Can the Family Business Afford to go through a Transition?
- Cash flow and business analysis are a key part of planning
- Be realistic about your business goals
You’ve had the first family meeting to talk transition planning, laid out your goals and aspirations for the farm, so what’s next? The next step is to test these goals and aspirations to see if they stack up.
When we work with a family to test the viability of a transition plan, we always undertake a deep-dive analysis of the farm’s finances and estimated cash flows over a five to seven-year period. Cash flow forecasts are critical to understanding what the farm’s yearly average cost of operation is. They are also used to run scenarios to test the different goals or aspirations each family member has.
For example, a goal to double the farm size in 3 years sounds great, but if the reality is achieving this goal relies on too much debt, you risk sending the business broke. In this case, the plan becomes 50 per cent growth.
Another consideration is whether you support mum and dad in retirement and what their lifestyle goals are. If they want a champagne retirement but the farm only has a beer budget, it’s better to know this upfront to better prepare for it, so they are looked after without burdening the farm’s operations.
This analysis is also an opportunity to lay down timelines on when the best time is to transition and whether the farm should grow over time. More often than not, they prove the family operation is more robust staying together than splitting.
A rigorous analysis of the farm’s future cash flows, business plan and scenarios is especially important for families who want to pass the farm down through generations. It shows them the impact of their goals and the viability of the business.
As we’ve said in previous articles, the key here is communication, negotiation, compromise, and acceptance that your goal may not be realistic. This approach will put the family operation in a position that it can afford to transition and compensate family members for their work and provide for them in retirement.
Transition and succession planning is an integral part of your family farm’s success. Talk to your local Sprout Agribusiness representative to find out more about your succession and transition planning workshops.