Plan for farming family business risks

Identifying and acting on risks to your business is more important than ever.

The pressures of running a farming business have increased substantially over the past few years. This can cause tension in many families, often leading to communication breakdown, misunderstanding, frustration and possibly divorce.

The increase in land prices and working capital, together with a volatile marketplace, calls for a new style of management to effectively deal with the risks of things going wrong. Whether it is a health and safety issue or family break-up, it is often very expensive and should be avoided.

Bank managers also confirm that lending margins are likely to be higher in the future, as many lenders say they will increasingly base charges on assessed trading risk rather than asset value. Therefore, businesses that have identified and quantified their risks with associated mitigation strategies, regularly managed by a cohesive family team, may be able to negotiate better borrowing terms in the future.

Risk management and regular family meetings can prove a worthwhile investment and often result in increasing profitability.

In addition to day-to-day production, the biggest challenges farming families face include:

• Communicating effectively within the family
• Dealing with generational differences such as father-son relationships
• Managing the expectations of the non-farming siblings.

It is difficult for families and individuals to deal with these pressures without some form of logical, structured approach and there are several tools available. These include a formal annual general meeting (AGM), a farming family constitution providing clarity by setting out the family’s goals and rules, and a risk register that identifies and quantifies each risk, enabling a mitigation strategy to be formed.

Most larger agribusinesses and farmer-owned co-operatives have regular management meetings and proactively manage their risks through a risk register. Many larger family farms could benefit from adopting this strategy.

Changes do require an initial impetus and this is usually driven by the younger generation. Many farming families do not communicate effectively or allow individuals, particularly the younger generation, to discuss their goals and aspirations in the business.

Therefore a formal family meeting – the “family AGM”, ideally chaired by an independent person – can bring fresh life into a family business. (See left for a typical agenda.)

These meetings, involving the whole family, need to be held at least once a year, when there are particular tensions or big projects are going on.

The independent chair could be thought of like a non-executive director and could be someone such as your solicitor, accountant or bank manager.

This can be followed up with a formal family constitution, which sets out the goals, values and rules of the family, a mission statement, succession policies and how to vote on and deal with major decisions.

The constitution can be very succinct, just a few pages, but when you have the family AGM it can be used to give structure to the meeting.

The actual risks to a business are usually managed by drawing up a risk register as shown in the table on the right. The risks can be assessed in terms of likelihood and effect.

The register would be used more than any of the other tools and should be reviewed almost on a quarterly basis.

The most important point is that successful businesses are driven by motivated and skilled individuals.

Therefore, profit is mainly about people and not necessarily numbers. But farming businesses which have adopted these tools have often increased in profitability as a result.