Family partnership - trapped!

[Stockwell]

First thing to say is I doubt many 2 man livestock tenants are clearing anything like £100K in profit. Either you deserve serious praise for what you are doing or are you confusing profit with turnover?

Assuming you are making £100K profit then something doesn't stack up.. if you are only drawing out half your share of the profits your other half has to be showing somewhere on the balance sheet else it has to be going out of the business in some other form of drawings.

1) Where is your income tax paid from? Out of the £24,000 paid into your account or from the business account, if the later it it is part of your drawings and you need to add that to the £24,000. Regardless what you take as drawings your £49K profit would mean a £10,700 tax bill to be paid from somewhere, more if you have student loan repayments.

2) Any other drawings are attributed to you apart from the cash? Private expenses such as council tax or utility bills paid from the business account for instance?


You share a £300,000 overdraft? Ouch. Overdrafts are primarily for cash flow borrowing, high cost, short term. If you are always deep in the overdraft 12 months of the year you need to restructure your borrowing!

Turnover £550k. Problem is quite a bit of the profit is valuation increase and also a loan that we’d been paying off so not actually all cash.

1- true, tax is paid by the business….not out of my drawings.
2-yes, cottage, truck and council tax paid. Perfectly happy with my income from the business. Just the longer term capital/debt situation.

yeah we’re in the overdraft all year round to varying degrees

 

[som farmer]

You must have some kind of agreement, as you say it is a 51% to 49% partnership?

If you don't have an agreement, and the partners can't agree, the partnership is dissolved and value shared equally between the partners.

Take the agreement to your accountant, and ask how it relates to the Partnership Act 1890.

the 1890 act is clear, 50/50 if no written agreement, if disputed.
otherwise flexible amounts to agreeing partners.
can be useful, or very unhelpful. Up to you 2

 

[farmerm]

Turnover £550k. Problem is quite a bit of the profit is valuation increase and also a loan that we’d been paying off so not actually all cash.

1- true, tax is paid by the business….not out of my drawings.
2-yes, cottage, truck and council tax paid. Perfectly happy with my income from the business. Just the longer term capital/debt situation.

yeah we’re in the overdraft all year round to varying degrees

Well there you have it then, you are drawing most of your share of the profit!!

 

[thorpe]

!You say you are responsible for 150K of overdraft, but have also expanded over the last 4/5 years. You need to look at what the cash flow projection for the next five years is (sorry crystal ball territory!) so you can understand how the borrowing may/may not support future profits........ and future rewards for your work?

Got to look at it in a future context I reckon.

a cash flow projection for the next 5 year's! personaly i wouldn't know where to start!

 

[som farmer]

for your own peace of mind, you need to sit down, with your accountant and dad, and sort it out. Needn't be a stressful experience.

know of someone else, in a very similar position, saw his dad talking to a young lady, went across, lady introduced herself as his half sister.

he didn't have a clue. Nor did a host of others, known him for decades.

the lady was drawing a nice lump from the accounts, leaving son, with a big overdraft, and none of the 'profit salted away', had gone to 'sister'.

sort it out, end of problem, helps when he passes, can't be touched by greedy siblings, know that one from personal experience !

 

[Sheepykid]

Turnover £550k. Problem is quite a bit of the profit is valuation increase and also a loan that we’d been paying off so not actually all cash.

1- true, tax is paid by the business….not out of my drawings.
2-yes, cottage, truck and council tax paid. Perfectly happy with my income from the business. Just the longer term capital/debt situation.

yeah we’re in the overdraft all year round to varying degrees

That’s a very good level of profit off that amount of turnover. I’d say if your old man lets you have 2k a month, tax paid by the business and most of the large living expenses paid like a house and vehicle he doesn’t sound like a monster. Just approach him and say what’s the plan regards the overdraft etc.
I reckon you’ll be able to work on the overdraft in time. Lots of things take time. It’s not all of us that earn 6 figures overnight and purchase every acre of land around us with cash.
If you’ve made significant investment recently hopefully that’ll be paying dividends and help to reduce your debt level or increase profitability.

 

[Stockwell]

Thanks for everyone’s very helpful advice.
perhaps I was worrying unnecessarily. As I’ve said, I’m more than happy with my income from the business…it’s just the the capital accounts page of the accounts where father has a few hundred thousand and mines sat at 20k which makes me think I’m putting a huge amount of effort in for not much more than a good wage.
I’m sure it’ll be made Clear with the accountant.
Also think I need to discuss dads will with him as I’ve two older brothers not involved with farming so not sure how I’d stand the cash to pay them what they might be left by father.

 

[lloyd]

Thanks for everyone’s very helpful advice.
perhaps I was worrying unnecessarily. As I’ve said, I’m more than happy with my income from the business…it’s just the the capital accounts page of the accounts where father has a few hundred thousand and mines sat at 20k which makes me think I’m putting a huge amount of effort in for not much more than a good wage.
I’m sure it’ll be made Clear with the accountant.
Also think I need to discuss dads will with him as I’ve two older brothers not involved with farming so not sure how I’d stand the cash to pay them what they might be left by father.

Perhaps you need to build seperate capital for yourself and drop
your hours a little from the main business.

 

[farmerm]

Thanks for everyone’s very helpful advice.
perhaps I was worrying unnecessarily. As I’ve said, I’m more than happy with my income from the business…it’s just the the capital accounts page of the accounts where father has a few hundred thousand and mines sat at 20k which makes me think I’m putting a huge amount of effort in for not much more than a good wage.
I’m sure it’ll be made Clear with the accountant.
Also think I need to discuss dads will with him as I’ve two older brothers not involved with farming so not sure how I’d stand the cash to pay them what they might be left by father.

The simple reason you are not building capital is that despite the generous 49:51 split you are drawing the vast bulk of your share of the profit. You want to build capital in the business stop taking so much money out.

 

[Johnnyboxer]

Well there you have it then, you are drawing most of your share of the profit!!

Just not all in actual cash

 

[Lazy Eric]

I think I’ve got myself into a pickle mainly down to my own naivety.

I’m a partner in the family business - my father and myself.
we’re a tenanted farm with a reasonably sizeable livestock enterprise.
In terms of profit, we are split 51% to my father and 49% to me. Total profits on the accounts would be around 100k per year but I draw £24000 per year and leave the rest of my share of profit in the business - same for father.

the issue is as I’ve been looking more into the accounts, I actually have virtually no capital in the business (20k ish). We’ve expanded a lot over the last 4/5 years so we’ve got a big overdraft which me and my father both signed for as partners. So I think I’m response for about 150k of overdraft but have hardly any capital.
i think basically without personally growing capital in the business then I’m no more than an employee, or more accurately - an employee with a load of debt.
me and my wife are at the stage we think we’d be much better going on our own but surely I’d have to pay my share of debt to leave the partnership? So we’d be in a massive hole straight away.
Got a meeting with the accountant in 10 days so will get some clarity.
basically I’d be doing all the physical work and putting in a lot of hours so never get chance to look at the inner runnings of the business which gets left to father.
another key point is - we don’t have a partnership agreement
Anybody have an opinion on my situation?

Do you get on with your father ok? I’m guessing you’re a young chap? If you were in partnership with your cousin or someone you maybe didn’t have a family bond with could understand maybe.
Are you happy with your work life? Just don’t cut your nose off to spite your face.

 

[Kidds]

If it is any consolation my capital account within our partnership stood at -£35k within 5 years of being made a partner. I couldn't see my way through that one. My drawings was not a patch on yours and no company vehicle.
Worked out in the end.

 

[Thick Farmer]

Thanks for everyone’s very helpful advice.
perhaps I was worrying unnecessarily. As I’ve said, I’m more than happy with my income from the business…it’s just the the capital accounts page of the accounts where father has a few hundred thousand and mines sat at 20k which makes me think I’m putting a huge amount of effort in for not much more than a good wage.
I’m sure it’ll be made Clear with the accountant.
Also think I need to discuss dads will with him as I’ve two older brothers not involved with farming so not sure how I’d stand the cash to pay them what they might be left by father.

You definitely need to discuss his will with him even if you don’t speak about anything else. Sorting a partnership agreement should also be a top priority.

 

[puppet]

We expanded cows and sheep quickly, all home-bred so profit suddenly jumped as they increased in value then produced even more calves/lambs to increase sales.
We always worked on an overdraft ( much smaller than yours) and over 10 years paid it down. I liked to use it as a barometer of how healthy the cash flow was. However, I don't know why your father has hundreds of thousands yet you have a large overdraft. I loaned the business personal money to wipe off the overdraft as pointless paying interest but earning none. The accounts reflect that and it is paid back in monthly instalments.
After the banks messed up in 2008 I vowed never to need them again once the overdraft cleared.
Sounds as if your meeting will explain profit shares and capital accounts. If you both get on, have a house, truck and £500 to spend each week then life not all bad. Just need to get some guide for the future but at least you are a partner

 

[DRC]

Thanks for everyone’s very helpful advice.
perhaps I was worrying unnecessarily. As I’ve said, I’m more than happy with my income from the business…it’s just the the capital accounts page of the accounts where father has a few hundred thousand and mines sat at 20k which makes me think I’m putting a huge amount of effort in for not much more than a good wage.
I’m sure it’ll be made Clear with the accountant.
Also think I need to discuss dads will with him as I’ve two older brothers not involved with farming so not sure how I’d stand the cash to pay them what they might be left by father.

on advice from our accountant at the time, my father gifted his share of the profit straight to me every year . Thus building mine up. This was along time ago as I’m retired myself now.

 

[egbert]

Turnover £550k. Problem is quite a bit of the profit is valuation increase and also a loan that we’d been paying off so not actually all cash.

1- true, tax is paid by the business….not out of my drawings.
2-yes, cottage, truck and council tax paid. Perfectly happy with my income from the business. Just the longer term capital/debt situation.

yeah we’re in the overdraft all year round to varying degrees

Now we're getting into it.
With what you're drawing, plus the truck/cottage/council tax, you're getting most of your 49%.

My concern is the big turnover, against a modest 'profit' for 2 men working at the business.
Remember, if you both went out to work, using the level of skills you likely have, you'd be expecting to earn more than £24k...possibly that plus house and truck.
Again, if the BPS is in the profit, and some of it is 'increased valuation' (and by golly that's a useful tool if you know how to use it) ......I'm concerned you're both running hard and not getting far.
Dads share of capital sounds like it's not earning much...and that's where the great many of us are.

Sort your position with Dad, then both get those debts down.
Good luck

 

[Sheepykid]

Now we're getting into it.
With what you're drawing, plus the truck/cottage/council tax, you're getting most of your 49%.

My concern is the big turnover, against a modest 'profit' for 2 men working at the business.
Remember, if you both went out to work, using the level of skills you likely have, you'd be expecting to earn more than £24k...possibly that plus house and truck.
Again, if the BPS is in the profit, and some of it is 'increased valuation' (and by golly that's a useful tool if you know how to use it) ......I'm concerned you're both running hard and not getting far.
Dads share of capital sounds like it's not earning much...and that's where the great many of us are.

Sort your position with Dad, then both get those debts down.
Good luck

Is it a big turnover though? You could do that on 400 fat cattle a year. Or 4500 store lamb. I doubt many would achieve a profit of £100k on 400 fat cattle or 4500 store lamb. Being £250 a head clean profit on the cattle or £22 a head margin on the lambs. Depends on your business model really. But the turnover I wouldn’t say was that scary. Just the way things are in farming we handle a lot of money for little reward sometimes.

 

[serf]

Thanks for everyone’s very helpful advice.
perhaps I was worrying unnecessarily. As I’ve said, I’m more than happy with my income from the business…it’s just the the capital accounts page of the accounts where father has a few hundred thousand and mines sat at 20k which makes me think I’m putting a huge amount of effort in for not much more than a good wage.
I’m sure it’ll be made Clear with the accountant.
Also think I need to discuss dads will with him as I’ve two older brothers not involved with farming so not sure how I’d stand the cash to pay them what they might be left by father.

You could get a mortgage on a house away from the place to Index link some cash to the future if all that money is basically disposable with most of other bills already
paid for .

 

[betweenthelines]

From my personal experience, I'd say you have three problems, you father, you mother and your siblings.

Your father may not have made a will, or he has done and left "everything" to your mother, or equally to your mother and all his children. When the Will is/isn't read your mother and/or your siblings might well say you were a paid employee and there was no legal partnership. Siblings could well say/claim that father had told them they would "get a share of his money" (which they would say includes all the farming assets)

You need a legally binding Partnership Agreement AND a copy of your father's will in your hand asap.

I say asap because sadly my father died very suddenly.


Believe me, where there's money involved, family can be barstewards.

 

[Chae1]

Now we're getting into it.
With what you're drawing, plus the truck/cottage/council tax, you're getting most of your 49%.

My concern is the big turnover, against a modest 'profit' for 2 men working at the business.
Remember, if you both went out to work, using the level of skills you likely have, you'd be expecting to earn more than £24k...possibly that plus house and truck.
Again, if the BPS is in the profit, and some of it is 'increased valuation' (and by golly that's a useful tool if you know how to use it) ......I'm concerned you're both running hard and not getting far.
Dads share of capital sounds like it's not earning much...and that's where the great many of us are.

Sort your position with Dad, then both get those debts down.
Good luck

What sort of profit would you expect from that level of turnover?