Fail to plan, plan to fail

The following is a fictional case study created by  BDO.

When siblings Shane and Nora took over the family grain operation from their parents, they knew they would probably need to expand to accommodate two families. Unfortunately, they farmed close to a rapidly expanding urban centre and land values were surging beyond their reach.

A summer holiday that included a winery tour and a blueberry farm visit inspired Nora. Both locations were packed with visitors enjoying the experience and buying products ranging from crafts to ice wine to preserves. Nora revelled in the lively atmosphere.

Nora started to see their proximity to town as an advantage they could tap into by creating a farmers market and artisan fair with a music venue. She found a strong ally in Shane’s wife Abby, who loved her ideas. They got together weekly to discuss the possibilities over coffee, eventually presenting their business plan to Shane. He liked it.

A passion for farm markets and music

Their vision was to convert an open-sided drive shed into a farmers market with stalls for local produce and artists. One mid-summer music festival would draw a different crowd and complement the market. They’d start with a few Saturdays to gauge support.

The proposed budget of $50,000 would spruce up the site for vendors and visitors. They promoted the market via social media over the winter and by the end of May, a full slate of vendors was lined up for opening day.

Plenty of customers… and problems

When the day arrived, vehicles started to roll in the laneway, but the euphoria was short-lived. The parking area was quickly overwhelmed, and cars were parked randomly on the lawn. The lessons were coming hard and fast. There wasn’t enough access to drinking water or refreshments as the temperature rose. One portable toilet was woefully inadequate, and vendors complained about losing power as the breaker kept tripping from overload.

Nora, Shane and Abby were run off their feet attending to problems. Despite the great attendance, it was a long, stressful day. Yet, over the course of the summer, there were numerous validating moments, and they knew they had something good. The community was increasingly engaged and requested they run every Saturday the next summer.

Facing challenges head-on

But to move ahead, they had to address the issues they were facing:

• They would need to hire staff.
• They were unsure if they had appropriate insurance.
• Some food vendors did not pass inspections.
• A safe stage with a sound system would be necessary for musicians.
• Accessibility issues had not been considered. Full compliance would be costly.
• Not all vendors had paid their fees.

They had set vendor fees low to ensure a full house, but with increasing costs and difficulty getting paid, their profit margin evaporated. They’d negotiated a consignment fee from the art vendors, but it was hard to monitor sales and they felt like they were not getting their fair share.

The three of them sat down in mid-October to discuss whether they wanted to continue. They had taken a substantial loss over the summer. Although they now had a pretty good handle on costs, they admitted that some expenses were being carried by the farm. And they knew they had to find more revenue in the enterprise to make it worthwhile. They would also need to borrow money, as they all agreed that the farm shouldn’t be financing the project. If they were going to keep this venture, they’d need a comprehensive business plan with less emotion attached.

We need a plan!

They began with detailed budget that considered hidden costs (insurance, utilities, property taxes) being carried by the farm. They calculated the capital needed to upgrade parking, temporary washrooms and accessibility issues. Long-term capital requirements for a proper stage and permanent washrooms were also estimated.

Using these numbers, they were able to determine the revenue needed to ensure a decent margin. They arrived at a new and more realistic fee for vendors, with an incentive for paying an up-front seasonal fee. And there would be a small parking/admission fee for guests. They also brainstormed ways to utilize the venue on non-market days – things like auction sales, corporate events and specialized sales for antiques or collectables.

Shane learned from their accountant that a grant was available to help cover the cost of hiring a summer student. This prompted a more comprehensive scan of government programs that might help.

A more business-savvy approach

Nora took all the information and created a document that showed the numbers from year one and the proposed changes they envisioned going forward. They met with their lender, lawyer and accountant. They were advised to set up a separate corporation to provide liability protection for themselves and the farm. It would ensure they didn’t put their existing operation offside of the income tax rules for family farm corporations.

The first year was about passion and energy. Going forward, they’d also have to follow a disciplined business plan. With this plan in place, the farm market was expected to thrive and grow as an appreciated addition to the farm family and surrounding communities.

BDO is a trusted advisor for agricultural accounting, tax planning and business consulting.


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