Getting financing for your diversification plan can be a lot more complex than getting a loan for the home farm
n the last issue of COUNTRY GUIDE we discussed why farmers consider diversifying into supplementary non-farm businesses. We also discussed the steps involved in testing the financial feasibility of a business concept.
This article addresses how to secure financing and get started on the right financial foundation.
It all comes down to money. Anyone who diversifies into a non-farm business venture wants to make money. But in order to make money, you have to start with some money.
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When you are planning a new business that requires only a small capital investment, you may be able to finance the venture with your own funds or contributions from family members or friends. But many entrepreneurs will need additional capital.
It’s important to get financing lined up early on since financing is never easy to acquire these days.Develop a business plan
Any time you approach a lender for funds, you will need a business plan. A lender will want to know your goals, the fundamentals of the proposed venture, the purposes for which you require financing and how and when you intend to repay the funds.
While this plan is vital for financing purposes, it is also an important guide for you and your business team, setting out the goals and direction of the enterprise. This document outlines what you intend to do and how you intend to do it, and once the business is underway, it will help you measure your progress.
The process of documenting the plan also makes you work through the important details of starting and running the business. This affords an opportunity to identify potential problems early on and to develop appropriate solutions — circumventing later, more costly errors.
While the complexity and specifics of business plans vary widely from one enterprise to another, the following are the basic components:
An overview of the business, its goals for one to five years, and an explanation of how you intend to make the venture a success.
A market analysis including industry, geographic area, potential customers and the strengths, weaknesses, opportunities and threats for the new business and how you intend to address these.
A merchandise profile with descriptions of products or services, positioning and pricing strategies.
A profile of the operation including the time, people, facilities and equipment required and whether these are existing resources or new; also suppliers, distribution, ownership, management, and business structure.
A marketing strategy including sales, advertising and promotion plans.
A financial plan with anticipated revenue and expenses, a list of current assets, current financing in place, capital requirements, financial projections, and other supporting financial documents that demonstrate how your business will be profitable.
When it comes to the financial portion of the business plan, be sure to determine whether there are any relevant local, provincial or federal government financing programs available. Consult with your farm accountant or the representative of your provincial agriculture body as a starting point.
If you have a stable farm operation, you may want to start your search for funds by approaching the banker with whom you already have a relationship. Still, to successfully secure the financing you need for a new venture, err on the conservative side of financial projections. Lenders expect to see a realistic portrayal of the viability of the proposed venture.
You should also be prepared to personally invest a portion of the total funds required to start the business and you may have to pledge certain farm collateral or personal guarantees.
Lenders expect owners to take on some personal risk to support the success of their business.
Set up the proper business structure
The proper structuring of the business is
another consideration to ensure you protect the assets of your farm and those of your family from undue risk. If, for example, you intend to start a costly and/or complex operation, like the cheese dairy that we discussed in the first article, it would be safer to incorporate the business as a separate legal entity to safeguard the farm assets.
It’s also important to understand the tax implications of a second business. In order to minimize the family’s personal tax burden, for example, you need to consider who will own the business and report income and profits or losses.
As well, there are tax rules specific to farm operations and you don’t want to muddy the tax situation by introducing a significant non-farming component. Therefore, even if you plan a fairly simple diversified business, like a small roadside market stand, and don’t wish to incur the costs of incorporation, you may still want to separate the new business from the farm operation by setting it up as a separate enterprise.
Separate record-keeping systems are also important in order to distinguish between revenue and expenses for the new venture and the farm operation. This will enable you to readily determine the amount of revenue and profits the new enterprise is, or isn’t, generating in order to make informed business decisions.
Establish a financial monitoring system
With a business plan and financial projections, you’ll have a solid foundation with which to monitor the financial health of the new venture. To help you measure progress toward your goals, and to alert you to any emerging problems, review the following financial statements on a regular basis:
Cash flow statement to track the amount of cash entering and exiting the business.
Income statement to review sales, gross profits, expenses and net profit/losses.
Balance sheet to measure changes in liabilities and net worth.
Be on the lookout for slowing inventory turnover or accounts receivable or a significant increase in the debt-to-equity ratio. These could indicate financial problems and you may need to take corrective action.
With careful thinking and planning, however, the more likely scenario for your diversified business will be success. This is what Al and Nan experienced with their cheese business as a result of their thoughtful approach to diversifying. They’re the successful owners of a dairy farm — and also the proud owners of a burgeoning artisanal cheese dairy.
Keep working at it, assess your progress on a regular basis and adjust your business plan as needed. The future in diversification is bright. CG
Coralee Foster is a partner of BDO Canada LLP (www.bdo.ca)and chair of the firm’s agricultural group. She provides accounting, taxation, succession, estate planning and consulting services to clients including agribusinesses and primary producers. You can reach Coralee in the Mitchell, Ont. office at [email protected]or 519-348-8412.
