Know costs and revenues
Deciding that you want to expand your operation or move to full-time farming needs to start with a financial understanding of your current operation. For example, to help you understand your debt-carrying capacity – which is key in most farm expansions – you'll need to know your farm's EBITDA (earnings before interest, taxes, depreciation, and amortization) as this will be the funds remaining to service any new and existing debt.
If you are unable to service the debt, this is a good indicator that you need to make some adjustments or maybe this venture isn't as lucrative as it first seemed. You will also want to complete a risk analysis.
Realistically, there are likely to be changes in the original plan; for example, construction overages, and changes to interest rates. To be prepared, you will need to ensure that you will still be able to meet your debt obligations, in good times and bad. As expansion evolves, you will also need to look at alternatives and risk analysis.
Furthermore, you also need to consider the cost of time and your family's lifestyle. Quantifying the amount of free time you're going to invest in this new venture can help inject some doses of reality into the decision-making process and discussions with the family. Will you be able to dedicate 100% of your focus to the farm and quit your off-farm job? Or can you estimate how long will it take until this can happen?
Knowing your living costs is the first step to understanding and discussing potential lifestyle changes and sacrifices this leap will have on your family. Will you be able to travel or dine out? Would you be willing to drive older vehicles and wait for house renovations? Just because you are farming full-time doesn't mean you necessarily have to give up everything. However, it will mean you have to prioritize time and lifestyle choices and know who will be running things if you are away.
Solid support system
Successful new ventures and expansions need strong business plans and advisors to help you in the execution. Although agriculture can be extremely rewarding, it also requires unique knowledge and is extremely capital-intensive.
Your trusted advisors need to have specialized knowledge and experience to help you identify pitfalls, risks, and opportunities. Regardless of how small or large your operation is, before expanding, check in with your tax advisor to ensure that you are reporting properly.
Additionally, your advisors should be able to help you set up your business professionally and efficiently for next-level performance. This varies for every operation but can be as simple as helping computerize farm books or setting up salary payments so the deductions are done properly. It can mean installing sensors in bins or using pre-purchasing or hedging accounts.
How BDO can help
Start by identifying trusted advisors to help you every step of the way. BDO's advisors are here to support you and provide the knowledge you will need to be successful.
For more information, reach out to a BDO agriculture expert today
Michelle Torrey, Senior Manager, BDO Canada
The information in this publication is current as of January 19, 2023.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.