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Strategic Business Planning for Farm Succession

Kynda Curtis, Ph.D.Associate Professor and Extension Specialist

Utah State Universitykynda.curtis@usu.edu

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Overview

Importance of formal written strategic business plan

Strategic plan process and components

SWOT analysis

Challenges

Management transfer planning

Strategic business plan resources

Activity

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Why Spend Time Planning?

70+ percent of new businesses fail in the first year. Within 5 years 85% are

gone

Business failures are most often due to: Inadequate planning Under capitalization Do not have the needed

management skills as part of their “team”

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Farm Firms are Unique

Hierarchy of Control

Stability vs. Growth

Business Life Cycle

Personal vs. Business Goals

Limited Planning Horizon

Traditional Lack of Strategic Management

Lack of Formality

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Strategic Planning Process

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Business Plan Components

Mission Statement

Overview of Goals & Objectives

SWOT Analysis (Strengths, Weaknesses, Opportunities, & Threats)

Internal resources – strengths and weaknesses

External resources – opportunities and threats

Management Transfer Description

Product(s) Description

Market(s) Description

Financial Statements

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Business Plan Components

Mission Statement Firm purpose, priorities, central goal

Goals Accomplishments with timelines

Broad/general statements

Objectives To do list for each goal with timelines

Precise/quantifiable statements

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Mission Statements

Statements that explain who we are

Type of organization

Products/services

Needs we fill

Statements that explain our direction, our purpose, our reason for being

What difference do we make?

Statements that explain what makes us unique

Values

People

Combination of products and services

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• Identify...

–Strengths

–Weaknesses

–Opportunities

–Threats

Firm

Internal

CustomersCompetitors

MarketConditionsExternal

SWOT Analysis

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Internal ScanningStrengths and Weaknesses

Firm and enterprise level

Personnel/labor Including management potential

Any needed training/education

Capital requirements

Machinery/equipment

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External ScanningOpportunities and Threats

Global Weather, trade, consumers

National Taxes, laws, regulation

Industry Markets, technology, competitors, regulation

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External Scanning

Opportunity orThreat

Change

Importance

FutureDirection

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Strategic Response(Strategizing)

How can the firm creatively use its

unique strengths to take advantage

of an emerging opportunities.

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Competitive Advantage

Characteristics of a firm that allow it to outperform rivals in the same industry

What the firms does better than its competitors Product, service , process, access

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Common Challenges

Managing people

Managing relationships

Effective communication

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Common Challenges

Additional recordkeeping requirements

Generating additional profits for enterprise expansion, additional members, etc.

Equity – enough or putting it at risk

Compensation for contributions

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Strategy Levels

Firm Strategies Specifies firm’s direction and planning horizon

Portfolio Strategies Specifies firm’s portfolio of enterprises

Enterprise Strategies Specifies how each enterprise will compete within its

industry

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Firm Strategy Types

Growth Strategies

Stability Strategies

Retrenchment Strategies

Termination Strategies

Succession Strategies

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Strategies/Objectives

Survival

Long-term stability

Social responsibility

Free trade, environmentally friendly packaging

Profit

Max profit over time

Market share

Maximize sales in market

Product quality leadership

Higher costs & higher product pricing19

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Potential Opportunities

New Enterprises New crop or livestock, value added products,

agritourism

Expansion New land, machinery, etc.

New Markets

New Technologies/Resources Machinery, insurance, seed

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Firm Strategies

Long ShortTermination Succession

Stability

Growth

Retrench

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Firm Portfolio Analysis

Firm

Enterprise Enterprise

Enterprise Enterprise

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Enterprise Categories

PrimaryEnterprise

(core business)

SecondaryEnterprise

SecondaryEnterprise

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Strategic Planning

Plan needs ability to evolve

Think in terms of labor, management, and capital

Can’t control world markets, but need to anticipate potential outcomes and manage risk

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Other Types of Planning

Long-Range Planning Goals/objectives are translated into budgets and work

programs

Financial Planning Financing business plans

Incremental Planning Making minor changes to improve current operations

(short-term)

Abdication Planning Outside forces determine long-run firm direction

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Strategic Business Plan must….

Generate enough income to meet needs

Provide funds for unforseen opportunities

Provide a surplus equity for younger party to buy in or shift resources

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Management Transfer Description

Building skills and management capabilities for the next generation

Older generation provides mentoring

If existing enterprise start with a small amount of land or livestock herd

Could be a new enterprise or use of machinery (custom work)

Include younger generation or purchasing entity and their spouses

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Strategic Management Needs

Forward thinking/proactive planning

Anticipate change

Sharpen focus

Identify opportunities

Identify success factors

Develop competitive advantage

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Managerial Attitudes

Reactive attitude Business environment is too complex to understand

Change is to be avoided

React to problems

Muddle through

Victim Attitude Business environment is controlled by others

Change is bad

Blame others for problems

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Managerial Attitude

Negative Attitude Always a reason why it won’t work

Change brings threats, not opportunities

The risk of taking action is greater than the risk of not taking action

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Managerial Attitude

Entrepreneurial Attitude Business environment is to be used

Changes provide opportunities

Focus on the opportunities

Planning Attitude Business environment provides business opportunities

Plan for change

Proactive search for opportunities and problems

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Example: New Enterprise - Goats

Growing Hispanic demand

Have needed management skills?

Have facilities, equipment, land, etc.?

Understand the market and type of market?

Generate enough income? Supplemental enterprise?

Provide surplus equity for younger party?

How is the family involved?

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New Skill Development

Foresight

Visioning

Strategic thinking

Innovation

Assimilation

Recognizing paradigm shifts

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https://www.agplan.umn.edu/

Planning Tool

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AgPlan

Mission

Values

Vision

Goals

History & Current Situation

Production Plan

Management Plan

Marketing Plan

Monitoring Checkpoints

Free

Develop your own business plan

Learn what you need to include in your plan with tips & resources

View sample business plans for ideas

Share your plan—print, download and work with your own reviewers

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Other Resources

Firm Assessment Tool (handout)

Building a Sustainable Business Workbook Publication of WSARAE

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Activity

Opportunities

List by type

Threats

List by type

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Activity

Strengths

List by type

Weaknesses

List by type

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Questions?

Thank You!

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Business Ownership

Sole proprietorship

Partnership

Limited partnership

C Corp

S Corp

Limited liability company

Cooperatives

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Sole Proprietorship

Simplest form of business organization

Requires no formal written documentation other than basic farm/ranch financial, & tax records

The owner owns and manages the business, assumes all risks, receives all profit

Taxes on profit paid at tax rate of owner (individual or joint for couple)

Advantages: simplicity & freedom

Disadvantages: personal liability, size may be limited, lack of continuity

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Sole Proprietorship

Pros Easy to start

Single taxation

Full control

Cons Full liability exposure

Non-transferable ownership

Harder to obtain financing

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Partnerships

An association of two or more persons who share ownership of a business

General partners contribute to the management of the business and are exposed to unlimited liability

Limited partners do not participate in the management & are liable only for what they have contributed to the business Limited partnerships appropriate when families want to

separate management responsibilities from ownership interests, such as when there are on & off-farm children

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General Partnerships:Organization & Characteristics

Sharing of business profits and losses

Shared control of property, with possible shared ownership of some property

Shared management of the business

Written partnership agreements not legally required, but highly recommended

Frequently used to bring family members into the farm business

Effective way to share ownership of operating assets

Gives the younger generation the opportunity to build equity in the business

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Written Partnership Agreements

Management Who is responsible for which decisions and how they

shall be made

Property List the property each partner will contribute and how it

will be owned

Share of profits and losses Carefully describe how these will be divided

Records Designate who will keep the records

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Written Partnership Agreements

Taxation Include a detailed account of tax basis of property and

copies of the partnership information tax return

Termination State the date of termination if one is known

Dissolution Method of division of property in case of dissolution of

partnership

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Advantages of Partnerships

Easier & less expensive form than a corporation

A carefully written agreement can allow the partners to maintain much of their freedom

Flexible form of business that can accommodate many different situations

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Disadvantages of Partnerships

Unlimited liability of each general partner

Any partner individually can act for the partnership in legal and financial dealings & the other partners will also be held responsible

Potential for poor business continuity

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Partnership Taxation

A partnership does not directly pay taxes It files an information income tax return

Each partner’s share of income from the partnership is reported on his/her own tax return

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Partnerships

Pros Pass through taxation

Many financing options

Easy set up

Ownership buy-out

Cons Full liability exposure

Shared control

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Corporations

A corporation is a separate legal entity with liability protection

It is formed and operated in accordance with laws of the state in which it is organized

Shareholders in a corporation are liable only to the extent of their investment

Existence of corporation is continuous even as individual owners change

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Forming a Farm Corporation

File a preliminary application, reserving a name for the corporation

Draft a pre-incorporation agreement outlining major rights and duties of the parties

Prepare and file the articles of incorporation

Turn property or cash over to corporation in exchange for shares of stock

Shareholders meet to organize and elect directors

The directors elect officers, adopt bylaws, and begin business

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Corporations

S Corporations Pass income to the shareholders Less than 75 shareholders One class of stock Taxed the same way as partnerships

C Corporations Pass income along in the form of dividends Taxed at both the corporate & shareholder levels Fewer restrictions on the number of shareholders,

different classes of stock Good for especially large businesses with many owners,

regardless of the double taxation

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Corporations

Pros Most liability

protection Structured

management Ownership

transferability Non-participating

ownership Greatest options for

funding

Cons Double taxation Least flexibility in

structure

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Corporate Veil

Owners personal assets are shielded

Only equity invested could be lost

Liability protection loss Fraud

Co-mingling of funds

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Preserving the Corporate Veil

Maintain separate personal and business accounts

If the company needs money- make a documented loan from personal monies to the company

Loan should be paid back in the future

Same applies to personal loans from the company Should be a loan or a bonus paid out to the recipient, not

a personal purchase made with the company account

All company assets fall under this structure

Attempt to eliminate intentional dishonest business dealings

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Limited Liability Companies

A limited liability company (LLC) resembles a partnership, but offers members the advantages of a corporation

Liability is limited to the assets of the LLC, not the individually owned assets of members

An LLC can have any number of members, all of whom can participate in management

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Limited Liability Companies

Ownership distributed according to fair market value of contributed assets

Net farm income from an LLC passed to members, who pay taxes at their individual rates (no “double taxation”)

An LLC does not automatically continue in the event of a death of a member

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LLC- Multiple Business Model

LLC- Multiple Business Model Liability is limited by breaking the total operation into

different companies

Example Company 1 – Hay

Company 2 – Trucking

Company 3 – Livestock

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Cooperatives

Cooperatives are a special type of corporation

They require articles, bylaws, and detailed records

Members who contribute capital enjoy limited liability

Net income is passed to members and taxed at their individual rates

Return to members cannot exceed 8%, with remaining profits distributed as “patronage refunds”

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Benefits of a Cooperative

Value-Added Products Product Differentiation Vertical Integration (processing, marketing)

Manage risk Marketing Contracts Delivery/Price Shares

Economies of Scale

Access to Supplies/Education

Technology Advancements

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Questions?

Thank You!