In a recent seminar with agricultural lenders, I was asked, “Is there a point when the economic plug needs to be pulled on a business?” The answer to this question can be very difficult and gut wrenching.
Often, family farm businesses consist of multiple generations. The generation in financial dire straits does not want to be coined as the one that lost the whole business.
Second, many producers have not conducted a skill assessment. The fear of the unknown in employment, along with lack of confidence in their ability to adapt to a different work environment, can be stressful. The failure of a business and potential loss of self worth is a tough dose of medicine to the confidence of individuals.
With all the above stated, producers need to take an objective approach to evaluating the business’ condition. This entails hiring an independent third party to help facilitate meetings of stakeholders and keep conversations productive.
Second, stick to the numbers and truly understand what staying in business may do to net worth, family and personal life. For some producers, I often suggest that they start planning now on which child they want to live with in retirement if they lose all the equity. If an underachieving sibling or child is present, the message becomes loud and clear on which direction to go.
Don’t forget the tax obligations. Partial or total liquidation can often lead to future tax liabilities. This is particularly true for businesses with low tax basis or forgiven debts.
Finally, continue to communicate with spouses, lenders and partners. Only through communication can problems be identified and resolved.
Hopefully your business will never face this situation. If it does, time, objectivity, communication, strategy and execution of the sale of the business are steps that are critical.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.