Expansion: It’s More Than Where We Are In the Cycle
On a recent 11-day road warrior trip that took me to each corner of the U.S. and to Canada, I was asked numerous times, “Should I expand?” Whether it was hog, dairy or greenhouse growth, or the purchase of more land, I noticed that many progressive producers were weighing the decision. I can’t tell you whether you’re in the right part of the cycle for expansion, but there are specific criteria that should fuel an objective judgment to keep you out of the minefield that often goes with growth.
First, does expansion meet your business, family and personal goals? Recently a 55-year-old father was opposed to expansion because of the risk of additional debt. His 45-year-old brother and his 25-year-old nephew were chomping at the bit to break ground on the new facilities. In this case, not all partners had the same vision for the business. This needs to be negotiated before any plans begin. Goal setting and visioning are prerequisites to expansion.
If you are expanding in new facilities, buildings or equipment, consider the life of the asset. With today’s rapidly changing technology and competitive environment, a long payback loan structure can lead to competitive pressure because of obsolescence of technology.
When expanding, follow the strategy of “better is better” before embarking upon a “bigger is better” strategy. Many producers attempt to grow themselves out of problems and into prosperity. In the end, they only find that because of their initial lack of efficiency they’ve buried themselves in a bigger economic hole.
What is your capital strategy? Many only examine the initial capital investment with one number in mind. Frequently cost overruns and working capital needs in the transition period are not considered, which results in financial and economic stress due to unexpected increases in overhead cost.
Consider the ripple effect. It’s not all about numbers. In our dairy processing business we had an opportunity to expand and double the number of stores where our products are available. Economically it works great on paper, but what about the impacts on employees’, families’, owners’ and stakeholders’ lives? Balance of business and lifestyle issues are critical in the expansion analysis.
Anytime can be a great time to expand if one follows objective thinking with focus on execution.
The Road Warrior of Agriculture
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Editors' note: Dave Kohl, The Corn and 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.
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