The Options Strategy – Why agriculture will need to move away from exit strategies
A person in my network sent me a text the other day that simply said, “you must read this book”. Included was a camera shot of the hardcover book Built to Sell by John Warrillow.
By the weekend I had it on my desk, and by Monday afternoon it was done cover to cover with a thousand highlights and sticky notes plastered across the pages.
What does a book about maximizing sale ability of businesses have to do with agriculture?
Quite a lot to be honest.
Often the succession or transition plan of an agriculture primary producer is cut and dry. Either the next generation is coming back and is going to take the reins or quite simply put – we sell.
The latest round of Farmer Coach identified this mentality – a very small number of farms wanted the operation to become a legacy business outside of family participation or not. This brought up the interesting discussion of why? In an industry where real estate has seen appreciation rates much higher than any stock market numbers, and the annual dividends can be a steady 2% to 3%, why are we eager to sell the entire asset portfolio and put our money into higher risk investments?
The answer I have seen? It’s easier.
Not to give away the great parts of the read, but the book is based around having what is called an “Options Strategy”. This is the ability to make any decision on the legacy and future of the business at any point in time without making large scale changes.
You can continue the business for generations, you can sell the business to investors or other family members, you can have a merger or acquisition, or in the end you could just sell.
The moral of the story is that by putting certain processes, people, and procedures in place you open numerous options for your future. You are not tied into either the kids taking it or I sell it off for parts.
Keyman Issues
The number one issue with farms is that the majority have a significant “keyman” issue. This is the notion that the owner does everything – they’re the CEO, the janitor, and the moment they are not around or not available the operation comes to an abrupt stop. Sound familiar? Back to the old “lifestyle versus business” argument we like to have and why this matters. This is why.
We all like the warm fuzzy feeling of being important.
I would be lying if I said my own business at Maverick Ag and Farmer Coach are not built on this feeling. The center of attention is a great feeling until you want to take more time off, or step away to spend more time with family or recuperate. By not being humble you create one of the largest reasons for an “exit strategy”, nobody else can run the damn thing.
During speaking engagements or talks with others in agriculture, we have always preached people – focus on the who and not the how.
The only way to eliminate keyman issues is to have the right people in the business, create processes that allow them to take over responsibilities and accountabilities, and then remove yourself from the equation. It takes trust, it takes commitment, and most of all it takes patience. Very few have achieved this level of farming prowess, but I promise those that have will never go back. Sitting in a cab gets old.
The How-To Manual
People, processes, and procedures make the world go round.
Don’t believe me?
Try putting together a piece of furniture from Walmart or Ikea.
Those paper instructions become the bible in a very short period. Even the most skilled carpenters start swearing when the manual is in the wrong language or does not have nice big pictures of us all to follow. Why would running a multi-million-dollar farm be any different?
I am going to be upfront: creating processes and documentation procedures is terrible work.
In fact, delegate this as fast as you can to whoever will take it.
You learn quite quickly that you may not be the best person to complete this task anyways. If you hire strong people, they probably have a better and more efficient way of getting things done than you do. So why would you be the one to tell the next generation how to do it?
The ability of processes and procedures towards growth is another level of sophistication. I have seen numerous farms grow without them, but I have also seen those same farms flounder and implode while doing so.
The risk is not usually financial ruin, but operational ruin. Burnout, loss of employees, the ability to track progress, missing fields that need to be seeded or sprayed, or even as serious as having mistakes or personal injury on the farm. How many close calls can you name on your farm in the last few years? The truth is that one is too many. Maybe a process or procedure can save somebody’s life in the future.
How About Just Mo Money, Mo Money, Mo Money
Maximizing profits is the number one goal of most businesses. However, in agriculture, we have found every reason possible to not even track progress. When I was speaking at an agriculture conference in the U.S., the audience members could not even tell me what accrual accounting is or what they have profited (not cash flowed) over the last few growing seasons. (In Canada we are slightly better, but I use the term slightly with parenthesis).
Agriculture has always been an asset value business.
What I mean by that is when we discuss sales price for a farm, it is based on real estate, inventories, and equipment value. Never have we ever talked about processes, people, agreements in place, or any other aspects that other industries utilize to value operations.
Because of the banking industry, we have been pigeon-holed into a valuation that removes all aspects of goodwill or the value that the business has built through proper professional internal operations.
I see this changing in the future, and it should.
Is a farm that has a management team of strong professionals, processes and procedures around all tasks on the farm, a strong compensation plan with equity sharing, and any other internal advantages worth more than its neighbour?
When I ask it this way the answer should be a resounding YES.
The issue is that the industry is so far behind on everything I’ve just outlined that this type of valuation has never been discussed. It will be, especially as policy makers push ESG strategies and landlords become longer-term and tied to the agreements of the farm. If your farm had all ten-year lease agreements, is their value to a buyer?
In the end, most of this is a dream at best for now. The book has changed how I think about my own business (consulting and coaching) and where we pivot moving forward so in that I call it a succession.
To the individual that sent me the recommendation – thank you. This truly did destroy my weekend as I lost sleep over the excitement and motivations I now have.
For the farms that are reading this, I ask you one simple ending question.
Did you become an entrepreneur to create something bigger? Then what is your Options Strategy?
