There are many instances that may lead to the need to dissolve a farming partnership. John Robson of rural chartered surveyors Robson & Liddle looks at the key issues and resulting consideration of valuing the business and its assets.
I have advised families in the farming sector for long enough to know that many forego the formalities of a partnership agreement which document the terms of their business together, but by definition partnerships do not last forever and even if there are no fallouts eventually the partnership will have to be valued, say on the death of a partner.
The original intentions of all the partners have to be clear.
Defining a partnership
A partnership is defined as “the relationship which subsists between persons carrying on a business in common with a view of profit”.
Unlike a Company or Limited Liability Partnership, there is no legal requirement for a partnership agreement and no formalities are needed to start one. In other words, the moment you start running a business with someone you are in a partnership.
Herein lies the danger for farming families. If you don’t have a formal partnership agreement, one that is bespoke to your individual circumstances, the terms of the partnership are governed by the Partnership Act 1890. The Act is a rather antiquated statute that may not reflect the informal agreement you thought you had with your business partner or partners.
No partnership agreement – The common issues
Someone wants out
If relations are breaking down and one of the partners wants to leave, the Act states that the partnership must be dissolved, all the assets sold and the proceeds split between the partners. While partners can agree to come to other arrangements, this is not always possible if relationships have become hostile to the extent that one or more parties is unwilling to compromise or negotiate.
Concerns about conduct
The Act contains no provision allowing a ‘misbehaving’ partner to be removed. The only options are to dissolve the partnership or negotiate that partner’s exit from the business. This gives the misbehaving partner a strong position in any negotiations because anyone advising them will know they cannot be removed without going through a costly and time-consuming process.
Death of a partner
With no partnership agreement in place, death of one of the partners can also lead to the need to dissolve the partnership. While there is generally greater scope to resolve matters through negotiation, there’s no guarantee the parties will agree on the valuation of the deceased partner’s share and it can often go against the provisions set out in a deceased’s’ Will, which is upsetting for all concerned.
Mental or physical incapacity
If a partner becomes mentally or physically unable to work in the farming business, there’s no way of removing them from the partnership under the Act, the only option would be to dissolve the partnership.
Valuing the business assets for partnership dissolution
If circumstances lead to a requirement to dissolve a farming partnership, the partners must sell off the business and its assets. This is all the more distressing in family farming businesses where the intention is usually to protect the land for future generations.
While there is nothing to prevent the remaining partners continuing the family business under a newly formed partnership, they may not have the resources to do so. This is especially the case when a partner dies and the deceased’s estate takes out his/her share.
Remaining partners may therefore have to sell business assets to raise money or, alternatively, raise finance. In such circumstances, it’s vital that the interests of partners are fully represented and that professional advisers are engaged to value the business and its assets accordingly.
This will include not just the value of the land and property assets, but also assets in the business such as Basic Payment Scheme entitlements, machinery, etc.
What to do next
We have covered in our blog before, what goes in to a farming partnership agreement. If you don’t currently have a partnership agreement in place for your farming business, I would highly recommend you speak with your business partner(s) about putting one in place and seek legal advice. It’s easier to do this now while no issues or disagreements are apparent.
If you do not have a partnership agreement and you are concerned about some of the above issues, then again seek legal advice as soon as possible.
While our expertise as rural chartered surveyors is valuing the land and property, we work with a number of solicitors that specialise in the farming sector and who would be more than happy to assist with issues relating to partnership agreements.
For advice on any rural land and property issues, call John on 01768 254 354.