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Family Business Matters       11/03 09:28

   Four Ownership Conversations You Need to Have With Heirs

   Here are the ownership conversations you should have with your spouse and as 
a family.

Lance Woodbury
DTN Farm Business Adviser

   Multigenerational family farms and ranches face important decisions about 
their futures. Some decisions focus on how the business will grow or adapt to 
changing markets or new opportunities. Some decisions have to do with who will 
eventually lead the business. Yet another set of decisions determines how the 
business -- the land, livestock, inventory and equipment -- will be owned in 
the future. Here are the ownership conversations you should have with your 
spouse and as a family.

   1. Who will own the business? There are two levels upon which to consider 
this question. The first is on-farm owners versus off-farm owners. Should all 
siblings inherit business assets equally regardless of their involvement in the 
enterprise? This may solve the parents' goal of treating the next generation 
equally, while simultaneously creating problems and conflict by mandating a 
business relationship between your adult children who don't work together.

   The second level of ownership relates to the differing amounts of time spent 
by the younger generation working in the family business. Should everyone own 
equal proportions of the business, even if some have worked there longer than 
others? Equal ownership may create resentment by those who have invested more 
time in the business, but a differentiated ownership structure can feel 
punitive to those who were born later and, by no fault of their own, can't 
catch up to their older siblings' years of service.

   2. How will the ownership transfer occur? Outside of agriculture, small 
businesses are often sold to finance the senior generation's retirement. But, 
in agriculture, the capital intensity and generational buildup of wealth, the 
opportunity for land rent to provide retirement income and the potential estate 
tax lead most families to gift assets to the next generation. When families 
don't specifically talk about this "gift or sale" question, people end up 
guessing or assuming an answer. The assumption of a gift can give an impression 
of entitlement. And, with an intended sale of some assets (for example, 
equipment), a window of time for tax planning and financial preparation is 
beneficial. A conversation well ahead of a transition is helpful to all.

   3. When will the ownership transfer occur? If the ownership transition will 
happen upon the death of the senior generation, the "kids" who inherit the 
business may be retirement age before they become owners. Many family members 
resent the fact that when they inherited the business, it was time for them to 
consider passing it on to their kids. They never felt like owners. But, if the 
ownership transition happens before death, the senior generation may find it 
hard to give up control. Finding the right time to start the transition is hard.

   4. How do partners get out of business together? When business ownership 
transitions from a two-person parent structure to a next-generation sibling 
partnership (with in-laws nearby), the odds are high that someone will 
eventually want to exit the partnership. A thoughtful approach to potential 
exits is one of the best gifts the senior generation can offer. Should a 
selling partner's equity be discounted? What terms protect the business while 
not creating animosity between siblings? How will assets or company shares be 
valued? There are no cut-and-dried, easy answers to these questions, but there 
are models and examples that can help you tailor a strategy that fits your 
goals as a family business.

   These discussions are difficult but necessary, and a "right" answer is 
elusive. Your job for many years has been to run the farm or ranch, or to 
manage the family assets. Now, your job also includes leading your family 
through an ownership transition. Tackling the four questions mentioned here 
with help from your professional advisers, if needed, can prepare your family 
business for a successful transition.

   **

   Write Lance Woodbury at Family Business Matters, 2204 Lakeshore Dr., Suite 
415, Birmingham, AL 35209, or email lance.woodbury@pinionglobal.com.




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