Agricultural Trends

August 11, 2023

Pitfalls of Business Transition

By: Dr. David M. Kohl

Business transition is commonly ranked as one of the top three challenges facing agricultural businesses. As the baby boomer generation comprised of individuals born between 1946 and 1964 transition, the challenge becomes even more paramount. There are often unexpected elements that make the business transition process appear analogous to a major mountain climb. Let's address some of the common business transition pitfalls. 

Waiting too long 

A California producer said it all in his comments before a seminar. His neighbor asked, “When are you going to become the copilot or even the passenger in your business?” His point was not to wait too long before you begin to hand over the reins, responsibilities and ownership. He further stated that he was stubborn and felt he was going to live forever. His neighbor's blunt question prompted him to get the transition process started and was a constant reminder to make sure that it was completed. 

Profitability in the business 

A subtle, but important, part of business transition is to make sure the business is profitable. Often, profitability is measured by tax records that are designed to reduce income taxes or, in many cases, generate losses through revenue, cost and depreciation adjustments. It is very important to do an accrual-adjusted income statement to provide a more accurate assessment of true profitability. Accrual adjustments consider the changes on the balance sheet for inventory, accounts receivable, accounts payable, prepaid expenses, accrued expenses and supplies. Studies conducted by both Purdue University and the University of Illinois illustrate that the net income variation between cash, or schedule F tax forms, and accrual-adjusted income statements amount to a 40% to 60% difference. 

Rusted out, worn-out, and faded-out assets and business management culture 

A kiss of death is when the younger generation obtains an asset base that is not “up to snuff” from an efficiency or competitive standpoint. To compound matters, sometimes significant investments have to be made soon after the younger generation takes over when they often cannot afford to do so. Layer on a management culture that is oriented in the past, rather than the future, and one has a recipe for a potential disaster. 

The possible cure for all of these pitfalls is to work with a third-party neutral facilitator or trusted advisor to get the transition process started and to ensure the transition journey proceeds as planned. The question becomes, are you ready? 

Dr. Kohl is Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship in the Department of Agricultural and Applied Economics at Virginia Polytechnic Institute and State University. Dr. Kohl has traveled over 10 million miles throughout his professional career and has conducted more than 7,000 workshops and seminars for agricultural groups such as bankers, Farm Credit, FSA and regulators, as well as producer and agribusiness groups. He has published five books and over 2,500 articles on financial and business-related topics in journals, extension and other popular publications.