Delve into the unique challenges and opportunities of Canada’s family-owned agricultural businesses in this compelling episode of Beyond Succession. Host Leah Tolton sits down with Dave Smardon, President and CEO of Bioenterprise Canada, to explore why patient capital is critical for growth in an industry where 92 percent of farms are family-run. Together, they discuss the extended timelines required for successful expansion in agriculture and how this differs from other sectors. They also examine the shifting investment landscape, highlighting how Canadian agribusinesses secure capital compared to their European counterparts and the changes needed to foster growth.
Explore how innovation, driven by advancements in technology and automation, is revolutionizing the growth potential of family-owned agricultural enterprises, helping them scale more efficiently. Leah and Dave also discuss practical strategies for navigating the shift from operator to investor, offering valuable insights on how these businesses can attract external investment while preserving their core values.
Transcript
Dave Smardon: [00:00:00] So when you look at agribusiness and food business in Canada, it's what we have talked about before, which is high volume business and low margin business. So the profit margins are very thin. So family businesses really struggle and they face different challenges. You know, there are investment organizations out there that are keen to invest in pharmaceuticals and life sciences and keen to invest in the internet softwares and so on. There aren't that many out there that are keen to invest in agriculture and food businesses.
Leah Tolton: [00:00:37] Welcome to Beyond Succession, a podcast series within the Bennett Jones Business Law Talks podcast that discusses topics around navigating the complexities of I'm Leah Tolton, partner at Bennett Jones LLP, and I'm a family enterprise and corporate lawyer, passionate about helping family enterprise businesses navigate the complexities of governance, succession, and growth.
Before we begin this podcast, please note that anything said or discussed on this podcast does not constitute legal advice. Always seek proper advice from your legal advisor as every situation is different and
Leah Tolton: [00:00:37] In today's episode, we're diving deep into the heart of Canadian agriculture, and we'll look at the current state of family enterprise within the agribusiness context, as well as what the future holds when it comes to investing in and growing this vital industry in Canada. Joining me today is Dave Smardon, President and CEO of Bioenterprise Canada, an organization at the forefront of supporting and accelerating the growth of Canada's agri food businesses.
Our conversation today will explore the unique dynamics of family owned agricultural enterprises, from the challenges they face in scaling their operations, to the opportunities that lie ahead for investors. We'll explore why successful transitions in this space often take decades and may require alternative ways to approach long term investment in this space.
Leah Tolton: [00:00:37] Dave has led the development of Bioenterprise Canada since 2005 and continues to advocate for a united agricultural ecosystem nationally, mirroring the collaboration and cross regional knowledge sharing that have made other top performing countries global leaders in technology and commercialization.
Welcome Dave to the podcast.
Dave Smardon: [00:02:38] Thank you, Leah. It's great to be here.
Leah Tolton: [00:02:39] When I think of a family enterprise, I think of a, an organization that might have a combination of pieces to it. It may have an operating company. It may have a company that holds some real estate. It may hold investments in some other vehicle. Uh, it may have some heirloom assets, things that people will inherit. It has some people, obviously, some human capital, and it may have some philanthropic interests as well. Could you paint a picture of the typical family owned agribusiness in Canada today? And can you speak a bit to what makes them unique compared to that or other business models?
Dave Smardon: [00:03:13] So let's start by looking at the definition of agribusiness. You know, to me, there's, there's the farming industry, there's the food industry, which we, put together, and we call it agri food in the in the farming industry. There's 190,000 farms across the country, and there are 600,000 people that live on those farms, and 92 percent of them are family owned.
So the vast majority of the farming industry is family owned farming. When you go into the food industry with food processing and beverages and so on, again, it's a, uh, $150 billion industry. So it's, it's, you know, together with agriculture, it's massive and 92% of those food businesses are less than a hundred people. So they're small. So when you look at agribusiness and food business in Canada, it’s what we have talked about before, which is high volume business and low margin business. So the profit margins are very thin. And so the amount of money that they're able to spend on a variety of things, whether it be upgrading equipment or innovation or whatever is quite nominal.
So family businesses really struggle. And so, and they face different uh, different challenges than businesses in, you know, for instance, I.T. or pharmaceutical or energy industries. You know, there are investment organizations out there that are keen to invest in pharmaceuticals and life sciences and keen to invest in the internet softwares and so on.
Dave Smardon: [00:03:13] There aren't that many out there that are keen to invest in agriculture and food businesses. So that's part of the challenge that family businesses face.
Leah Tolton: [00:04:47] That's interesting. So, you know, I'd like to pick up on your comment about agricultural businesses being high volume and low margin, you know, and I'd like to spend some time in this discussion talking about scaling and growth.
Dave Smardon: [00:05:12] So growth is, is, is more of an internal evolution that takes place over a much longer period of time. And so when we look at some of the ag businesses that we see, uh, uh, through our organization, Bioenterprise, many of them will take 12, 15 years before they get to a point where they are, what we would call, you know, an SME.
Leah Tolton: [00:05:12] How does this high volume, low margin combination particularly impacting enterprises when they're seeking growth and investment? What does that look like for them?
Dave Smardon: [00:05:12] So growth is more of an internal evolution that takes place over a much longer period of time. And so when we look at some of the ag businesses that we see through our organization, Bioenterprise, many of them will take 12, 15 years before they get to a point where they are, what we would call, you know, an SME.
A small medium-sized enterprise that is ready to grow and ready to prosper. That's a very long period of time. You know, again, going back to the internet where you can develop an internet application and have it up and running in six months, you'd be generating revenues in, in 10 months, and then you're ready for innovation upgrades, investment, and so on very quickly. So the industry that we're talking about requires a tremendous amount of patience and that's ownership patience.
Leah Tolton: [00:06:19] And so, you know, when you're in that growth phase, and you're talking about patient ownership, you're talking about human resources issues and things like that, I'm thinking in the back of my mind about how family matters intersect with that, you know, particularly in that farming space.
Dave Smardon: [00:06:58] Well, as we're talking about family-run businesses, typically on the farming side, the agribusiness side, you've got the husband, the wife, the children are typically all involved in the business and. Assuming that the children are keenly interested in it, then the business can get passed down to the children and they'll continue to run it and it'll continue to grow over a period of time.
One of the dilemmas we've seen though, of course, is that children get their university degrees and they may not have interest in the business that their mother or their father have. And they may go off to the big city and become lawyers or accountants or do something else. So the idea of succession planning becomes a big issue.
Leah Tolton: [00:08:39] Which comes with its own challenges. And, you know, we've talked about that in other episodes of the podcast about preparing for sale and you know, what that process actually looks like.
I'd be interested also to hear your thoughts about the prevailing view or the ability of agribusinesses that may not be family-owned farms. Let's talk about your broader concept that you introduced at the beginning of your remarks. And let's talk about how those kinds of operations can grow or expand with the benefit of some outside investment. What does that look like in Canada? And what if, if in any way, does it look different in other parts of the world?
Dave Smardon: [00:09:15] So in Canada, we have a very large country and a very diverse agribusiness sector. And so, it's quite a bit different from what you might see in some of the places like the Netherlands, or Israel, or Ireland, or France, or the U.K.
The diversity is both a really positive thing for us, because it reduces risk of any one sector, but it's also a negative thing in that it's really hard to bring about a significant or critical mass of interest in one particular sector, because it's so wide. And so in Canada, as you go across the country, the definition of agriculture changes so dramatically.
Leah Tolton: [00:10:13] You've referred to some European jurisdictions in that comment, you know, in some Middle Eastern jurisdictions. What do you see or what have you seen family-owned or agricultural businesses, agri-food businesses, be able to pursue or access in those places that we might be able to replicate here, or we might seek to replicate here?
Dave Smardon: [00:10:33] Yeah, we often look towards those places I mentioned as being high standards in what we want to achieve. If you look at the Netherlands, the Netherlands has a very small geography, have some very large corporations that are involved in the innovation of those sectors. So organizations like Unilever and DSM, you have a massive bank called Rabobank that is involved, or ABM Amro is another one.
And then you have the government. They're there to support various aspects of growth and you have investment groups and you have the university community, the academic research community, all in a very small geographic area. And so what they do really, really well is collaborate. And collaboration, of course, is much easier to do in a small geographic area than it is in a country the size of Canada.
Leah Tolton: [00:12:12] So, when we were preparing for this episode, you talked about the manner in which capital is more available in some other jurisdictions than it might be in Canada. And you know, you expressed the opinion, I think, and you can correct me in your comments if I'm wrong, that, you know, it would be ideal if we could create an environment here in Canada where capital was available to Canadian agribusinesses in the same manner as it is in Europe. Can you tell us a little bit about that.
Dave Smardon: [00:12:39] Yeah, and, by the way, I would never try to correct you, Leah.
Leah Tolton: [00:12:44] Well, you could, I'd let you.
Dave Smardon: [00:12:46] Yeah, so, the, there's a couple of areas that are, that are important here. The first one is family office investment. Oh, you know, these are angel investors or families or multiple families that have gotten together.
They made a lot of money and they want to invest it back into Canadian operations. If you look at the number of family offices that we have in Canada compared to United States or compared to Europe, it's really, really small family offices and individuals tend to invest in the same industry that they got their money in because that's what they know the best.
Leah Tolton: [00:15:23] So, you know, looking at that from the perspective of the agribusiness and, you know, you're drawing on your earlier remarks that the process of succession can take a while. It can take a while to build up an enterprise to the point that it's, you know, a growing enterprise and, you know, at a stage perhaps where it could attract outside investment.
Dave Smardon: [00:16:03] Well, I think the thing that we are exposed to the most that can have an impact on this is innovation. And so, you look around the world and it's a highly competitive world. Now we're not just competing across the province or across the country. We're competing globally. And so there are others out there that are our competitors who are adopting innovation and have the support systems to allow them to adopt innovation.
Remember, we talked earlier about how it is a high volume, low margin business. You may not have a lot of excess money lying around that you can invest in technologies and innovations that may or may not work in your environment. Other countries do have that kind of capability. They have the support systems in place to help those companies, to help subsidize, perhaps the acquisition of those innovations to allow them to grow.
Leah Tolton: [00:17:24] You're talking about innovation and you're talking about, you know, creating efficiencies. Is there a role here for something like, or for some technological solutions to play a role in helping family enterprises scale and attract investment in the agriculture sector?
Dave Smardon: [00:17:38] Absolutely. We see literally hundreds of them, year over year over year. And whether it's something as simple as introducing financial software to some of these companies where the entire operation is integrated into the software. You'd be surprised at the number of businesses that don't have that.
And then you can talk about fertilizer replacements or fertilizer management software, or you can talk about biologicals. There's so many different innovation paths that apply to this, and they all have a certain amount of risk associated with them, but you have to get to a point where you can bring those technologies in-house and apply them to your business and start to experience the productivity changes.
Leah Tolton: [00:18:27] And so have you any success stories to share of enterprises that have managed to do that transition from operators into investors that may have, you know, focused on innovation or technology to facilitate that?
Dave Smardon: [00:18:39] There are, there are a couple of leading entrepreneurs who are now investors. And one of them is very well known. It's, um, Arlene Dragon's Den. Right. I mean, she has a food incubator and she also has an investment organization and she's kind of integrated the two together and she's got a lot of knowledge that she has to deliver back to those companies. So that's a great example.
More recently, the SkipTheDishes folks now starting up a venture capital organization. So there are few and far between, but there's more and more of them occurring on a yearly basis. The more high-level successes we get, whether it be a food industry or an agribusiness or the selling of a farm, presents those opportunities for those entrepreneurs or those owners to give back and they will form their own family offices or their own venture capital firms.
Leah Tolton: [00:19:30] You know, that takes me to a point that's important from the perspective of the family enterprise. We look for organizations that are ready to move from the role of operators to capital managers and investors and who take a view that's broader than just the view that applies to the family or the owners group that exists right now and look to be the type of organization that creates wealth generation opportunities for multiple generations.
So I think that's part of what you're talking about here, but I do have a question about if we are dealing with a family-owned enterprise, whether a farm or another agri-food business that really values the fact that it is closely held or that the values of the family are reflected in the operations. How can an organization like that work to transition and attract investment while maintaining that family-oriented business culture? Have you any wisdom to share on that?
Dave Smardon: [00:20:33] That's a toughie. I know there are some examples of how businesses have made a hard right-hand turn or a hard left-hand turn partially in, I guess you could say, getting out of the farming industry directly, but taking all the land that they owned and they rented back out to someone else who wants to farm it. Right. And so now they are, they have a different business, different business model. The skill sets are different in many respects.
The family, the young children in particular, often have a greater interest in that than they do in driving a tractor on the farm. So there's that kind of thing that we're seeing happening a little more often. So in essence, they're looking around and they're seeing where's the competition, where are the opportunities, and maybe this is the right opportunity to get out of the direct farming industry and become a landowner real estate owner. That can lead to other forms of real estate as well. That's one example.
Leah Tolton: [00:21:37] So, that ties in the comment you made in respect of seeing where the market is going and taking advantage of the insight you have and maybe opportunities that present themselves there to some reinvention or creation of different opportunities that may actually have broader appeal and therefore create some cohesion or some collective agreement among the family members who are participating that this is something they'd like to pursue.
Dave Smardon: [00:22:03] Right, right. And as far as long-term growth, it's difficult for me to pinpoint a particular example. I mean, we have a lot of companies we've worked with that have taken a long time to grow to a certain level. And when they got to that level, they expanded their operations and they expanded their human resources and their C-suite, there was a suite of executives.
But they had to get to that point to be able to afford these people. And that comes back full circle to how long is it going to take you as an agribusiness to get to that point?
Leah Tolton: [00:22:36] Right. So now we're tying together concepts of growth, of scaling, of investment, of seeking capital, placing capital and those kinds of things in order to get to that stage.
Dave Smardon: [00:22:48] Exactly.
Leah Tolton: [00:22:49] When you get to that stage, assuming that someone or an organization has been successful in putting in the time and keeping track of what competitors are doing and thinking about ways that they can innovate and seeking growth opportunities, are there structures that you've seen put into place that have worked well to assist people with those growth transitions? Are there things that you would, you know, have seen not work well? What kinds of things should people be thinking about when they're looking to go this direction and grow their agribusiness?
Dave Smardon: [00:23:20] A lot has happened in the last seven to 10 years to support these types of businesses. First of all, I would start with the earlier stage businesses that truly have something unique that they can build into a larger business.
You can take advantage of non-dilutive financing, non-dilutive monies that come out of the various provincial governments, federal governments, economic development agencies, and so on. We are awash with those kinds of monies, and agriculture and agri-food businesses can take advantage of those. It doesn't affect their equity.
Leah Tolton: [00:26:13] Well, that's interesting. So if we're seeing more and more investors coming into this marketplace, where do you see the most promising opportunities for family enterprises to expand or diversify?
Dave Smardon: [00:26:23] Well, that's a big one. There's a lot of talk about the implementation of technologies, whether they be robotics, sensor technologies, a lot of hoopla right now around artificial intelligence. All of these things are going to have dramatic impacts on how we do our food industry, our food business, whether it be growing it, harvesting it, packaging it, and selling it.
So anyone along that value chain can take advantage of these innovations and build a leadership position by implementing them, being kind of in that first group that does that – the most innovative group. And that's not without its risks because we're dealing with a very conservative industry.
Leah Tolton: [00:27:54] Right. So, big opportunity for someone who comes up with a concept or who employs a concept that creates those efficiencies and controls those costs, et cetera, but that comes with risk obviously.
Dave Smardon: [00:28:06] You asked me, one of the other questions or one of the areas of interest, keen interest, is the whole area of labor. Labor has been a huge issue in the agriculture industry for decades. And still is and will be for quite some time, but we're seeing a lot of harvesting technologies that are coming out, and it's everything from harvesting lettuces to harvesting pomegranates to harvesting mushrooms all across the board and having these kinds of technologies implemented.
Automatic harvesters, which are robotics-based and sensor-based. You remove the issue that you have for labor that is supposed to be out there picking these products and packaging them and putting them on the cart so they can get shipped somewhere. That's a big, big issue. Risk and a big expense.
Leah Tolton: [00:29:02] What promising opportunities do you see for investors in Canadian agriculture?
Dave Smardon: [00:29:07] I think there's a lot, but I think as an investor, you have to adjust your thinking a little bit. Over the years, the idea is that if I invest in something now, I will exit that investment in three years and I'll make a ton of money. That works in some sectors. For the most part, it doesn't work in agriculture and food.
Leah Tolton: [00:32:14] That's a great note to end on, I think. Dave, I thank you so much for agreeing to appear on the podcast. You have shared so much wisdom with us today, and I know that our listeners will appreciate the commentary you've made and will take some thoughts away about how they might be able to contribute to the conversation.
Dave Smardon: [00:32:33] My pleasure, Leah. It was a lot of fun. Thank you.
Leah Tolton: [00:32:36] Thanks for joining me on this episode of Beyond Succession, a series within the Bennett Jones Business Law Talks podcast. Make sure to hit the follow button on whatever platform you are listening from, so you get notified whenever we release new episodes. Also, don't hesitate to reach out if you have any questions about challenges or issues that you're facing in your family enterprise. Take care. I'll catch you in our next episode.
Please note that this publication presents an overview of notable legal trends and related updates. It is intended for informational purposes and not as a replacement for detailed legal advice. If you need guidance tailored to your specific circumstances, please contact one of the authors to explore how we can help you navigate your legal needs.
For permission to republish this or any other publication, contact Amrita Kochhar at kochhara@bennettjones.com.
Bennett Jones
