We’re stoked to have Derek Martin from 56 Capital Partners join us and talk with Holly Flores.
According to USDA Economic Research, net farm income in 2018 is expected to reach a 12 year low. Additionally, on-farm household income remains negative on a year over year basis. These are challenging statistics for our farmers across America. Whether farmers are thinking about evolving their business in order to overcome increased costs or they are thinking about succession planning and how they will manage their retirement years, it is critical they are engaging in these conversations before it is too late.
Derek Martin, of 56 Capital Partners, grew up on a farm with his parents in Michigan. He knows the different challenges that a farmer may face as they plan for their future. This brief video shares some insights from working with farm owners and highlights some challenges and solutions for planning for retirement.
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Holly: Welcome to Hanging with Holly and today I have Derek Martin with me of 56 Capital Partners. Derek, will you tell us a little bit about 56, well first where that name even came from and then also what you do.
Derek: Fair enough. 56 Capital Partners came from our team’s idea that 56 men signed the Declaration of Independence to go out and start a new world of freedom and prosperity for all. And our emblem is 56 surrounded by 13 stars for the 13 colonies at the time. And that’s what we decided to do coming away from a big brokerage firm. It’s been the dream that we’ve imagined the entire time. And we work with high net worth individuals primarily in the agricultural businesses with regards to their succession and retirement and transition plans.
Holly: A very cool inspiration of independence, I like that. So, agriculture, how did that come about for you?
Derek: Agricultural came about for me with regards to that’s how I was raised. Born and raised on a farm in Michigan, my dad’s side did the cattle and grain as well as hogs, things along those lines. My moms side did the fruits and vegetables, which is where I primarily had the privilege to work. And so, it was a natural fit for me with regards to being able to relate to those individuals having been there and done that. Whereas, I find a lot of people from the proverbial Wall Street world do not understand their way of life.
Holly: Okay. If you’re working with business owners that are farmers or maybe they are in businesses that support farms, what are the challenges that they’re facing?
Derek: The challenges they face are often not unique to the world of agriculture as they are to the world of business. They often will face the same issues with regards to cash flows and overall transition planning. The two detriments I find in the agricultural world that are specific, that we play a bigger role in is the fact that this is the blood, sweat and tears, it’s been a family homestead for multiple generations, whereas a lot of businesses that are being transitioned now are kind of first generation dad built it.
Derek: The other issue that we often face is the idea of recession. In a normal business model recessions typically last 18-24 months. You have diminished cash flows but not necessarily zero. I define a recession in the agricultural world as, it’s a little theatrical, but the hand of God. Freezing out of crops, hail, fire blight, Dicamba, things like those are diseases that affect farmers. And what the average individual doesn’t understand is that those diseases may wipe out an orchard, you have insurance for it, but now it starts a 10 year zero revenue recession with regards to you have to bulldoze the field out, you have to re-get your nutrient level up, redo the hydration with regards to irrigation more than often. Then you have to get trees, which takes two to three years to get that number of trees, then you have to plant them and four to five years to grow until they start to become productive orchards. Our clients face large revenue droughts rather than short revenue droughts.
Holly: Wow, so it sounds like being a normal business owner is tough enough as it is but being a farmer you gotta have some resilience in you.
Derek: You absolutely do. And one thing that we benefit from is the resiliency of the agricultural model. If the local hardware store is having issues, Home Depot doesn’t come in and help them, it’s a dog eat dog world. In the agricultural world the entire community comes together and helps each other out because they know they’re one way or one year away from something like that happening to them. And that’s happened in my family. If it wasn’t for some of our neighbors taking care of us for several years we would of been out of the business altogether.
Holly: Sounds like a great community.
Holly: How do you help farmers, those business owners prepare so that they can ride the wave per se to get through those?
Derek: That is the biggest thing is getting the conversation started. We make a good joke all the time that the conversation is the same but the dinner table changes. Farmers all across this nation face the same consequences of, who do they pass the farm onto? How do they develop sweat equity of the son or daughter who’s working there, and the other son or daughter has moved away to New York and want nothing to do with it? Mom typically has an influence on, “Hey, let’s share this with the kids equally.” Equally is not necessarily fair. And so we work through that and getting the conversation started. What amazes me is I can plant enough thoughts in business owners mind, and then give them plenty of hours on the tractor to sit there and think about it and let it stew. And then you start to get those emotions out of them that all business owners face.
Derek: It’s not just the agricultural industry. But then we can sit there and work on things, especially tax advantages that they may not necessarily know. And farmers are really good about admitting they don’t know what thy don’t know. So bringing that expertise in there. How to structure the transition. How to do the timing of it. And then how to create a source of revenue they can live off of, which you’ll find in the agricultural world there’s such a focus on diminishing income so they don’t pay taxes is that they never really paid into the social security system. And so most of them don’t have any social security or it’s very minimum, a couple hundred dollars a month.
Holly: I didn’t realize that.
Holly: So for new young business owner up and coming farmer per se or taking that family business, what sort of advice would you give them as they’re getting ready to begin this financial investment as well as this life investment?
Derek: It’s the perfect time to fail. You never want to think about failing in any business but when you’re young is the time to make mistakes and learn from them. With low interest rates relatively speaking, especially considering most of their parents got in the late 70’s early 80’s, interest rates are a completely different ballgame for them. So you can expand the family empire and the farm now at a magnitude their parents could never dream of. And now is the time to take those risks. And we set a lot of these things up in different companies with regards to formation. And so if one portion of it goes down it doesn’t actually hinder the rest of the operation, so kind of a divide and conquer, take bigger risks.
Derek: And we have a saying, don’t get pain envy. Pain envy is watching the neighbors new John Deere go down the road and you need to go down and get yourself one. Don’t let that happen. If it’s not broke don’t fix it. And so, just keep on track, don’t overspend, and also diversify your investments. Don’t put everything into the farm. We see that across all small businesses is where a lot of our younger individuals say, “I have to put money into the business. I have to put money into it.” It’s no different than if you had a W-2 job, you save a portion of your income for later on for retirement or worse case scenario. It’s not different in the agricultural world.
Holly: Good advice. And closing thoughts for those farmers, whether they’re young coming in or older coming out. There’s a lot of changing technology coming into the industry. What do you see on the horizon for them over the next five to 10 years?
Derek: On the horizon for the next five to 10 years it’s typically their largest cost and not necessarily a fixed cost but a variable cost of workforce and labor. There’s a lot of H2A going on, which is getting certified workers to come across the boarder with talk of the boarder wall. A lot of those are issues.
Derek: Technology on the other hand is making it so much more efficient in the fact that we already have combines in practice that have no drivers, it’s all GPS. The younger generation understands that, they’ve witnessed it, they learned about it in college. They learned about how to control and overview irrigation based on using drones, so you don’t have to have multiple individuals out there going out and checking irrigation. Those type of things are going to make it easier on them but there does need to be a capital investment to get those technologies going forward, which will then diminish their variable labor cost, which will help out. So, that’s going to be the dual play of where to invest and how to invest. At the same time it also means farmers in small towns are going to potentially lose their jobs of the hired hand who’s been loyal to the family.
Holly: Yeah, I see that but I also see how important it is to bring younger generations together with the older in order to make this a smooth transition and to keep the farm alive.
Holly: So in closing, I always like to ask what your favorite Colorado adventure is. Will you please share one to put on my bucket list?
Derek: Fair enough. The bucket list, there’s a lot of great things to do in Colorado. We’re always blessed every year, but one of my favorites is the hot springs. Just the relaxation effect of it is priceless to me. And so, I would encourage people to go visit those, spend a few days just relax and enjoy it.
Holly: Which hot springs?
Derek: I’m a fan of Glenwood. I’m a Doc Holliday fan. I’m a Wild West historian. I like to research a lot of those things. So the story of Doc Holliday you can follow through in Glenwood and you can research it. It’s a good little time and it’s a little actual beer tour that encompasses with your hot springs.
Holly: Good compliment to the trip, all right.
Derek: It is a good time.
Holly: Great tip. Thanks Derek, we’ll catch up again soon.
Derek: Thank you. Sounds good.