Pratt looks at profit impacts on transitionWritten by Saige Albert
“The three primary reasons succession fails is we won’t talk about it, the business isn’t viable in the first place, and the kids don’t know what they are doing,” said Pratt.
Establishing a business
Pratt began by stating that many ranches aren’t run as a business, but rather as a collection of jobs and a pile of assets.
“We are making the transformation from the pile of assets and collection of jobs into a real business,” he said.
“One reason ranches don’t pass to the next generation is because they aren’t viable in the first place,” Pratt continued. “Ranching in financially unattractive and economically unrewarding, historically.”
At the same time, Pratt noted that there are only four ways to make money – as the employee, as a self-employed individual, as a business owner or as an investor.
Self employed individuals are seeking to be safe or secure and tend to focus on the things they do not want, while business owners seek freedom and look at trying to make positive things happen within their business.
“We are trying to give you the tools to go from self-employed to being a business owner,” he clarified. “The real test is can you leave your ranch for a year? Business owners can.”
Pratt also noted that when asked why they ranch, many producers answer that it is because they like cattle or they enjoy the lifestyle. However, he countered that the reason to have a business is to serve a customer.
“Some of us don’t even know who our customer is,” he said. “Our job is to solve the customer’s problem. Ask yourself, who is my customer and what is their problem?”
At the same time, ranching businesses must make a profit, but shouldn’t be centered on only profit.
“Profit is to business as breathing is to life,” Pratt explained. “Profit is not the purpose of business, but a business must make a profit, just as you must breathe or you will die, but breathing is not the purpose of life.”
If a ranch isn’t profitable, Pratt commented that it isn’t a business, but rather a really expensive hobby.
“When I first went into Ranching for Profit, Stan Parsons told me that the natives of Zimbabwe used three-legged pots to cook their meals,” Pratt said. “The legs have to be all the same length so water doesn’t spill out and dinner doesn’t get burned. This has everything to do with business.”
In running a business, he noted that a ranch has three legs – money, land and production.
The money leg is split into economics, or profitability, and finance, or the ability to afford activities.
“If the legs aren’t in balance and the pot tips, it’s money that spills out, and it isn’t dinner that gets burned – it will be you,” said Pratt.
Another vital piece to the ranching puzzle is people.
“The people are in the pot,” he said. “Life is not supposed to be about supporting the business. The business is supposed to be supporting your life.”
Maintaining the balance of the pot isn’t easy, but Pratt noted that it is essential to a ranching business.
Pratt also mentioned that it is important to distinguish business from self and to act like a great business.
“Tom Watson with IBM knew that IBM was distinct from him,” Pratt mentioned. “You are not your business. If you are your business, how can you step in or step out?”
By maintaining separation between ownership and the business, Pratt mentioned that succession is more possible. Ranchers that fail to distinguish an individual identity aside from their business won’t be able to retire or pass on the operation.
“The other thing is, to become a great business, it had to act like a great business before it became one,” Pratt added, quoting Watson. “It either is a great business as it becomes one, or it will never become one.”
Hard work and harmony
In a ranching operation, Dave Pratt of the Ranching for Profit school noted that hard work and harmony are very important.
“Part of it is us, and part of it is the people we are working with and we believe in,” Pratt explained. “Doug Floyd said, ‘You don’t get harmony when everyone singe the same note’.”
What many mean by harmony, however, he says is really just peace, which is ineffective.
“A lot of wives will say they want family harmony, but what they really mean is they want to keep the peace,” Pratt said. “When we do that, we are sweeping issues under the rug. All we end up with is a lumpy rug.”
He also added, however, that harmony isn’t the absence of conflict, but should really be when different ideas can come together for results.
“If you and I agree on everything, then one of us isn’t necessary,” he commented. “We tend to associate with people who think like us, but I can’t think of anything I’ve learned from the people that I agree with.”
Pratt added, “If I trust you and disagree, then I can be open to your ideas and maybe I can learning something.”
By sharing ideas, he noted that ranch profitability can increase.