Due diligence duties for the new farmer
Legal advice for the new farmer: check out what you are taking over, warts and all, writes
Are you planning on taking over the family farm business?
I have written here on numerous occasions about the tax and legal implications that need to be examined before transferring the family farm, for both the transferor and the transferee.
Besides the aforementioned, there is also the financial element to examine before putting pen to paper.
You need to know exactly what you are being asked to take on.
Even if you are receiving the farm as an unconditional gift, you should still carry out financial due diligence — checking the numbers and making sure there are no black holes or hidden financial issues or any cashflow issues.
The most important aspect of the due diligence process is taking note of discrepancies between what is reported and what is actually going on.
Ask lots of questions.
If you don’t get satisfactory answers, ask again and ask why.
Most important in the due diligence process are the business’ financial records.
These include balance sheets and income statements for past years, projected financial statements, insurance coverage, tax filings, and sources and uses of funds statements.
You need to establish what monies are owed to various suppliers.
You need to be given up to date redemption figures in relation to any bank loans attached to the farm.
Having done your research, you should verify the information you have been given about the farming enterprise.
Due diligence should give you a realistic picture of how the business is performing now, and how it is likely to perform in the future.
It should also highlight any issues or problems which might need warranting or guaranteeing.
Due diligence is about much more than just the finances of a business.
You need to ascertain what you are getting into, what needs to be fixed, what it will costs to fix, and what liabilities you are being asked to take on.
You should examine all business records and documents before you take over the family farm.
Look at all those that might incur liability for the business, including contracts and invoices and charges on assets.
When in the process of taking over the family farm, the last generation may be very attached to what they’ve built.
Whether they started the business or were gifted it or inherited it from a relative, they no doubt have invested a great deal of hard work and time over the years.
Just as starting a business takes a great deal of energy, moving on from one can be just as taxing,and surprisingly emotional, too.
Be sensitive to your family members’ feelings as you embark on this latest chapter in your family’s business history. It can be hard for the person handing over the business to someone else, and they may be very private about their affairs, but you cannot be shy about finding out about exactly what you may be taking responsibility for in the future.
You may have worked alongside the proposed transferor for some time, and know a great deal about the finances of the business already, or perhaps you were given very little access to financial information, or you are not familiar with the farm you are planning to take over.
With privilege comes responsibility.
Regardless of the type of situation you find yourself in, it is certain that you need to establish the financial position of the business you are being asked to invest your time and future in.
It’s better to make an informed decision, to avoid regret. Better to know ‘warts and all’ before it is too late.
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