Personal risks

Where people – especially long-standing staff, close business associates or family – are concerned, judgement sometimes becomes clouded.

Small issues are allowed to grow and a business can slip into a vulnerable position almost un-noticed.

Take farm staff as an example.

Reliance on a key worker for a specific skilled operation is becoming increasingly common as farms seek to minimise labour costs.

At the same time key members of staff are becoming more skilled and specialised as their job roles and the machines they operate become ever more demanding and technical.

In bigger, integrated businesses a secretary or business manager may be equally pivotal.

Should that key person be unable to work then a drop in technical or commercial performance is inevitable.

To mitigate risk, you need to have contingencies in place to ensure that such an absence can be covered and that technical performance doesn’t suffer.

You should also consider the consequences if you are unable to work.

For many farm businesses the consequences of the owner or manager being out for even a moderate length of time could be catastrophic.

In these situations think about taking out Key Man Insurance that will pay out on the death, disability or diagnosis of serious illness of the named key individual.

It is also important to identify (and cultivate) key stakeholders in the business.

This may all seem very clinical and cold but such relationships, if ignored, won’t be there to help when things go wrong.

Stakeholders in a farm business include customers and suppliers, bank managers, advisers and government or agency representatives as well as business partners and family.

Build and maintain good relationships with them all.

To some, that will simply mean being a good person to do business with – paying invoices on time and delivering goods within specification.

Complying with protocols and legislation all help in building and maintaining harmonious relations.

When planning or developing the business, think who needs to know about any decision and keep them in the loop.

Forming and nurturing a wide network of contacts opens up new business opportunities and creates a form of business benchmarking.

Go to conferences and seminars; join groups – after all, on a personal level, most farmers often do need to get out more!

Family succession

While farm businesses have traditionally been passed onto the next generation this is becoming less common as farms become less viable and the next generation raises its aspirations for income and standard of living.

Poorly managed succession can risk future business viability.

According to a 2004 survey by the Small Business Service more than 100,000 businesses a year fail because of a lack of succession planning.

So, however simple it may be, draw up a plan.

It is said that the five major events that can severely impact a farming family or a family business are the five D’ s – death, disability, disaster, divorce and disagreements.

Planning a farm transfer without providing protection against the possibility of any one of these major events is gambling with your and your family’s future, whether you are entering, exiting or modifying the farming business.

Most people don’t like to talk about such things, or develop and put in writing contingency plans for addressing them.

You must!

Key risks associated with succession

  • Business lacking direction

Farm businesses can drift along with no direction, the older generation maintaining control for too long and not passing the business to the next generation when they have the drive and enthusiasm.

There is a danger that planning becomes focused on maintaining and preserving assets as opposed to investing and speculating on the longer term.

  • Financial planning

Without correct planning the business could be at risk from Inheritance Tax and Capital Gains Tax with potentially large financial consequences.

  • Tenancy

Will the next generation be able to succeed the existing tenancy?

There are implications with respect to succession over 1986 Agricultural Holdings Act tenancy agreements..

  • Lack of communication

Many assume that they have a successor within the family without first finding out the personal aspirations and plans of the persons concerned.

Family members’ expectations may be unrealistic.

  • Business profitability

The current farming business needs to be sufficiently profitable to allow investment in a retirement fund, otherwise this will be a drain on the farm in the future.

A lack of profitability may make the prospect of taking over the reins less appealing to future generations.

  • Skills shortage in the next generation

There is a danger that the next generation does not have the sufficient skills or experience to effectively manage the farm business.

  • A role for the retiring generation

It is hard to avoid interfering, especially if still financially dependent on the business, so make sure a role is clearly defined.

  • Unforseen events

Exiting or entering farming is a major life decision that requires you to make provision for events which could impede or even destroy the transfer or the farm business.

  • Will

The lack of a will presents the risk of not carrying out the deceased’s wishes in how the farm business is passed on.

It can also expose the business to tax which may have been avoidable with proper planning.

The list may seem daunting but most of it is common sense.

Don’t try to do it alone or just in family discussion.

Set the above as an agenda and either discuss with professional advisers or at least have a facilitator to help family discussions on the route to a solution.

Loss of interest

Odd as it may seem, just getting fed up with the daily grind is a risk.

And once that sets in neither technical nor business performance will be as sharp as it might.

Tough economic and trading conditions, solitary work, long working hours, repetitive daily routines and geographical isolation can understandably lead to feelings of disillusionment, isolation, depression or worse.

Various organisations and charities exist which can give advice, support, counselling, and help to those in need, these include:

The best way to avoid or combat these feelings is by having a social life or interests outside of the farm gate.

Holidays play an important role.

Divorce

In 2002 the number of divorces was at an all time high.

On average 1 in 3 marriages end in divorce.

On farms, long working hours, isolation, low incomes, stress, debts and the rest can put severe strain on personal relationships.

Given that even modest-sized farms will have a significant market value, the financial settlement of a divorce poses a very real risk to a farming business.

The law that governs divorce is the Matrimonial Cause Act 1973.

The Act states that the only grounds for divorce is the irretrievable breakdown of the marriage.

Given the high emotional and financial costs of a divorce and the risk that they pose to farm businesses, always try to explore alternatives.

One way forward might be seeking professional relationship counselling.

Relate offer one-to-one counselling and courses and can be contacted at www.relate.org.uk or tel 0845 456 1310.

Test your knowledge

How well prepared is your farming business to confront personal risks? Here’s a checklist to test yourself:

Q1 Have the core long term family assets been protected from divorce proceedings by…
   
a) Pre-nuptial agreements?
b) The use of trusts?
   
Q2 In the event of your untimely death do you have…
   
a) A will?
b) Life insurance cover?
   
Q3 Does the farm have a succession plan? And if so does it involve…
   
a) Family communication?
b) A retirement plan?
c) The transfer of labour and management?
d) An ownership transfer plan?
e) A contingency plan?
f) A timetable?
g) Professional guidance?
   
Q4 Are the private drawings taken from the farm…
   
a) Sustainable in the long term after allowing for re-investment in the business?
b) Sustainable in the short term?
c) Unsustainable in that they exceed the farm profit and are contributing to rising debt?
   
Q5 Is future pension provision…
   
a) Based on the assumption that core farm assets will be sold to fund retirement?
b) Based on the assumption that the on-going farm business will fund retirement incomes from annual profits?
c) Provided for by long term ‘off-farm’ savings put aside specifically for retirement provision?
   
Q6 Have vital members of the family or staff been identified and covered by key man insurance?
   
a) Yes
b) No
   
Q7 In a partnership or company structure, are you having properly convened and minuted meetings?
   
a) Yes
b) No

Sponsor’s message

RiskAware is a DEFRA-sponsored programme of risk management for agricultural consultants and farm business advisors.

It is led by Farmcare and Lantra and supported by the Futures and options Association, the HGCA, Barclays Bank, HSBC, The Royal Bank of Scotland, The NFU Mutual, the Environment Agency, the HSE, MLC and Frontier. Nine courses, from March to July, are being conducted across the country. To enrol contract info@riskaware.org.uk