Family Business Buy-Outs in the Agricultural and Rural Business Sector

There are many reasons why an FBO may be appropriate, for example:

• There could be insufficient pensions or other investments for the senior generation to live off of in retirement. In other words, the parents will not have sufficient means for their retirement if they give the business away;
• To address the question of fairness within the family. The family may wish to adopt a business-first approach, whereby ownership of the family business passes to those next-generation family members working in the business. However, the senior generation might wish to achieve fairness in order that family members not working in the business receive a larger share of assets held outside the family business. Even if the senior generation are adequately provided for in their own lifetime, they might not be confident that there will be sufficient surplus assets on their death to achieve this. Therefore, the sale of the business by way of FBO may achieve fairness in the longer term as those family members not involved in the business may revive a more equitable inheritance from the senior generation;
• It might be thought necessary as a matter of pride and self-worth for the next generation to pay something for the business rather than having this “handed to them on a plate”. If this is the case, these aspects will need to be discussed in detail between the generations. Conversely, it might be the view of the senior generation that the value they have created during their working lives should be formally recognised by the purchase price paid for the family business.

There are various types of payment structures that the FBO could adopt, for example:

• The FBO could be financed by a third-party commercial lender, whereby a loan is taken out by the family company. There might be a reluctance to go down this route as the introduction of heavy gearing might be against the conservative instincts of the business-owning family, particularly if, say, a farm has been owned by a family for generations. It may also be the case that the business might simply not be able to obtain mainstream commercial bank lending;
• The next generation could borrow the funds, perhaps supported by a re-mortgage of their home. This type of arrangement could be to support company borrowing or instead of it. It may be thought appropriate for the next generation to take some personal risk to demonstrate their commitment. The next generation may argue that they have already made a considerable personal sacrifice in dedicating their careers to the family business;
• The purchase price could be paid on deferred terms and financed from the future cash flow of the family business. The deferred payments could be fixed amounts payable on certain dates, or the amount of the payments could be linked to the performance of the business. The payments could be simply contractual under the sale agreement or structured in the form of loan notes (i.e. debt securities); 
• If the company has sufficient distributable reserves, the senior generation could be bought out by a company share buy-back. Alternatively, where there are surplus funds in the target company, a new company could be established as the buying vehicle, which could utilise those surplus funds as part of the purchase price with the balance of the price paid on deferred terms. These structures have the advantage of the company financing the buy-out and not individual family members/shareholders;
• It may be appropriate to consider more radical restructuring of the family business to free up funds.  For example, a non-core business or business premises/farming land could be sold to raise funds;
• A hybrid ownership solution could be adopted, whereby the senior generation retains a residual interest in the family business, with the next generation taking a controlling interest. To a certain extent, this could have the advantage of managing the purchase price to be paid to the senior generation and could allow the senior generation to receive income via dividends.