Sunset Farms Inc. has changed mightily since its 1847 founding in Allenton, Wis., just northwest of Milwaukee. The log cabin that housed the first settlers is gone. Across the road in a farmhouse built in 1909 lives descendent Paul Wolf, 41, one of four brothers who took over farm operations in 1972 when their parents incorporated the business.
When Wolf's parents began operating the dairy farm, it had 13 cows. That number has swelled to 1,350 head of cattle—600 cows are milked three times a day; the rest are young stock and dairy steers.
For a short time in the 1970s, the two oldest brothers operated farms side by side. But the family soon realized one dairy would be more efficient, says Wolf, Sunset's dairy herd manager.
By working together, they "found out what it was like to be off on a Sunday and have vacations." Presently, the farm has 18 full-time employees, 11 of whom are owners, some of whom are not family members.
The fact that many U.S. farms face similar metamorphosis from a small, single-family farm to a business operated by multiple employees and owned by some non-family members was confirmed when Wolf attended The Executive Program for Agricultural Producers (TEPAP) as a 2008 DTN scholarship recipient.
TEPAP is administered by Texas A&M and teaches mid-career producers about a wide range of advanced agribusiness topics, including succession planning and farm-tailored buy-sell agreements, contracts in which the owners agree that if one dies, or leaves the business for any reason, the other owners purchase his or her interest in the farm.
Wolf's parents began their estate planning in 1972 when the farm was incorporated. The family attempted to put together a buy-sell agreement, but the initial attempt never panned out. Wolf and his brothers often discussed buy-sell agreements but never formalized their discussions.
It took the prompting of their business consultant, Rod Wautlet of Agri-Business Consultants in Madison, Wis., to get serious. Wautlet and Troy Schneider, an attorney with Twohig, Rietbrock & Schneider, S.C., Legal and Professional Services in Chilton, Wis., assisted the Wolfs in designing the agreement. Schneider grew up on a dairy similar to Sunset Farms.
"The four brothers set the base plan," Wolf says. They then presented it to "the next generation," which includes an assortment of children, in-laws, nieces, nephews and non-family members, for feedback. The agreement was examined from all angles by all involved. Wautlet and Schneider provided outside perspective and caught some omissions, such as a disability agreement.
Customize the agreement. When people put together a buy-sell agreement "one of the most important things to remember is one size doesn't fit all," Schneider says.
They need to consider what it will take financially to make a transaction happen, he advises. Are the life insurance policies enough if a payout needs to be made? Will there be enough cash flow to run the operation and leave a surviving spouse financially viable?
"Historically, farms have had one problem: liquid cash," Schneider says. "The best time to establish those ground rules is before you need the rules."
When setting prices in a buy-sell agreement, certain values can be stipulated, Schneider explains. For example, a buy-sell agreement could cap land prices at $5,000 an acre and limit land appraisals to agricultural use, excluding residential or industrial uses.
"Most buy-sells that I have seen do use the after-tax valuation in their calculation and Sunset uses a similar format," Wautlet says.
The buy-sell agreement Sunset Farms developed is the guideline for handling situations that may arise. For example, someone may die, get injured, quit or an owner may have to be fired, Wolf says.
"When something happens it's probably not going to be as clear-cut as the buy-sell agreement," he adds, but the agreement is the framework for decision-making.
Sometimes it is easier to deal with a death—which often involves life insurance policies—than, for example, a 30-year-old owner/employee becoming disabled, Wolf points out. The buy-sell agreement provides guidelines on how long the business should support someone if he or she is injured.
"A lot of times disability insurance is an answer," Schneider says. Otherwise companies can design their own policy. But since private policies cost companies money, disability insurance is a common choice.
In the case of an employee leaving or a divorce, you're often dealing with limited liability corporation units or shares in a corporation rather than the buying or selling of assets, Schneider explains.
Some parameters that protect buyers and sellers are already recognized in the courts when dealing with corporate shares. This includes a minority-interest discount, which would apply to an owner who owns less than 50% of the business's outstanding shares. Because a marketability discount could also apply, the market for shares in closely held agricultural businesses is often limited.
The Sunset Farms Inc. buy-sell agreement also sets a framework for succession planning, a process the eldest Wolf brothers have just begun. "It [the buy-sell agreement] is a benefit to the employees. It sets up the rules. Everyone knows where everyone stands and that helps form the basis for decisions," Wolf says.
Buy-Sell Agreements
Starting Points
Nothing in a buy-sell agreement means anything without good numbers. Obtain detailed financial data from your accountant or farm management person before attempting to discuss and develop an agreement.
Bring outside people, such as your accountant, consultant, financial planner and/or banker, into the planning process to offer a different perspective.
Come up with talking points—scenarios of things that would trigger a buy-sell agreement—such as the three D's: death, divorce and disability.
Draft, discuss. Redraft and re-discuss. All owners should understand the agreement's content. Revise until the agreement is truly comprehensive and understandable.
Potential Pitfalls
Failure to update the buy-sell agreement can be disastrous. If an agreement is put together and left to sit on a shelf for 20 years it can become useless and actually may become harmful. Annual updating is ideal—regular maintenance is easier than a 15-year overhaul.
Take into account the cyclical nature of agriculture when developing agreements and setting prices. Traditionally, price setting is done during the initial appraisements. Over the years, though, prices can vary considerably. Weighted averages can be useful in keeping prices appropriately set.
Don't be afraid to request language you can understand. Minimize "lawyer language." Explain the "why" behind the agreement in the document. Even phrases such as "It is the owner's philosophy..." can be used.