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Equal partners

Agriculture.com Staff 07/07/2010 @ 9:09am

It's not easy bringing new partners into an existing farming operation. But the Rulon family of Arcadia, Indiana, has been doing it successfully for 35 years. One of the keys to their success is that they don't have senior partners and junior partners. Instead, they have equal partners.

It started in 1971 when Jerry Rulon, who began farming in 1963, took his brother, Doyle, in as a partner. To do that, Jerry loaned Doyle 50% of the equity he had built up in the operation. That made Doyle an equal partner and entitled him to half the earnings and half the growth potential.

Since then, Jerry's sons, Ken and Roy, and Doyle's son, Rodney, have joined the operation under similar terms.

"Some people's reaction to this partnership is that my dad (Jerry) went from 100% of the earnings in 1970 to 50% in 1971," says Ken. "That's true. But what's an idea worth? Isn't it possible that Doyle's ideas were worth more than dad's equity?

"Doyle brought some assets with him. Dad loved the production side while Doyle, who had worked for Armour Packing Company and a few places like that, was more of a computer/accountant-type guy." Besides, Jerry was being paid interest on half his equity.

Ken says taking equity out of the farming operation is like a company issuing a preferred bond. "Corporations do it all the time," he says. "They spin off assets and take debt in return."

Doyle died unexpectedly in 1986. That triggered a buy/sell agreement in place between the brothers, and Jerry used a life insurance payment to buy Doyle's half of the operation from his estate.

"We think that is pretty important," says Ken. "All our spouses know how that works."

Meanwhile, Roy had started working for his dad and uncle in 1983. After Doyle's death, Roy and Jerry formed a new partnership. As Jerry had done with his brother in 1971, he loaned Roy 50% of the equity. But there was a difference.

"If Dad had put all of the land and all of the equipment in that new partnership, Roy wouldn't have been able to make the interest payments," says Ken. "Consequently, Dad kept the land and some cash out of the new partnership with Roy.

"The cornerstone of the whole process is shrinking the equity and shrinking the debt so that the next generation can have a substantial and real impact on what we are accomplishing," says Ken.

This new partnership started out in 1986, farming 2,200 acres with very little equity. Both Jerry and Roy drew relatively small salaries. And, under the terms of their agreement, Roy could not take any additional capital out of the operation until he had repaid Jerry for the equity.

Ken was not in the picture during those years. He had taken Howard Doster's class on going home to farm with dad before he graduated from Purdue University in 1982. But instead of going home to farm, he embarked on a career outside of agriculture with General Electric.

Ten years later, Ken returned to the farm. In order for him to get started, it was once again necessary to shrink the equity in the partnership.

So as the new partnership was formed, Jerry and Roy simply kept some of their cash out of it. They each used the proceeds to buy land, which they now rent to the farming partnership. Instead of borrowing equity, Ken simply agreed to take less money out of the operation until he was on an equal footing. That took him about five years.

It's not easy bringing new partners into an existing farming operation. But the Rulon family of Arcadia, Indiana, has been doing it successfully for 35 years. One of the keys to their success is that they don't have senior partners and junior partners. Instead, they have equal partners.

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