5 Ways To De-Risk Your Farm Operation
The value of your farm business is determined by your exposure to risk. To have a high-performing operation, you should identify ways to manage and reduce the threats it faces.
When you start thinking through potential risks such as stricter loan requirements or a key employee leaving, you can easily become overwhelmed.
“We generally don’t like to deal with risk or think negatively,” says Steven Slezak, a former finance professor at California Polytechnic State University. “But risk and uncertainty are the rule we have to deal with in agriculture. The problem is people tend to confuse risk and uncertainty. Risk is quantifiable, uncertainty is not.”
Here are a handful of risks you can immediately manage on your farm.
1. Outdated Documents.
Succession and estate plans should be updated as major life changes occur, says Amy Wirtz, an attorney, certified exit-planning adviser and mediator. “Most people haven’t read their documents for 15 or 20 years and don’t even know what they say,” Wirtz explains.
To combat this issue, Wirtz has her clients do a “death dress rehearsal.” Clients bring in all their documents, family members and advisers. Then, they talk through the steps they would take after the client’s death.
“You get to watch the implementation of your documents,” she says. “This includes how the process works, the timing of transfer, the taxes to pay, etcetera.”
If the outcome of the plan is not what the farmer wishes, changes can be made. “This process is imperative to growing the value of the business,” Wirtz says. “Many people have wills that were done when their kids were born, and they have never revisited them.”
2. Family Conflict.
“Most family-owned businesses are not closely held—they are hermetically sealed,” says Danny Klinefelter, professor and Extension economist at Texas A&M University. This desire to hold business practices close to the chest can cause major problems, especially when a farm is transferring ownership or management to new leaders.
Through his long career, Klinefelter has seen five common communication and relationship problems arise for farm families. They are: dictatorship, secrecy, inability to admit being wrong, unresolved conflict and unfair fights.
Nearly all families suffer from at least one of these issues. Klinefelter suggests hiring a family business consultant to bring out these topics so they can be addressed.
3. Business Growing Pains.
Today’s tough economic times can provide growth opportunities for your business. But, are you growing at a healthy and sustainable pace? Before you add acres or diversify, scrutinize your current operational costs and financial reserves, says Jill Eberhart, principal with K∙Coe Isom.
Then identify your long-term goals and perform due diligence. “Take steps to understand what you are buying,” Eberhart says. “Weigh the risk tolerance and the expected return.”
Ensure your family and team are on board for the expansion and develop an integration plan. “If you are buying land 100 miles from your home, who is going to manage it? You need a roadmap so when you are in the middle of an emotional decision, you don’t rely just on feelings,” she says.
4. Landlord Flux.
A huge risk for farmers who rent a large percentage of acres is landlord-tenant relations, Wirtz says. “Your landlord’s succession plan can cripple your business,” she points out. “How can you incentivize your landlords to make you their succession plan?”
“Farmers are working with a new generation of landowners,” adds Jim Farrell, Farmers National Company CEO and president. “Today, we are dealing with Baby Boomers who likely didn’t grow up on the farm and don’t have an emotional tie to the land.”
As a result, landowners today are more focused on farmland returns. Farrell and Wirtz suggest having straightforward conversations with your landlords, treating them with respect and being willing to share financials to justify a rent change.
5. Contingency Confusion.
What is your backup plan if your trucker has heart attack? What if you have a heart attack? These questions aren’t fun to ask, but the answers are vital to your operation, Wirtz says.
Start by asking key employees to identify a backup team member who could temporarily carry out their responsibilities. This can be someone already on payroll or someone from the outside who has similar skill sets. This will help you prioritize your team’s cross-training needs, Wirtz says. This will also help you decide who could fill in for you if you need to be away from the farm for an extended period.
