Ownership transfers: Borrowing wisely

Taking on debt during the transfer phase doesn't have to be risky, particularly if projects have been identified, quantified and scheduled.

Étienne Gosselin | Agronomist | Journalist

Money opens doors, but when it's not managed properly, it can also create uncertainty, especially during ownership transfers. How can you make use of capital without getting bogged down in debt?

Is it possible to borrow without taking on excessive debt? Absolutely, say 2 agronomists at Desjardins, René Gagnon, Business Development Manager, and Marc Fortin, Business Transfer Specialist.

Multiple factors in play
"Microeconomic, macroeconomic, political and social factors play a role in the debt levels of farms. New technology, the recent increase in land prices, the availability of workers, the quality of life of operators, rising interest rates and uncertainty regarding free trade agreements all have an impact on business decisions, including debt," says Mr. Gagnon.

Are young people more likely to go into debt? 
"Not necessarily," says Mr. Fortin. "Young people are eager for challenges. They want to compete with former classmates and other producers. They focus more on investments, and they have different risk tolerances and time horizons than their parents, who have built up assets and aren't necessarily willing to commit to long-term projects."

The next generation is more educated and informed than ever, and has a firm grasp of management principles. "Personally, I like to see ambitious young people who take the initiative and parents or mentors who guide and challenge them rather than slowing them down," adds Mr. Fortin.

When transferring ownership, the business needs equity to buy out the sellers, which creates financial pressure. "For the next generation, paying their parents isn't the only goal. They want to continue building the business--even during the transfer phase--and plan for inevitable short-term investments. Continuity is important for both generations," says Mr. Fortin.

Borrowing: A means, not an end 
Mr. Gagnon continues, "Our job is to measure the impact that an investment would have on the business's finances and encourage producers to make decisions as managers rather than borrowers. A loan is a means, not an end."

He explains that as businesses grow, the value of loans can increase significantly in absolute terms. But debt should be seen through the lens of the additional cash supply it generates, the future opportunities it creates for the business and--most importantly--the management skills of the people who manage the debt (regardless of their age).

3 common traps

1. Not planning ahead
Taking on debt during the transfer phase doesn't have to be risky, particularly if projects have been identified, quantified and scheduled.

Problems occur when projects haven't been planned out properly and everything happens too fast.

2. Borrowing too much
Don't borrow based on the amount of equity or the value of assets or collateral. The best way to determine how much you can borrow is to figure out how much you can repay.

Account managers focus on whether the business has enough money to make regular payments on capital and interest, which ties in with the entrepreneur's management skills.

3. Taking a short-term view of interest rates
Rates are still low for the time being, but they're expected to rise gradually to slow inflation. Young people need to remember that interest rates went as high as 15% to 20% in the 1980s.

It's very important to measure your business's sensitivity to a rate hike!

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