28 December 2001

GOFORANORDERLYEXIT…

FARMERS who plan to leave agriculture need to do so with as few problems as possible, and a new NFU initiative with accountants and solicitors aims to help them do just that.

"Making an orderly and dignified exit from a business which has been in the family for generations is something many farmers have struggled to come to terms with," says NFU panel member Tyrone Courtman, of business advisory firm Cooper Parry.

"But the reality is that operating in a global market-place means a significant number of agricultural businesses have already suffered, and will continue to suffer, the same plight as ship-building, mining, textiles and the motor industry."

So when should the decision be made to quit, and what is the best way to maximise assets?

"That is very difficult to answer because farming is a way of life rather than a business venture, and it carries with it a sense of pride and self-esteem," says Mr Courtman.

It is not surprising that farmers often fail to recognise the signs of potential economic problems, instead preferring to continue in the vain hope that the business will improve. Many would prefer to sell the family silver before admitting that changes are inevitable. For many it is often too late, with the legal process taking over and the liquidator being called in.

Battening down the hatches and waiting for better times is probably not a viable option for many farmers facing financial difficulties. Mr Courtman says decisions need to be primarily business-based with personal and emotional considerations put to one side.

"For those making an orderly exit, it is advisable to seek professional legal and financial help," he says. "It is important because shutting down a business is not an everyday occurrence. While it can be a relatively simple exercise, to do so in a cost-effective manner, preserving value and thereby maximising realisations, requires considerable skill and knowledge."

For starters, it is essential to understand the commercial, legal and tax issues that could have an impact on the end result.

Crisis point

"The problem with trying to dig oneself out of a crisis is that once all the expansion, selling and part-time work issues have been exhausted, reality sets in. Then the only realistic option is to cease trading, realise business assets, pay liabilities and then distribute any surplus to the business owners. Do not delay this decision – in a declining industry it can only serve to reduce business value."

The first consideration must be to establish whether the business has sufficient assets to meet all the liabilities, and whether there will be enough cash resources to meet them as they fall due.

"This is important because it can have serious personal consequences for both individuals in a business and the directors/employees of limited companies. It will determine the priority order of asset distribution, for example," says NFU panel member Philip Lyon of chartered accountants Mazars Neville Russell.

"If payment is dependent on fixed-asset realisation, timing and proceeds for which are uncertain, it might be necessary for the business to seek protection using one of the insolvency rescue mechanisms, such as voluntary arrangement."

Consideration should be given to the continued trading of the business to allow for the realisation of stocks and work in progress, which would otherwise be lost if the business ceases to trade. From a corporate perspective, ceasing to trade can have dire tax consequences, such as trading losses becoming unavailable for relief against gains arising on sale of assets. Tax is payable, while losses go unrelieved.

"Once trading has finished, consider plant and equipment valuations," says Mr Lyon. "Decisions on how to realise maximum value from these assets require professional input. For example, could it be better to sell whole assets or constituent parts?"

Realising full asset values requires careful thought and consideration for a whole plethora of legal reasons. For example, are premises freehold or are they occupied under a lease agreement? Owning property that is leased to other businesses can also have legal implications, particularly with respect to gaining vacant possession.

Security

"Has the property been put forward as security against borrowings?" says Tom Watkinson of NFU legal panel firm Roythorne & Co. "And what view might the bank have once it knows you have ceased trading? It is essential to consider alternative uses for the buildings to realise a higher value, and even look to utilising the pension fund to acquire the business premises.

"In terms of equipment valuations, check whether it is on lease or hire purchase. It could be that the contract has to be seen through to the end, so it is essential to understand what legal obligations come with such an arrangement," he says.

In making an orderly exit, issues around employment and business suppliers need to be sorted out. Suppliers have rights, as do employees. Contractual issues need to be addressed to avoid opening a minefield of legal issues and complications.

For example, when ordering stock from suppliers for products such as seed for next year, what are the implications of cancelling the order? The key must be to try to maintain a good relationship with suppliers and hope that they understand the predicament. Agreeing what is owed, and to whom, needs to be managed by legal and financial professionals to reduce potential problems.

"Employment is a very complicated area, and one that needs to be understood," says Mr Watkinson. "It is not a simple exercise making someone redundant, as they have contractual entitlements. What are the implications if the business is unable to fulfil its obligation to the employee, and what happens if the employee pension is under-funded?

"There are also issues around an employers obligation to continue submitting returns to government departments, particularly PAYE, NIC, VAT, and in respect of companies, corporation tax returns and annual accounts."

Once the correct procedures are in place, enabling the realisation of assets and settlement of all liabilities, tax-efficient extraction of any remaining cash should be considered, says Mr Courtman. In the case of a corporate business, a liquidator will be needed to turn the assets into cash and to conduct a solvent members winding-up. &#42

&#8226 Maximise asset value to meet liabilities.

&#8226 Realise stock value and work in progress.

&#8226 Consider tax relief issues.

&#8226 Maximise plant and machinery valuations.

&#8226 Consider potential legal and financial input.

&#8226 Consider employee and supplier rights.

&#8226 Extract residual cash from the business.

Take steps to maximise the value of business assets, says Tom Watkinson.

Find out if the business has enough assets to meet liabilities, says Philip Lyon.

Decisions taken when quitting should be business- based. Dont be afraid to seek professional advice, says Tyrone Courtman.