Jean-François Fortin
Partner | CPA, CA | Assurance

Are you thinking about expanding your dairy farm to increase profits? Be aware that healthy growth does not necessarily mean the size of the herd.

A dairy herd that produces 20 litres of milk per day could prove more profitable than a herd that produces 30 litres. How can this be?

The prolific cow enigma

Farm A (Prolific Cow), has a 40-kilo milk quota and a herd that produces an average of 19 litres per day, generating net income of $2,867 per kilo.

Farm B (Generous Cow), with 160 kilos and an average of 32 litres per day only generated $651 per kilo.

What’s the key to the enigma?

A key factor is balancing costs incurred and the resulting production. There are three indicators:

• Labour costs;
• Feed costs;
• Veterinary costs.

In Farm A’s case, these three amounts total $2,000 per kilo, whereas in Farm B’s case, they are over $3,600 per kilo.

In both cases, the other expense items, interest and maintenance costs, are almost equivalent.

Naturally, a large efficient farm operation can generate significant earnings, but only if the three parameters are properly controlled.

Growth vs. profitability

If you’re considering growing your business, remember that growth at any cost is not necessarily a good idea. It’s important to undertake an in-depth reflection and ask the right questions before making a major investment.

A farm producer must be an excellent manager and a skilled technician to maximize profitability. Additionally, you should set your priorities:

• Will sales go up and at what cost?
• Will this reduce certain necessary expenses?
• How will this impact my quality of life?

This analysis is an essential prerequisite. Our experienced team can support you in conducting the evaluation and help you strike the right balance.

18 Oct 2018  |  Written by :

Jean-François is an assurance expert at Raymond Chabot Grant Thornton. Contact him today!

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Gaston Fournier
Manager | M.A., CHRP | Human resources consulting

The acquisition of a farm business requires a significant time investment. This is why transferring a farm must be well planned and carried out progressively.

More than 7,500 active young farmers in Quebec and recent studies show that the young agricultural successors are better educated. More than 80% have a post-secondary diploma.

Being optimistic is great, but a successful generational transfer, whether of a family farm or selling to an unrelated third party, will take at least five years in the planning and must be carried out gradually.

To guide you towards success, our team of experts proposes a seven-step business transfer.

1. Drafting a portrait of the situation

The level of preparation for the transfer and successor is of the utmost importance. Sometimes during this step owners have a hard time dealing with the idea of selling their business. Accordingly, an analysis of the different options available to transferors and transferees, including the timetable, will and testament, list of partners involved in the transfer and succession planning, can provide them with strategic support in this process.

At this step, experts such as tax specialists, legal advisors, industrial psychologists and management and asset management consultants will determine the coaching needs.

2. Mobilizing the strategic players

A “project manager” should then be appointed who will coordinate and mobilize the multidisciplinary team of specialists involved based on the diversity of the transfer issues (tax, strategic, human, legal, etc.).

The commitment of key resource people is a key factor in the success of the transfer, but the significance of employees, clients or suppliers should not be forgotten. A clear communication plan will ensure a smooth transition.

3. Analyzing financial needs and financial capabilities

The next step is to analyze the different transfer scenarios available to transferors and to consider the various possible financing options for the transferee. This is where the transferor’s active role within the business will be assessed (progressive withdrawal, mentoring, cohabitation, etc.). The transferor’s post-transfer objectives and financial needs will also be defined.

As for the transferor, a financial plan considering the main current and future priorities will be developed taking into account various options such as loans, lease-purchase, subsidies, succession funding and programs, etc.

4. Thinking strategically

During this step, you need to think about the future of your business and the successors’ needs. A strategic plan will help determine your business’s objectives and the means for attaining them.

Furthermore, you need to establish the business’s market value and determine the governance, which includes the board of directors, management committee, transferee’s mentoring plan, etc.

5. Analyzing and understanding the tax aspects of the transaction

In a business transfer situation, it is imperative to analyze certain tax aspects such as:

  • The business’s value;
  • Possible transfer methods;
  • Shareholders’ agreement;
  • Insurance coverage;
  • Estate and will planning.

Based on the transfer method chosen, experts will be able to guide you to minimize the tax expenses.

6. Searching for financing

Depending on the stakeholders’ objectives, this is when financing strategies are explored, that is to say, choosing the payment method (down payments, instalment payments, share purchase program, dividend payment, financing from the transferee, etc.).

Consultants can also help you with the planning and negotiation of your financing based on the transferee’s business plan. Key elements such as the successor’s determination, financial assumptions and the calculation of acceptable ratios will then be assessed.

7. Carrying out the transfer

After implementing the transfer scenario selected and obtaining the financing, the transferees will have to set up mechanisms that will help ensure the business’s continuation as a going concern and get the transfer started. At this step, they will see to:

  • implementing the transition structure;
  • sharing the responsibilities;
  •  drafting the successors’ development plan;
  • adapting the management style.

Remember: a successful transfer relies on a multidisciplinary team to support you and a long-term plan.

17 Oct 2018  |  Written by :

Mr. Frounier is a manager at Raymond Chabot Grant Thornton. He is your expert in human resources...

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Do you own an SME? One of your greatest accomplishments, ensuring your business’s continuity, cannot be taken lightly. Join the ranks of those who plan well in advance to make sure they keep their key employees. Succession is not a destination, it’s a journey that warrants the support of experienced experts. Take advantage of our approach.

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Over 90% of Quebec SMEs are family businesses. To successfully transfer the business to the next generation you need to follow a comprehensive, disciplined and well-thought-out process that involves a key human component. Take advantage of our unique, integrated business transfer approach.