) would only pay tax if and when they disposed of their share of the assets. Also, they would all be able to use their respective capital gains deductions, and the land base was such that a division would enable each of the partners to continue their share of the operation unless they chose to take a different direction.
The active partners met on a regular basis when the transition from owner-managed business to partnership occurred. One partner managed the cow-calf
