Is Your Farm Transition Ready?
June 15, 2019 In my last article, I covered the challenges that farmers face in succession planning. But, not all hope is lost. My company has been a part of many succession plans that have been and continue to be successful, and they all share these characteristics…
- The understanding that effective succession planning is more than just transitioning to new leadership. There are transactional components at work as well. They take an objective investor’s approach to looking at their business… Is the risk at a low level and is there a potentially high return on investment?
- Operational Efficiencies: Are there efficient processes and procedures in place that can be easily managed and communicated?
- Financial Strength: Looking at the metrics (ratios, receivables, banking situation), is the company operating at a high level and doing more with less?
- Transition Ready: If the owner should suddenly leave or pass away, how easy would it be to transition to new leadership or potentially sell the business for a high return? What about the legal and financial preparation?
Transition-Ready Businesses are More Valuable
Transition ready means that you are prepared legally and financially, but also emotionally. From our own experiences, especially in family businesses, that it is often an emotionally charged and difficult exercise. In fact, according to the Exit Planning Institute, after transitioning or selling their businesses, most owners “profoundly regretted” it after just 12 months. There are some that can just walk away but many more that can’t; so this needs to be considered when selling your business. Perhaps it is an earn-out or a situation where you ease out of the business over time and this would need to be a part of any discussion with new leaders or buyers.
Operational discipline, financial strength, and looking at the business from an investor’s perspective all point to a higher success rate. Here are some other value builders that will not only increase the valuation of your business but will make it much more desirable in the eyes of a potential investor or buyer. This is primarily what they are looking for:
- Presence of Recurring Revenue: Consumables, which are usually always present in a farming/horticultural operation; sunk money, for example, long-term contracts or history of recurring purchases; and leases.
- Consistent Sales and Profit: The ability to drive revenue, but not at the expense of margin. New product/service offerings, new markets, diversification, and those elements of your operation that deliver consistent sales and profitable results.
- Owner Independence: Can the business operate independently of the owner? Workaholics who are in their operations seven days a week and micro-manage their businesses are bad bets for a potential buyer.
- Sales and Marketing: An owner that has all of the key relationships and is responsible for a majority of the sales, especially to larger customers, can be an issue. Are customer relationships spread out among your staff? Are sales spread out among many customers or with just a few? Are you staying on top of trends? Website, email lists, social media and digital marketing?
- Barriers to Entry: Are there any governmental hurdles or restrictions? How established is your customer base? Essentially, what potential buyers are looking for here are barriers to entry for potential competitors. Location is a critical factor as well—your proximity to your customer base and is a competitor angling to move in? What is the value of the land? Depending on your location, it may be more valuable to a developer.
- Do you have a Niche? A differentiator or something you are known for in the industry, for example, a special variety or level of quality? Is the niche side of the business growing above average?
- Strong Modernized Systems: Do you have up-to-date inventory and management systems and are your processes and procedures efficient? Are you moving toward more automation? Is information and reporting readily available?
- Bankability: Well-prepared financials and key performance metrics with predictable and reliable cash flow. Know your numbers.
Transfer Ownership to Employees or an Outside Buyer
One option may be to have your existing company leadership buy you out. For buy-out scenarios, whether to employees or an outside buyer, it is critical to have a team of knowledgeable advisors (your financial planner, attorney, certified public accountant and other key business advisors) on the same page to make sure you are financially and legally ready. Land and real estate appraisals are especially helpful if potential buyers are not interested in your operation but just want the land for development.
A glut of companies will be transitioning or be up for sale in the foreseeable future as the baby boomer generation continues to move into retirement. Focus on making your company more transition ready and focus on those aspects of your business that drive and build value.
It also is important to focus on your emotional readiness with a life or business coach. There also is a lot of value in aligning yourself with a knowledgeable executive search and business advisory group that can help you find your next leader and management team, as well as help you build your organizational bench strength. Instead of planning to fail, you can now plan a clean transfer and a mutually beneficial transition and transaction to a new owner.
It is hard to transition when there is no family in place to take the reins, but that doesn’t mean the planning should stop. On the contrary, it is more important than ever to get started. After all, succession planning is about preparing for the transition and transaction of your life.
Are you ready?