3 business pitfalls to avoid

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I spend a lot of my professional life helping agricultural producers build and manage their business operations. The “darker side” of my profession is the time I am forced to spend helping families mediate their business problems.

In the past, I have shared ways to improve a business; this month, I’ll focus on problems that can destroy a business.

Trust, but verify 

Just because someone else in the operation is responsible for a task does not mean that family members should not monitor the business.

I was recently asked to help a family with their debt problems. One family member was the business agent for the family. He paid all the bills and was responsible for dealing with the lending institution. All family members signed the annual loan guarantees at the bank, but no one really paid attention. Imagine the family’s surprise when the banker called one of the other family members with concerns about the business’ financial position!

The business manager had not shared the financial position with his partners.  When the business experienced financial stress due to falling milk prices, he kept the bad news to himself rather than alert his partners to the problem. He said that the other family members should have realized that low milk prices were creating a problem. Fortunately, the family had sufficient real estate equity to be able to restructure their loans

To avoid this, share financial records, including loan balances, at least quarterly.  Hold regular, monthly family meetings and encourage each person to discuss problems or opportunities in their area of responsibility. Involve all family members when making decisions. Take action to solve potential problems before they get too big.

All in or all out

Everyone must be completely committed to the business.

For example, a family member said the business was not providing enough income for his family so he developed a separate part-time business to supplement income from the farm. At first, he used his time off to promote the new activity. But soon, the new business started to take priority over his regular duties.

Family members complained that the family member was devoting more time to the new part-time business yet was still drawing the same salary. The mood within the family deteriorated to the point that it was forced to take on additional debt and buy out the family member.

If you are a partner in a business operation, you must devote 100 percent of your time to the business. All funds are shared with the business, regardless of the source. If the business is not generating enough funds to support its members, then the family must decide if the business should continue, fold or be restructured.

Develop a succession plan

Lastly, a common problem revolves around how or when to bring the next generation into the family business. Anger develops between family members when one member’s child joins the group and other family members balk at allowing additional members to join.

You must address the problem before it is time for a new family member to join the business. The family business can add new members only if there is a demand for their labor and if the business can support the new member. 

Establish the criteria for bringing in the new member, such as net income, retirement of an employee, increase in size of business and so on. Have an open discussion with your family business advisers to confront the issue within the family.  Remember, not all family members can join the business operation. Sometimes, it’s the age of the new member and timing that completes the decision to add a new member.

Darrell L. Dunteman is a partner in Bonnett and Dunteman, Certified Public Accountants and Consultants in Bushnell, Ill. Dunteman also edits the Farm and Ranch Tax Letter, a monthly agricultural tax publication. Contact Dunteman at: farmandranchtaxletter@earthlink.net.



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