Thinking About Expanding Your Business?

by Ruder Ware
Contact

Flyte Family Farm in Coloma has grown a lot over the years.  Not only has Flyte grown tons of crops, but Flyte has also grown its business, which has expanded to five greenhouses and 3200 acres.

Adam Flyte and his wife, Carrie, started their business growing corn, soybeans and fresh vegetables, which they sold at seasonal farm stands.  In 1999, Adam and Carrie expanded into hydroponics. But, expansion has been gradual. 

“As opportunities presented themselves and if it made financial sense, we expanded to meet demand,” said Adam, who built one greenhouse in 1999, one in 2000, two more in 2001, and another in 2004.  Along the way, Adam and Carrie also acquired three farms.

The Flyte Family Farm business expansion has been a success.  But, what makes a business expansion successful?  What should you consider when deciding whether to expand your own business?  What do ag lenders say about business expansion?  Here are some things to consider:

  1. Why Now?  According to ag lenders, the most important question is why do you want to expand?  “You need to ask yourself ‘What’s driving the need for expansion?’” says Rich Wilcox, an ag lender, who is vice president at BMO Harris Bank.

    Terry Johnson, vice president of ag/commercial lending at Pioneer Bank agrees, “it all starts with the ability of the producer to explain why” it wants to expand.     

    In a 2012 article on growth management strategies, David Coggins, executive vice president and chief banking officer at Investors Community Bank, wrote that, “operators have all kinds of reasons for growing/expanding . . .. It all comes down to finding out your own ‘why’ before developing a plan to get there.”

    In the case of Flyte Family Farm, the “why expand?” question was answered when Adam and Carrie saw demand for hydroponics that also fit the couple’s educational backgrounds in horticulture and agri-business.  That would be classified as a good reason to expand.

    What are bad reasons to expand?  “My neighbor is expanding or I read an article that says you need to expand to be profitable,” says Johnson.

    Going big doesn’t always mean becoming profitable and that leads to our next consideration.
  2. Is Your Current Operation Profitable?  Ag lenders will tell you there is nothing magical about business expansion that will make you more profitable.

    “If you have high operating ratios now, you’re probably going to have high ratios in expansion,” said Johnson, who indicates you should take a look at your existing operation and figure out how to become more profitable before expanding.

    If your goal is to increase revenue, then expansion should not be the first step you take.  Rather, Coggins writes, you should take “advantage of all the opportunities to ‘get better’ before you work on ‘getting bigger.’”

    Wilcox concurs, “Can you work to do better before you strive to do more?”
  3.  Have You Factored in a Drop in Commodity PricesWhen commodity prices are high, it is natural for producers to want to expand their business so they can make more money.

    But, Johnson cautions producers should not “make long-term decisions based on short-term economics.” Johnson points out that expansion is a 20 to 25 year decision that you may make when prices are high, but what happens when prices drop?

    Therefore, it is very important producers have a plan in place for dealing with a downturn in commodity prices.  If revenue falls short, how are you going to pay for the costs of expansion?

    “I would advise them to think it through and record their thoughts as part of a business plan which would include projections of best case, middle case, and worst case scenarios with odds of each,” says Wilcox.

    To protect against fluctuations in commodity prices, Flyte Family Farm diversified its products.  Flyte grows corn, soybeans, hay, and sweet corn. Flyte also has 800 acres certified as organic. Organic crops include: blueberries, sweet potatoes, sweet corn seed corn, and hay.
  4. Maintain Healthy Equity in Your Assets.  Johnson advises that businesses should “not borrow their last dollar in expansion.”

    “You may need to borrow additional money in the future to deal with unexpected costs.  If you have strong equity, you can get through the hard times.” Johnson says.

    Wilcox agrees that expansion may cause some issues that were not anticipated.

    Therefore, Wilcox asks, “is the business strong enough financially to absorb post expansion drop in equity or missed problems with expansion plans?”

    Adam Flyte acknowledges that managing your debt load is very important and that “working capital is key.”

    So, what percent of your assets is it smart to borrow against?

    From a collateral standpoint, “No more than 70% of the asset value on the high side. Lower levels might be smarter.” Wilcox said.  From an owner-equity standpoint, Wilcox does not recommend getting below 40%.

    Ideally, the goal would be a “debt to assets ratio of 50% or less” Johnson said.
  5. Make Sure Everyone is on the Same PageExpansion sometimes means family members or friends are coming together to boost business. But, your family or friends may disagree on their roles or how the business will be conducted.

    Wilcox wants to know, “Is the family and employee base on board with expansion plans?”

    Johnson relayed a story about a father who expanded his dairy business so he could farm with his five sons.  Later, when the operation was struggling, the sons admitted at a family meeting they didn’t like milking cows.  The moral of the story is communication between family members and business partners is critical.

    Expansion may also bring you additional responsibilities and headaches.

    Coggins writes that an expanded organization can test your “management talent” and “you need to ask yourself the hard question of whether you have the talent for taking on a bigger and much different job and a more strategic role in the organization.”
  6. Seek Out Trusted Advisors.   A good ag lender can be a helpful adviser.  Johnson notes that you should not run away from a lender who asks you lots of questions.

    “The questions are designed to help you understand whether expansion is appropriate for you.” said Johnson.

    Coggins writes “Your banker is going to look at a whole host of factors in considering your request for expansion, from working capital, to long-term cash flow assumptions, transition and construction phase issues, contingencies and having a well-documented plan.”

    Adam Flyte agrees that your ag lender can be a critical part of your success.  The lender is a “friend and a partner,” Adam relates.

Finally, be aware that legal issues can arise as you expand your business.  Such issues include: partnership or LLC operating agreements, construction agreements, estate and succession planning, leases and offers to purchase, and employment agreements, to name a few.  So, don’t be afraid to add an attorney to your circle of trusted advisors.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ruder Ware | Attorney Advertising

Written by:

Ruder Ware
Contact
more
less

Ruder Ware on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.