The other day, I was at a speaking engagement where I conversed with a farm family concerning the refinancing of debt. The unfortunate timing of the capital expense necessary to upgrade technology coupled with the economic downturn has led this family to seek a debt restructure using their land as the financial buffer.
This family operates a multiple-generation crop and livestock business. Conversations eventually led me to indicate that refinancing this short-term gap of cash flow and profits will push the term of the loan commitment over a 20- to 30-year period, causing the next generation to inherit the burden of the losses. In this situation, one has to consider the following variables in this assessment.
First, does the next generation have the commitment to take on this additional burden? A full assessment of the younger generation’s players and stakeholders is critical in the business-planning process. Next, does the younger generation have the necessary business IQ or horsepower to take on these extra burdens for an extended period?
An evaluation of the adequacy of the land, machinery, equipment, livestock and human resources is critical in the discussion. Resources that lack upgrades to stay relevant with the industry can be a recipe for long-term disaster.
Another point to consider is the outlook for the industry. More specifically, is the business in a position to be competitive in the industry. In some cases, Father Time has caught up with the business owner’s ability to maintain a competitive edge.
Finally, what initially caused the financial cash flow issue? Was it a change in markets, a natural disaster, health issues, a management hiccup or lifestyle considerations that created the challenges? Sometimes introspection can go a long way to unraveling a very emotionally and financially challenging decision.
The outcome of a debt restructure can affect multiple generations and requires serious thought. These crucial conversations are necessary to have before seeking financial assistance that can chart the course of action in both the short and long run.
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.
