Road Warrior

Ag lender’s role in agriculture business succession: Part 1

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Let’s draw upon the experience and expertise of agricultural lenders on the other side of the desk and provide some insight concerning one of the biggest, peskiest issues facing North American and global agriculture. In a nutshell, it is transition management, which includes passing along assets to the next generation of family members or business owners. Some fast facts presented at the South Dakota Bankers Association’s Agricultural Credit Conference are indicative of the issue. Approximately 60% of businesses with an estate or transition plan have not updated it within the past five years. Approximately 85% of agricultural businesses have no estate or transition plan in place. One of the most helpful resources a producer can draw upon in this challenging task is their agricultural lender. Let’s examine a few of the ways your lender can be utilized to jumpstart or accelerate this process.

Comfort Blanket

The lender is often the comfort blanket to the business owners and stakeholders. The lender usually has a strong relationship with them, particularly on the financial and management side, assisting the business in managing through the cycles, and building and preserving wealth on the balance sheet. The lender often knows the key family members and stakeholders, as well as children, and in some cases even the family dogs as well. A lender can quickly identify people’s goals and objectives, both short and long run, which is important in the early stages of the transition planning process, as well as when updating a plan. The lender has often worked side-by-side with business owners, asking difficult questions and being their confidant as a teacher, coach and facilitator.

Financials

A good set of financial records with a paper trail is essential for a successful transition planning process. Much of a high-priced professional talent’s time can be wasted assembling and organizing up-to-date financials, both on the business and personal sides. The lender can provide perspectives on how the transition planning scenarios and options will impact financial metrics and key ratios, cash flow needs, and profitability of the business. They also have a perspective on the quality of assets, i.e. land, machinery, equipment, and livestock. One of the “kisses of death” in transition planning is when the younger generation purchases an unprofitable business or assets that are either rusted out, worn out, faded out, or technologically obsolete.

 

Next time I will focus more on the lender’s role in transition planning.

Discuss this Blog Entry 2

on May 2, 2014

Our corn industry has gone a long way and in fact they have increased the production last year and is planning to increase again this year. - Banners Broker

on Jul 4, 2014

Nice and very informative article. I gained a lot of knowledge regarding a agricultural business. Agricultural business is quite profitable business but depends on season. So, you need to find the perfect season for doing this type of business. To estimate and to for proper planning your business you can hire a professional bookkeeper who will manage all your business data and schedules. Freelance Bookkeeper Van Nuys

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What's Road Warrior?

Dave Kohl is an ag economist specializing in business management and ag finance. He can be reached at sullylab@vt.edu.

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