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3/13/2012
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Strategic Business Planning for Farm Succession
Kynda Curtis, Ph.D.Associate Professor and Extension Specialist
Utah State [email protected]
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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!