Farming Operation 'Should Support Your LIfe'

www.agrinews-pubs.com
Martha Blum
2010-07-23

SANDWICH, Ill. — The goal of a business is not to create jobs for people.

“The purpose of your life is not supposed to be to support a business. The purpose of a business is supposed to support your life,” said David Pratt, ranch management consultant.

Pratt, with California-based Ranch Management Consultants Inc., discussed effective family relationships during a seminar held in conjunction with the Illinois Beef Association’s Summer Tour and Conference.

“The success rate for passing the farm to the next generation is 30 percent,” he said. “That is a symptom of a lot of other things that aren’t working very well.”

The management consultant identified several reasons that are contributing to this poor success rate.

“One reason is dad doesn’t want to talk about it,” Pratt said.

“Another reason is the business isn’t viable,” he added. “Our definition is if you can start a business today without inherited wealth, pay the full cost of labor, pay interest on all the assets, pay all the input costs and get a positive return, that’s profitable.”

The succession also may fail because the heirs don’t have managerial or entrepreneurial capacity to deal with the operation.

“One of the single biggest things you can do to move forward with succession issues is to separate the land business from the operating business,” Pratt advised.

“For livestock operations, the average return on assets is minus 1.5 percent if you don’t count land appreciation,” he said. “So if the average farm is losing money, why don’t they go bankrupt?”

These operations do not go bankrupt because most of them are subsidized, Pratt said.

“But I’m not talking about government money. I’m talking about off-farm income, farmers working for free, appreciating land value and inherited wealth,” he explained.

“If a farm doesn’t make a profit, it’s not a business — it’s just a hobby,” he said. “A profit is to business as breathing is to life.”

According to Pratt, the average cow-calf herd in Illinois is 29 cows and 85 percent of the farms have fewer than 50 cows.

“Only 1 percent has over 200 cows,” he said. “But no one ever said a business had to be big or it had to be full time.”

Pratt described the difference between working in the business and working on the business.

“Working in the business is all the technical jobs like feeding cows, giving vaccinations, and fixing facilities,” he explained.

“We do these things really well and they’re important because if someone doesn’t turn the bull out with the cows, the business fails.”

Working on the business involves looking ahead.

“This includes planning, staffing requirements, deciding how to hire and fire people, planning for drought, planning for recession, developing marketing plans, etc,” Pratt said.

Many producers struggle with working on their businesses, the consultant said.

“No one has ever taught us how to do these things,” Pratt noted. “The future is not a straight path from here. It’s a pretty curvy path, so you better be anticipating that.”

It is important for every business to select the right person for each position.

“Just because they have your genetics doesn’t mean they’re the right people,” Pratt said.

“When we know somebody is in the wrong position, we tend to leave them there, especially if they are a family member,” he added. “And we do that because it is really tough to fire your dad or your kids.”

Another reason the wrong people are left in positions is because managers are afraid the person can’t be replaced.

“We take the worst part of change and we make it excruciating because we haven’t convinced ourselves it will work,” Pratt said. “So we go real slow and guarantee it won’t work instead of figuring out what needs to happen and make it happen.”

Managers sometimes don’t deal with people in the wrong position because they know there will be a lot of stress during the confrontation.

“If we don’t deal with it, there’s only a little stress we live with every day,” Pratt said.

“We need to get the wrong people off the team because it’s not good for us, it’s not good for our good people because they become resentful, it’s not good for the business and it’s not good for the people who shouldn’t be on the team because they are probably miserable, too,” he said.


Return to Article List