1. Inventory of the Legacy: Dr. Bart Eleveld Extension Economist, Farm & Ranch Management Agricultural & Resource Economics Department Balance Sheet and other lists

2. Need to know what’s being transferred • Personal possessions of emotional value • Where are possessions on “heirloom scale”? • Values and traditions • Can’t be forced on next generation, but they can’t continue them if they don’t know what they are. • Human resources, management skills and capabilities • Titled property • Core of the business that’s being transferred • Partially determines strategies of transfer, ownership and future management plan for the business • Assets: What does the business/family own? • Liabilities: What are the claims by creditors? • Equity or Net Worth: What is left if assets are liquidated?

3. Balance Sheet is starting point for all business planning • Gives an instantaneous or “snap shot” view of financial strengths and weaknesses. • Tells how vulnerable to risk or downturns the business may be. • Shows the liquidity and solvency of a business / family / individual • A convenient way to list titled property

4. What is liquidity? • Ability to pay short-term debts and obligations of the business/family without major disruptions or liquidations of long-term (durable) capital. • Can you pay all claims that are expected during the next 12 months? • Can you “ride the waves” and stay afloat?

5. What is solvency? • Ability to pay ALL debts and obligations of the business/family by liquidating or selling of whatever assets might be necessary. • A more extreme measure of financial well-being. • Will you survive a catastrophe (liquidation) with something left over? Lifeboat, raft, or just floating debris? • In the context of today’s seminar, the catastrophe may come unexpectedly, or the liquidation may be planned, or the ship may continue to sail along, albeit with a new skipper, depending on the preparation and plan.

6. Current Assets Cash, bank accounts and inventory items readily convertible to cash Intermediate Assets Machinery, breeding livestock Long-Term Assets Land, buildings and improvements to real estate Personal Separate or combine with business? Current Liabilities Notes and accounts payable within 12 months Intermediate Liabilities Loans payable over 2-10 years Long-term Liabilities Loans payable over 10+ years Net Worth (+ or -) Retained earnings Change in market valuation Useful way to inventory physical and financial assets and liabilities

7. How do they balance? Liabilities + Net Worth Liabilities Assets Assets Current: Liquidity Total (Long-Term): Solvency Balance by definition: Assets = Liabilities + Net Worth Net Worth = Assets - Liabilities

8. Example Scenario: Max and Marlene Profit • 50-something couple with three kids they want to bring into the business • Complete case study is in binder • Will look at Balance Sheet today and in next workshop will look at the Income Statement and planning budgets

9. Max & Marlene Profit • 3 children, oldest wants to farm with family • Marlene has full-time job, Max does custom work plus part-time job • 1500 ac. cropland in wheat-barley-fallow • 2500 ac. private rangeland • 50 ac. irrigated pasture • 80 cow-calf pairs • How to make it work ?

10. What, you can’t read this? There’s a copy of it in your binder. And we’ll look at it a piece at a time. Blank worksheet for FINPACK in binder Excel spreadsheets on website: http://arec.oregonstate.edu/succession.html

11. Current assets Cash and bank accounts Inventories of supplies Inventories of marketable commodities

12. Current liabilities Accrued interest (if loan payments were made on balance sheet date) and accrued taxes Notes and accounts payable This year’s principal on long-term loans

13. Intermediate assets Useful life of > 1 year and < 10 years. Breeding livestock Machinery and vehicles

14. What value to use? • Cost or book value • Purchase price minus accumulated depreciation • What an accountant would use • Market value • What you could realistically expect to sell asset for • What a lender would use • Raised breeding livestock? • Both are useful to know • Cost: Net worth shows “retained earnings” due to income accumulation • Market: Net worth shows “actual market equity”

15. Intermediate Liabilities Notes and loans on intermediate assets (2-10 years)

16. Long-term assets Useful life of > 10 years Real estate: land, buildings and other improvements to land. Potential for large differences between cost and market value

17. Long-term liabilities Notes and loans on long-term assets: usually mortgages and contracts on real estate Deferred or contingent liabilities: If you liquidate, who besides creditors do you have to pay?

18. Deferred or Contingent Liabilities • On current assets: • ordinary income and social security taxes • On intermediate and long-term assets • Capital gains taxes on gains or recaptured depreciation • Also allow for selling costs of durable assets • In succession/estate planning context it may be useful to include estate and inheritance taxes

19. Summary of Balance Sheet LIQUIDITY SOLVENCY NET WORTH

20. Resources for Balance Sheet • FINPACK financial analysis software • Center for Farm Financial Management @ U. of MN. • Does balance sheet plus feasibility and cash-flow budgeting for whole farm/ranch management plans • Free trial download available: • http://www.cffm.umn.edu/ • Can “rent” an annual license for ~ $100/yr. • 2 spreadsheet formats • Montana State University’s • OSU/WSU Integrated Financial Statements • Both on Succession Workshop website: • http://arec.oregonstate.edu/succession.html