Keep/Cull Decisions for A Successful

Operation

Dr. Alex WhiteDairy ScienceVirginia Tech

axwhite@vt.eduCourtesy of Canadian Simmental Association website

Main considerations:◦ Production

Can we get her pregnant?◦ Functionality

Is she mobile? Age? Can she see? Can she eat?

◦ Genetics Necessary traits, potential, meeting industry needs

“An eye to the future” Disposition Mothering ability Fleshing, efficiency, etc.

Keep/Cull Decisions

Tell me something I don’t know….

Or, tell me something I need to admit to myself!

Blah, blah, blah

Keep/Cull Decisions for A Successful

Operation

Dr. Alex WhiteDairy ScienceVirginia Tech

axwhite@vt.edu

Does this sound familiar?◦ Mom & Dad own a majority of the farm assets◦ Successful, but aging operation◦ 3 children

One has no interest in the farm One only wants to farm One has no clue

◦ And, one is married to someone who wants to be part of the operation

◦ Or, the “in-law” hates the operation

A Successful Family Operation?

Mom & Dad love each child◦ Will says “each gets an equal share….”◦ Or, they have no will

Either way, kiss the farm goodbye

Child #1 is a clone of Dad Child #2 is the exact opposite of Dad Child #3 is the best, brightest, but….

◦ Spouse & Dad = Oil & Water

Make the Nightmare Stop

Child #1 feels entitled to take over the operation

“After all, I’ve worked on the farm, and I’m the oldest”

Or, Farm Child & Farm Parent get along great◦ But Parent doesn’t share plans with Child◦ Child does what Parent says◦ Parent doesn’t show Child “the books”◦ And something happens to Parent….◦ Now Non-Farm Children take an interest in

the farm Farm Child has little/no equity in the operation….

It Can’t Get Worse, Can It?

30% of family businesses make it to the 2nd generation

12% survive to the 3rd generation 3% make it to the 4th generation

Family Business Institute

Why?◦ Lack of money?◦ Poor market conditions?◦ Bad luck?◦ More likely, no/poor transition planning

We Will Survive – We’re Family

Family Farm Transition Options Keep the farm in the family

◦ Maintain ownership

Keep the family in farming◦ Onward & upward!

Chain the family to the farm◦ Shackled to an unprofitable farm

Sell the farm◦ Take the money and run◦ vs a “forced sale”

Family Business Transition Very emotional issue

◦ Senior (Sr.) faces losing some control, being less involved

◦ Junior (Jr.) faces high debt loads, increased responsibility & time constraints

Taken more seriously after someone dies◦ Usually too late◦ Many decisions based on emotions

May have drastic implications!

With my apologies

◦ “Replacements” = Younger Generation(s)

◦ “Old Cows” = Older Generation(s)

Keep/Cull Decisions for Family

Bringing in the “Replacements”◦ “Production”

Production knowledge – nutrition, repro, etc.

◦ “Functionality” Skills & abilities to be successful Is there “room” for them

◦ “Genetics” Willing to listen & learn Desire, work ethic, responsibility Business management & continuing education Willing/able to teach the older generation

Keep/Cull for Families

Must be able to support themselves◦ The $250,000/Operator Rule for full-time job

Must generate an additional $250,000 of revenue

That’s roughly 300 cows at today’s prices 500-lb calf @$200/cwt, 85% weaning rate

◦ It costs ~ $0.80 to generate $1.00 of revenue Feed, vet, labor, repairs, marketing, ….

Depreciation, interest, insurance, property taxes

The Replacements

“Custom Heifer Raising”◦ Send the next generation away for 3-5 years

Learn new production techniques, network

See different management styles & practices

Gain confidence, maturity, and independence

Figure out if this is what they really want to do!

Provide “new blood” to the family operation

The Replacements

“Quarantine” upon return◦ A “probationary period”

Ease them into the operation gradually

◦ Responsible for 1-2 aspects of the operation Pasture management, herd health, etc.

Provide them with benchmarks, goals

Give them authority to make decisions But provide guidance and feedback

Give up some of your control Be a teacher & mentor – share your knowledge

The Replacements

Have a Timeline◦ Develop a plan to gradually shift the:

Ownership of assets Management responsibilities

◦ Controlled growth◦ Younger generation needs to be patient, though

Heifer calf productive cow◦ Takes time (and patience)◦ Takes nurturing and investment◦ Need to prepare her to be successful

Same thing goes for your next generation!

The Replacements

What about non-productive family members?◦ Avoid this by:

Sending them away or 3-5 years

Probation

Teaching/mentoring…

Plan ahead, prepare them to be successful!

The Replacements – Uh oh

What about non-productive family members?

◦ But it’s too late for that: Honest, open communication

Use the benchmarks & job descriptions Motivators or “dropdeads”

Change their duties to more suitable ones

Help them find new employment Hopefully everyone will be happier & better off

◦ May need to bring in non-family manager Management Heterosis!

The Replacements – Uh oh

Again, with all due respect! The older generation(s) has needs, too

◦ They need to: Nurture the younger generations Be willing to share their plans – communicate Give up some management control

In a controlled manner Become teachers and mentors Listen to the younger generation

Learn from them! They’re good! Be patient

The “Old Cows”

Productivity?◦ If productive

Continue to teach/mentor, share, enjoy

◦ If not productive Still drawing salary from the farm?

Pressure on cash flow $250,000 Rule still applies

Impact on management “Ham-stringing” the next generation

Impact on morale & family relations Can you “cull” or “fire” them?

The “Old Cows”

Develop written job descriptions◦ For all involved parties

That includes the older generation◦ Map out all of the needs & allot them as needed◦ Helps keep things from falling between the cracks

Develop a written business plan◦ Legal, labor, operations, marketing◦ Finance, risk management, contingency planning◦ Transition/Exit plan, estate planning

Some Transition Tips

Personality profiles for everyone◦ DiSC®, Myers Briggs®, True Colors®, etc.

◦ Extremely powerful communication tool

◦ Great for conflict management Aw, we’re family, we have great communication….

Get professional help! (Advisory team)◦ Legal, accounting, financial, production,

marketing

◦ Transition, exit planning, estate planning

◦ Mediators or facilitators

More Transition Tips

Have regular business meetings◦ Off-site, neutral turf

◦ Have an agenda, and stick to it

◦ Take minutes

◦ Talk about goals, transition, “business stuff”

◦ Talk about estate planning

◦ Invite professionals, advisors, speakers

◦ Leave your egos at the door Make decisions that are best for the family, not for

one individual

More Transition Tips

Retirement Planning ◦ Eases the transfer of the operation

◦ Provides living income for older generation Less cash flow pressure on operation

◦ May be more profitable than re-investing in the farm over time

◦ Reduces the risk to the family Diversification Judgement-proof

◦ Tax advantages

Transition – A Key Step

Retirement goals:◦ 25-yr old $3-4 million ($25/day)◦ 35-yr old $2-3 million◦ 45-yr old $1.5-2 million◦ 55-yr old $1-1.5 million

$50,000/yr living equivalent for 30 years in retirement

3% inflation 8% nominal return pre-retirement 6% nominal return during retirement Assumes no other income or sale of assets in

retirement

Retirement Planning

Tax advantages:

◦ Tax deductible contributions Reduces your income taxes each year

◦ Tax deferred growth As long as the funds remain in the account

◦ Tax free growth (Roth) Great for younger folks!

Retirement Planning

Main Farm-Based Retirement Plans

◦ Traditional IRA or Roth IRA $5,500/yr ($6,500 if over age 50)

◦ SIMPLE-IRA A 401(k) for small businesses $12,500/yr ($15,500)

◦ SEP-IRA A pension plan for small businesses ~20% of net income, max of $53,000

◦ Solo 401(k) For those with no employees Similar contribution to SEP-IRA

Retirement Planning

Churn, Earn, Turn, or Burn◦ “Wonder, Blunder, Thunder, Under”

Manage (Nurture) your Replacements◦ Have a transition plan◦ Start Now!!

Retirement planning for all parties

◦ Start Now!!

The Business Cycle