By Kevin Spafford, Leave A Legacy
 

In preparing for an episode of Leave a Legacy TV, I met recently with a very large, vertically integrated dairy owner. The profile was for "Legends of Leadership," and I intended to focus on his vision for the future. 

As we talked about his operation and prepared to videotape the interview, I asked about his succession plans. I was shocked to hear this 68-year-old founder, with three active (and one inactive) children, a 4,000-cow dairy, processing plant and other related interests, say, "I really haven’t given it much thought."  

"This interview is about leadership," I reminded myself. "Yet, how can he be a leader in every sense of the word if he’s not preparing for the single biggest obligation a family business owner may ever face?"

The planner in me almost overran the TV host as I struggled not to react. I didn’t want to turn our conversation into a consultation, so I stuttered and stammered to contain the five questions that kept bubbling to the surface.

Review the following questions. Noodle them around in your mind, and maybe, just maybe, they’ll help you to realize that succession planning is a responsibility of leadership. Building a business bigger than self is admirable; growing it forward is enviable.

Five questions you should resolve:

1.     Is continuing family ownership important?

For most family agribusiness owners, continuing family ownership may be one of the primary reasons for going to work every morning. Most of the participants in our first round of Legacy Project Workshops rated continuing family ownership  as "strongly agree or agree" (87% in Madison, 94% in Owatonna and 93% in Sioux Falls).

2.     Have you identified a successor, and implemented a leadership development/management transition plan?

3.     Are you, your family and the farm protected from the devastating contingencies of death and disability of key personnel ? including you?

4.     Do all of your dependents ? family members, loyal employees, third party suppliers, bankers and the co-op ? know the details of your succession plan?

At our recent workshops, we posed the question, "Do you have a written succession plan?" The response was predominantly ‘no’ (97% in Madison, 89% in Owatonna and 95% in Sioux Falls).

What would your response be? If, like most of our workshop attendees, you don’t have a written comprehensive succession plan; if you haven’t identified a successor; if you don’t know for certain that you, your family and the operation are protected from devastating contingencies; and can’t assure your third-party alliances that the operation will continue in your absence ? it may be time to seek help.

5.     Does your operation employ a third-party advisor who understands your succession intentions, speaks for the entity (gives voice to the agribusiness) and guides you and the family through a comprehensive process of succession planning?

Again, workshop attendees tell us the primary issue keeping them from completing a plan is they don't know what to do and/or don't know where to find help (66% in Madison, 61% in Owatonna and 86% in Sioux Falls).

If you struggle with the where to begin and who can help, check out The Farm Journal Legacy Project.

It should be the next step in your succession planning pursuits. Whether you’re just beginning down the path, or looking for a second opinion, the tools we provide, the information we’ve created and the experiences that we promote are all designed to help.

We invite you to check back regularly, since new content is added almost daily. The goal of this initiative is to provide good information, relevant tools and worthwhile planning experiences so that you may achieve your succession dreams. 

Kevin Spafford serves as Farm Journal’s succession planning expert. His firm, Legacy by Design, guides farmers and agribusiness owners through the succession planning process. Send questions and comments to Legacy by Design, 2550 Lakewest Drive, Suite 10, Chico, CA 95928, (877) 523-7411 or legacyproject@farmjournal.com.

By Linda Smith

This article first appeared in the April 2010 issue of Top Producer magazine.

Ag lenders agree that the bar has risen to qualify as a borrower. Equity requirements are increasing, the cost of renting money is rising, loan structure is tighter and lenders’ attitudes are "trust but verify"—reporting requirements are also increasing.

In an environment of tighter credit and cautious lenders, knowing how they think will give you an edge when the time comes to borrow money.

A panel of four ag lenders with 122 combined years of experience shared their thoughts at the 2010 Top Producer Seminar. The bankers discussed what they look for in a good lending relationship and the warning signs they watch for when a customer may be in trouble (see sidebar below).

John Blanchfield of the American Bankers Association listens for the telltale "sucking sound"—the sound of equity in the business being depleted outside the business. "That means nonproductive assets bought by someone without a healthy cash reserve," Blanchfield said. Examples include too many high-tech toys and a condo in Cancun.

Bankers also watch carefully when a farmer suddenly introduces Junior as a business partner. "We expect the younger generation to come in, but with a transition period," said Sam Miller of M&I Marshall & Ilsley Bank in Appleton, Wis.

Another red flag that makes bankers suspicious is when a farmer proposes a new line of business way outside his core strengths. Is this a well-researched opportunity or a sign of desperation?

Distressed Borrowers. Borrowers who cannot repay are distressed borrowers, said Curt Covington of Bank of the West in Fresno, Calif. "They often feel denial and fear. Reactions range from ‘It’s not my fault’; ‘I don’t want to deal with it’; and ‘I own the problem, but you need to fix it’ to ‘I own the problem and I need to fix it,’" he said. "Clearly, we prefer clients who fit the last category."

To avoid becoming a distressed borrower, the panel suggested communicating with all creditors, enlisting the help of experts on the front end of the situation and framing the situation from all perspectives, including financial, legal, social, emotional, personal and family.

It’s important to take action on the problem and devise a plan that works, Blanchfield said. "If you are restructuring your debt, it must be in writing, achievable, executable and designed to return the business to viability," he added.

Lastly, don’t look back. "There is no sense in beating yourself up about the past; learn from it and look to the future," said Roger Schlitter of Roger’s Farm Financial.

Cash Is King. Manage your margins and build liquidity and working capital, the lenders suggest. "Working capital is king during periods of volatility," Covington said. "Farmers have been too reliant on real estate equity as a backstop in the years past."

The lenders recommend that producers have cash on hand equal to at least 20% of their operating expenses for the coming year. 

"Lending has to be driven by repayment capacity," Miller added. "Going forward, profitability and cash flow will carry a heavier weight, rather than asset value."

Top 10 Warning Signs
Bankers watch for the following warning signs regarding agricultural loans:

1. Inability to pay off annual operating loans

2. Loss in business net worth year after year

3. Less than 30% net worth or equity

4. More than five creditors on the balance sheet (this includes supplier credit)

5. Unpaid trade credit (more than 60 days old), especially if creditors call the bank wanting to know when they will get paid 

6. Unpaid taxes

7. Operating expenses greater than 80% of gross income, especially if the trend is on the rise

8. Lack of financial statements

9. Rapid, leveraged expansion

10. Turnover in management and/or advisers

Linda Smith writes for Farm Journal Media’s Top Producer and agweb.com.