If your neighbor’s ranch came up for lease tomorrow, would you be able to bid on it? When making this decision there are two factors to consider. First, do you have your numbers organized in a format that gives you the confidence to place a fair market value bid? And second, do you have the courage to act when that bid is accepted? Sounds scary, doesn’t it!
Typically I bring that question up just as rhetorical teaching material, to stress the importance of understanding and calculating opportunity costs. But this just happened to one of our Executive Link members earlier this year! And not just on a small parcel to run a few cows in the summer either, but on substantial acreage. They are ranching at scale and this is their primary income, the new lease doubled the ranch! So let’s look at some principles they followed to acquire the lease and make the jump.
Gross Margins and Overheads
At Ranching for Profit, we organize numbers into gross margins and overheads. Calculated correctly, the Gross Margin per Unit will show you what each unit (in their case, a cow) will contribute to pay overheads. Overheads are land and labor costs, which in their case are going to increase substantially. In fact they will basically double with the new land lease and adding another key employee to help with the added labor. They had strong gross margins calculated, which made the expansion justifiable. (Expanding on a low gross margin would create more work and not much value, expanding on a negative gross margin means going broke faster.)
Economics vs Finance
After they analyzed their projected gross margins, new overheads, profitability, plus as always considering their work/life balance, mission and vision, it was time to decide how to stock the new ranch. Because they included opportunity interest in their cow-calf gross margins, they could have borrowed the money to buy the cows. (Opportunity interest is a 10% calculation based on your cowherd market value to ensure your cows are paying for their use of your capital and the ability for expansion if borrowed capital is pursued.)
They decided not to borrow the full amount to buy all the cattle on their own as that would have been a sizable loan and annual payment. Instead they had partners join them in purchasing the cattle. By understanding the difference between opportunity interest and the actual loan payment, they considered other cattle enterprises. In the end, the ranch is going to be stocked with a combination of owned cows, partner cows (or cows on shares), short-term stockers, and custom grazing yearlings and pairs. Balancing economics and finance can be tricky, especially in young businesses, so being creative will be a bonus.
Courage to Act
After running the numbers, having the courage to act is the next hurdle. When I look back through text messages and emails that we shared and just one phone call, this all happened in a matter of three weeks. Not very much time to double the ranch, but they were ready to accept the challenge. Dan Sullivan, the co-founder and president of Strategic Coach, says that luck will come, but the real question is what will you do with it? (How much of your success is actually luck?) Being prepared for opportunities, knowing what to do with them, and actually moving on them are three different aspects. When I contacted the Executive Link members to use their story for this article, we had some good jokes about what the title should be, but in all reality, they made a bold decision, and now they can move forward. Had they stalled and let the opportunity slip by, only regret or what-ifs would have filled their minds.
I believe they are going to do great things in the ranching industry. I am not saying it will be easy, but it will be great in the end. If you are wanting to join a group of forward thinking ranchers improving their businesses and everyone around them, check out our Ranching for Profit schedule here. In addition to our week-long schools we have several Young Adult Intensives and other workshops throughout the summer that will provide you with an introduction to our curriculum.
