Family ag operations face a common problem: When should you add a family member to the operation? A recent consulting case illustrates that point to a T.
The dairy in question milked approximately 400 cows and also operated a 2,500-acre crop operation. The business started about 15 years ago and operated as a partnership between two brothers. Even with the recent poor milk price, the operation was financially sound. The farm employed three additional employees in addition to supporting the two partners.
One of those employees is the son of the eldest farm partner. The other two employees are long-time employees. One of them is actually older than either of the partners and was hired by the father of the current business owners.
Meanwhile, another son of another partner just graduated from college and wanted to join the operation.
Without terminating one of the existing employees, the older farm partner did not feel the farm could afford to hire the new graduate. Tempers began to flare between the family members.
The family had hired the son of one partner, said the mother of the potential new employee. “Since his son was hired, we have a right to hire our son,” she said.
In addition, neither partner wanted to terminate the non-family employees. And, based on my analysis, there wasn’t a need for an additional employee. To arrive at a solution, we explored the following factors.
Can the farm support more?
One of the first analyses I perform regarding adding family members, is “are there enough plates at the table?” In other words, is there enough work and cash flow to support this person?
Records from the Illinois Farm Business Farm Management Association indicate that family living expense for an average farm family exceeded $70,000 for 2008. This doesn’t mean all the family living expenses must come from the farm. But, the farm must have enough cash flow to provide a fair level of compensation for a new family member.
Just because the first son was able to join the operation is not a guarantee that there will be a position available for additional family members. The business’ first obligation is to the existing members. Sometimes joining the family business is based on birth order and the availability of a position on the farm.
Family members should be hired only if they are capable of meeting the needs of the existing operation. Family members should be evaluated just like any other employee. If a family member cannot properly perform a job, he or she should not be an employee. Existing family employees should become “partners” and receive ownership only after a period of evaluation and apprenticeship. All existing family business members should approve the addition of any new family member based on merit, not just family relationship.
We often rely on non-family members to help operate our farms. Terminating an employee simply to provide a job for a family member sends the wrong message to other employees. If an employee feels that he may be replaced as additional family members are available, why should he remain as an employee with your farm?
The family agreed to hire the new graduate only if one of the existing employees retires or the operation can expand to support the employee. The new graduate will accept employment with a local agribusiness firm until an opportunity is available with the family. The family also developed procedures to admit family members into business ownership and to evaluate the addition of other family members in the future.
Sit down today to develop your own plan to prevent potential problems in your family and your business.
Darrell L. Dunteman is a partner in Bonnett and Dunteman LLC, Certified Public Accountants and Consultants with offices in Havana and Bushnell, Illinois. Contact Dunteman at: email@example.com