New Generation Challenges
8/24/2018
Dr. Dave Kohl
grain falling into a container

Dave Kohl

 

Recently, I took part in a webinar with lenders and producers, which is almost always a promising combination for interesting discussion. One question in particular emerged that while not new, is extremely pertinent in today’s economics. A producer asked, “As the younger generation, I am increasingly assuming responsibilities of the business, but am also observing characteristics of those operations in the bottom 30 percent of profitability. How can I diplomatically, yet effectively communicate a sense of urgency in adjusting these practices in order to return to the upper end of profitability?”

First, this is a common issue among those in the transition of an inter-generational business. Sometimes, it easy for the senior generation to become complacent because of ample equity on the balance sheet. And in other situations, they may have lost their zeal for the business, reluctant to adapt to a rapidly changing industry. This happens for varied reasons including age, health, mindset, depressed profits or overall financial losses.

In tackling this situation, the first step is to start with the facts. Conduct a financial audit of the past three to five years. I recommend incorporating a third party for this assessment, perhaps an accountant, agricultural lender or farm management consultant.  Of course, in examining the analysis, both generations must be involved. The numbers often speak for themselves in revealing business deterioration, if present; specific performance issues; and a sense of urgency, if warranted. As an important note, be sure to base this analysis on accrual-adjusted numbers, not Schedule F tax records. Otherwise, revenue and expense figures will likely reflect the manipulation of tax minimization strategies.

In the analysis, question the direction trend of accounts year over year including inventory, accounts receivable, accounts payable, accrued expenses and prepaid expenses. These are commonly the indicators of the business’ financial health and future, positive or negative.

In addition, watch for some common disadvantages. In some businesses undergoing generational transition, the senior generation has not replaced capital assets or maintained a competitive edge in technology. This can place the younger generation in an immediately vulnerable position. Next, examine the past record of refinancing, especially as it relates to cash flow and profit issues. Will the younger generation have the option to refinance and is the business debt manageable in a sustainable business model?

While examining the business, it is also helpful to assess all the players. In other words, are the two generations on the same page and do they have the same goals? Another useful role for a third party is to have each individual involved detail their short- (one to two year) and long- (three to five year) term goals. Then, compare the goals to determine which are mutual and which are not.
Next, be wary of the phrase, “This is the way we’ve always done it.” Of course, past experience and fresh ideas are both undeniably important. However, the key to a sustainable business and successful transition is a balanced approach. The new ideas that challenge the status quo need to be integrated with the caution, patience and wisdom of past experience, thus creating a powerful combination.

In some cases, I have seen this winning combination take the form of a new enterprise or separated section of the business. The younger generation assumes full financial and operational responsibility of one sector, but has the distinct benefit of the senior generation’s perspective. In this way, new ideas can be implemented without jeopardizing the overall business.

Finally, it is extremely easy for a business to slip into the bottom 30 percent of profitability. Usually, this is due to a combination of factors that occur over a period of time, and are recognized too late. The main goal of this assessment is to accurately forecast the future of the business, which could indicate partial or total liquidation.

In summary:  Conduct a financial assessment with third-party oversight; look at the numbers as indicators for the direction of the business; outline and compare goals for all parties; integrate new ideas in ways that encourage and protect the business like a segmented enterprise; and finally, be honest and transparent regarding the future of the business whether it is growth or an exit. Like any change, generational transition can be successful when met with logic, facts and open and honest communication.

Dr. Kohl is Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship in the Department of Agricultural and Applied Economics at Virginia Polytechnic Institute and State University. Dr. Kohl has traveled over 8 million miles throughout his professional career and has conducted more than 6,000 workshops and seminars for agricultural groups such as bankers, Farm Credit, FSA, and regulators, as well as producer and agribusiness groups. He has published four books and over 1,300 articles on financial and business-related topics in journals, extension, and other popular publications.

 



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