Buy In Or Buy Out

If the kids want to be in business, they should make a business-like decision to buy in.

A Handbook for Ranch ManagersSkin in the game is the best motivator of all. — jtl, 419

Dave Pratt via Ranching for Profit Blog

In response to a ProfitTips column I called The Great American Tragedy, one Ranching For Profit School alumnus, and friend, shared the following story. He gave me permission to share it with y’all but asked to remain anonymous. He wrote:

Planned Grazing: A Study Guide and Reference Manual   Recently a friend and I were discussing the high failure rate of small businesses and that, even for those businesses that do last more than a few years, almost none get transferred to the next generation. Then he made an interesting comment about how lucky I was that my family was one of the few examples he knew of where a successful succession took place. After all, here I was, running cattle on my parent’s ranch, operating a small but successful ranching business, living right down the road from the folks.

Environmental & Natural Resource Economics: The Austrian ViewI took his comment as a compliment, smiled, nodded and began thinking about the idea that we had managed a successful succession. After a bit of noodling around, I reached a different conclusion: regardless of how it looks from the outside, I am highly skeptical about just how much “succession” took place, and here’s why:

Combat Shooter's Handbook Reconnaissance Marine MCI 03.32f: Marine Corps Institute The Betrayed: On Warriors, Cowboys and Other MisfitsThe real reason I’m still here running the ranch is that I basically bought my parents out.

The Essence of Liberty: Volume I: Liberty and History: The Rise and Fall of the Noble Experiment with Constitutionally Limited Government (Liberty and ... Limited Government) (Volume 1)  The Essence of Liberty: Volume II: The Economics of Liberty (Volume 2) The Essence of Liberty: Volume III: A Universal Philosophy of Political Economy (Liberty: A Universal Political Ethic) (Volume 3)As a kid, I never really gave much thought to staying in agriculture, as I didn’t perceive there was much economic opportunity. I took a few horrible ag classes in college, then gave up on that too. In my late twenty’s I was surprised to stumble into an opportunity to buy the little ranch next to my parents’ place. In some ways it was a dream come true. In others it was a nightmare. Looking back, it was really a financial bail-out for everyone (except me).

The reason for the need of a bail-out was that in the 1980’s my mother, bless her heart, had gotten herself and her partner (the lady next door/owner of the ranch I purchased) into a deep financial hole.

I was able to obtain some low-interest financing that allowed me to buy the land, plus purchase all of my parents’ cattle and equipment. I also entered into a long-term lease on my parents’ ranch (the home place). I was leveraged to the hilt, but it gave me complete decision-making power over the land and livestock operation. The money I was able to pour into the “organization” was just enough to get my mom and the neighboring property owner out of hock. It’s not that I precisely planned things to work out that way, but luckily they did.

About a year later I attended my first RFP. Following that experience, I went home and began making wholesale changes: got rid of all the farming and haying equipment, then began evolving the cattle enterprise toward something that would actually work. In the meantime I was working my ass off (off farm) and pouring that capital against the operating loan. I married a woman with a good job (good enough to support our household) and kept adapting. Through extraordinary effort, I was able to pay off some of the higher interest loans early, and things got better. My parents were helpful and supportive, although they still spoke longingly about the good old days. In the end, they really had no power to object to the new model, as I had sort of put them out of business.

I’m not trying to sound like a hero or a genius. Frankly, it was all pretty crazy. And somehow, that doesn’t feel like a successful succession process.

Dave, I know in the past you suggested that it might be helpful for the kids to take over the cattle operations while leaving the land ownership in the hands of the elders. Based on my experience, I would say that having some substantial skin in the game AND taking over control of operational decision-making is critical to making substantial change in the structure of most family businesses. And that will certainly require borrowing some capital to start with, hopefully not from the parents. If I had simply “partnered” with my folks on the cattle, or “shared power” about the direction of the ranch, I never would have been able to make the changes necessary for survival.

You may know of some examples of smooth, cooperative succession where the parents gradually and gracefully pass off decision-making power, but I think they are few and far between. If the kids want to be in business, they should make a business-like decision to buy in. This, of course, would follow an analytical look at the business model.

A Handbook for Ranch ManagersA Handbook for Ranch Managers.  In keeping with the “holistic” idea that the land, the livestock, the people and the money should be viewed as a single integrated whole: Part I deals with the management of the natural resources. Part II covers livestock production and Part III deals with the people and the money. Not only would this book make an excellent basic text for a university program in Ranch Management, no professional ranch manager’s reference bookshelf should be without it. It is a comprehensive reference manual for managing the working ranch. The information in the appendices and extensive bibliography alone is worth the price of the book.

You might also be interested in the supplement to this Handbook: Planned Grazing: A Study Guide and Reference Manual.

About Land & Livestock Interntional, Inc.

Land and Livestock International, Inc. is a leading agribusiness management firm providing a complete line of services to the range livestock industry. We believe that private property is the foundation of America. Private property and free markets go hand in hand—without property there is no freedom. We also believe that free markets, not government intervention, hold the key to natural resource conservation and environmental preservation. No government bureaucrat can (or will) understand and treat the land with as much respect as its owner. The bureaucrat simply does not have the same motives as does the owner of a capital interest in the property. Our specialty is the working livestock ranch simply because there are so many very good reasons for owning such a property. We provide educational, management and consulting services with a focus on ecologically and financially sustainable land management that will enhance natural processes (water and mineral cycles, energy flow and community dynamics) while enhancing profits and steadily building wealth.
This entry was posted in Estate Plannning, Succession planning and tagged , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s