Management Tips in Value-Added Agriculture

Farm Business Management Update, October 2000

By David M. Kohl

Two professional colleagues mentioned agriculture was crashing in some areas of Virginia. I commented that it also was in rapid decent in other areas of the United States and Canada.

No, it is not the farm crisis of the 1980s where people discontinued business because of financial problems. Structural changes in agriculture and global competitiveness are dividing the winners and losers. Land with proximity to growing populations or natural amenities are rapidly being developed, while other farms without alternative uses are lying vacant.

The restructuring of rural America is in high gear. While some pundits only see gloom and doom and the glass half empty, what appears to be emerging, particularly in Virginia, is value-added agriculture and niche marketing. Ten to fifteen counties in the Valley and Eastern Virginia are oriented toward commercial agriculture. Other localities with proximity to retirement areas and to a mix of the old and new high tech economies provide fertile grounds for farmers to carve out niche markets.

Numerous requests are coming to professionals for advice in starting and managing value-added businesses. While no absolute answers fit every situation, the following tips might help entrepreneurs avoid some of the pitfalls and traps that come with the territory.

First, the entrepreneur should develop a written business plan or at least a concept paper. The research and time often takes the emotion out and adds objectivity to the decision-making process. These plans will be very useful in obtaining capital from institutional or personal sources.

The document should include a clear mission statement, vision of the business, and short and long term goals with targets. Regulations concerning licenses, tax reporting requirements, and everyday operating issues must be researched.

Second, the entrepreneur should perform a market analysis. Frequently, market research is as simple as asking people what they think of existing products and services or possible new products and services. One should determine the competitive advantage of the product or service. The competitive advantage could be unique - product, price, or special customer service. A marketing plan needs to have at least a backup plan or alternative. If it is an existing business, the owner must be thinking one or two products or services ahead because competition frequently emerges quickly to take advantage of someone else's success.

Third, capital and time needs should be over-estimated by 25 percent. If $20,000 is needed to start the business, most likely it will cost $25,000. If four months are estimated to get started, it probably will take five.

Fourth, if the entrepreneur lacks tangible collateral such as real estate or saleable equipment, the business plan will have to demonstrate earnings and working capital reserves. Personal and government guarantees, contracts from markets and co-signatures can enhance ones chances of successfully securing the capital. A last resort is credit cards. Last year 27 percent of new, small business start-ups were capitalized through a credit card. Making minimum payments at high interest rates can lead to disaster. A $2,000 loan at 18 percent interest with minimum payments can take up to 23 years for payback. If the business is a success, some profits need to be set aside for working capital reserves. Getting caught up in all the latest toys or expenditures that lead to high overhead cost is also a recipe for failure: "Cash is king!"

Fifth, the entrepreneur needs to build in a salary. Granted, emotions for operating ones own business will run high and many startups take up to three years to break even. However, one must examine the opportunity cost of time and labor plus fringe benefits of alternative uses of time and talents. As a general rule, $30,000 to $50,000, which includes benefits, would be a full-time equivalent salary.

Sixth, time management is another critical element. If the entrepreneur is a full-time employee, a maximum of 1,000 hours per year is recommended for the venture. The 1,000 hours could be 80 to 100 hours a week over a short duration or weekends or evenings spread throughout the year. If the business conflicts with personal or family goals and objectives, the 1,000 hours could seem like 1,000 years.

Seventh, technology can be valuable. For example, in Eastern Canada near a popular resort, a lady operates a dairy farm, processes cheese, and sells it throughout the world via the Internet. The combination of high tech, the Internet, and high touch express mail, and her special cheese has created a profitable venture. Similar value-added businesses can be found worldwide.

Eighth, value-added marketing takes time to develop the branding capabilities. In a service business, it can take up to seven years. For example, many lawyers, financial planners, and consultants indicate that it takes seven years to establish their reputation. If successful, the business will usually come through word-of-mouth.

Ninth, developing and executing the plan, the entrepreneur needs to build in an exit plan or strategy. Do buildings have multiple uses? Could equipment be sold for more than 50 cents on a dollar?

Finally, a word of caution. The economy is now in the 114th month of business expansion. Is the business recession-resistant if a mild or extended downturn in the economy curtailed consumption and spending plans of the consumer?

Contact the author at sullylab@vt.edu .

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