What to consider for next steps in growth or diversification
There comes a time in farm operations when the conversation to expand or diversify the business comes up. The inevitable questions commonly include how, when and, most importantly, why?
But what does a farm CEO need to consider before answering these questions? Asking an advisor like Mark Verwey, BDO’s partner and national agriculture leader in Portage la Prairie, Man., would be a good start. He’s been advising farm clients for more than 25 years on everything from estate and succession planning to tax planning and wealth management.
Involve your financial institution
From Verwey’s perspective, one of the first considerations is to have your financial house in order, since a growth or diversification phase is often a capital-intensive proposition.
Have your financial house in order, since a growth or diversification phase is often a capital-intensive proposition.
“It’s important to meet with your financial institution well in advance of any decision, to try and arrange pre-authorized financing,” he says. “This will allow you to move quickly should an opportunity arise.”
A lender will examine the strength of your operation before approving additional financing, so be prepared to talk about three ratios: debt-to-equity, debt-servicing and working capital.
Build a solid business plan
Similarly, diversifying may be a great decision, but don’t go in blind. Verwey suggests farmers have a solid business plan to cover key areas such as production, labour, technical expertise and marketing opportunities.
“You must avoid going into a project that you love without having the technical expertise nor potential to make it profitable. That’s what you call a hobby,” he says. “Bottom line is that acting from the heart can be dangerous without the proper financial analysis.”
Flexibility is key
Operations aside, the pandemic of 2020 was a fluid situation, and farmers had to consider many factors that could impact their business model.
“COVID-19 has exemplified how uncertain farming can be, the need to be financially aware of your operations and the need to be prepared for these uncertain times ahead,” Verwey says. He adds that Canada’s farmers always face challenges, including recent geopolitical issues with China, price fluctuation, weather and farm subsidies.
Feeling stuck at the starting line? Check out our March 2019 story about Beverly Greenhouses, one of Ontario’s largest commercial cucumber operations run by brothers Jan and Dale VanderHout. One of many ways they diversify is through energy, generating baseload electricity for internal use and recycling heat to keep the greenhouses at optimum temperature. Diversification may be easier than you think.
Form a clear financial picture of your operation with FCC financial calculators to assess your liquidity, solvency and profitability. Software such as FCC Ag Expert can also help provide the detailed info you need to identify opportunities and challenges and plan your next steps.
From an AgriSuccess article by Trevor Bacque.
Investing is an important part of any producer’s business plan or structure. But before you expand or diversify, it’s good to know the ratios and strategies to make sound decisions.
Starting a new business while running a stable farm operation is possible with the right formula.