Understand partners' risk tolerances

Understand partners' risk tolerances

Multi-generation businesses need to find a balance that works.

Farmers face production risk, market risk, financial risk and other risks. Managers have ample tools to analyze and manage those risks.

To most effectively use those tools, managers need to understand both their willingness to take risk and their ability to bear risk. Psychological attitude defines willingness to take risk. Financial position determines ability to bear risk.

In sole proprietorships, one person’s attitude toward risk sets the tone for how much risk the business may take. Multi-generation farms have to consider the psychological risk-bearing ability of all players. In both cases, lenders may influence how much risk the business actually takes.

Multi-generation businesses need to find a balance that works.

In multi-generation farms, some players may be highly averse to risk. Others may be risk seekers. Differences exist among generations or even between spouses.

Management teams need to recognize the various individual attitudes toward risk and then mold them into an overall risk management plan. Doing so greatly improves the odds multi-generation farms will thrive.

Reasons for differences

Personalities, backgrounds and experiences drive differences. They are neither right nor wrong. Grandpa and Grandma in a multi-generation farm may have spent 30 years in near poverty to pay off the first quarter section, even if they only paid $650 an acre for it. To them, Generation 3 buying $15,000-per-acre land is far too risky.

Generation 3 may underestimate risks that exist due to lack of experience, or having only seen the good crop times of recent years.

Farmers often become more risk-averse as they age. They recognize risks that the young do not, or choose to ignore. Older farmers have more to lose and less time to recover. Young farmers, who have nothing, and therefore have nothing to lose, may be willing to take huge risks. Occasionally, the older generation may be the risk seekers because taking earlier risks paid off handsomely.

A consensus business plan may end up calling for taking a bit more risk than the comfort zone of the risk-averse generation and a bit less than the comfort zone of the risk seekers. Being too hesitant to take reasonable risks can constrain the growth of the business.


Caught in the cross fire

Some years ago an acquaintance signed on as risk manager for a multi-generation cattle feeding operation. Every week he calculated how much the feedlot could pay for feeder cattle and still turn a profit. He began noticing a pattern.

When the younger generation went to buy cattle, they sometimes came back empty-handed.

When the older generation went to buy cattle, they always came back with cattle. But often they paid $3 to $5 more than the risk manager told them would work. And then they instructed the risk manager to find a way to hedge the cattle and the feed to make them work before the check hit the bank.

You guessed it, the hired risk manager was soon seeking employment elsewhere.

Multi-generation businesses outside agriculture have the same issue. Another acquaintance retired from a midlevel management position in a big business. He took a part-time job at a family-owned golf course.

The younger generation wanted to expand the golf course and diversify into other venues. The older generation, thinking a modest profit trumps a potential sizable loss, focused on asset preservation.

Both sides wanted my acquaintance on “their” side in the family management power play. You guessed it, my acquaintance was soon seeking part-time employment elsewhere.

The morals of these stories are these: Multi-generation businesses need to find a balance on willingness to take risk that’s acceptable to all players and fits within the financial ability of their business to take risk. Second, when business managers hire expert advice, they should strive to use the advice they’re paying for to their advantage.

- Decision Time: Risk Management is independently produced by Farm Futures and brought to you through the support of Case IH. For more information, visit caseih.com/beready.

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