Balancing need with ability to pay

A critical juncture in the life of the family agribusiness is the transition from one generation to the next. One of the reasons for this, explains Trevor Dickinson, is that the capacity of the business to pay any form of remuneration has to be balanced with the requirements of the individuals who own and operate it.

In many family agribusinesses, succession is a period not only of highly charged emotions, but of danger, for it is at this stage that the capital integrity of the operation may be put at risk. Most family businesses that progress through the classic phases of business growth (survival, stable, professional and institutional) have figured out how to transfer ownership down the generations without threatening the capital base.

A major deterrent to building and preserving an adequate capital base for a family agribusiness is the senior generation’s perception that it must somehow harvest its equity during the succession process. That perception is neither right nor wrong.

Family businesses are sold every day to facilitate such harvesting, and, for the senior generation that built the business, selling may well be a natural and highly appropriate culmination of a lifetime’s work. But while the sell option may work for the senior generation, it is not a particularly effective transfer tax strategy and may mark the end of the business as an economic resource for the family.

Access to a stable capital base is essential for the long-term success of most enterprises. And no business can sustain its market position, let alone grow, when its capital base is dramatically diluted each time the mantle of ownership shifts from one generation to the next.

Fair market value, as traditionally defined, is a poor measure of the worth of the family agribusiness for the purpose of the intra-family succession of ownership. A more realistic and accurate transition yardstick is need, together with ability to pay.