Due dili­gence

it’s just as im­por­tant whether taking over a farm or a com­pany

Irish Examiner - Farming - - COMMENT - Karen Walsh

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 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 trans costs fer or 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.

Even if you are re­ceiv­ing the farm as an un­con­di­tional gift, you should still carry out fi­nan­cial due dili­gence.

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