Before buying or selling a farm, ask “Why?”
Note: This is part one of a two-part blog series on buying or selling a farm. For part two, “Selling a farm: capital idea or capital gains tax?” see here.
You want to buy or sell a farm. Before you push a “For Sale” sign into the ground or negotiate with the owner, make sure you’re doing it for the right reasons.
We’ve advised many clients on how to put their farm on the market, or, conversely, what steps go into a farm purchase. However, one area clients often skip over is the why. Unless you’ve carefully thought out the “why” behind the transaction, you may end up selling the only part of your farm earning money or buying an operation that will only drag you down.
Taking Everything Into Account
The first consideration is how the farm is performing in, or would fit into, your overall operation. We help our clients perform an enterprise analysis — a deep dive into all of a farm’s assets and operations that produce income or add expenses, and determine the farm’s profitability and cash flow. An enterprise analysis takes a comprehensive accounting of everything from the farm’s infrastructure to production. With this analysis in hand you can project how selling or purchasing the farm will affect your enterprise as a whole. A seller might find that the farm is the only profitable part of the operation, or provides regular income essential to paying the bills when income fluctuates. A buyer might find that the farm they hope to buy would require too much travel to profitably operate, or require significant cash inflows at times when cash would be tight.
If you’re selling, is it because you need the cash to finance another farm investment or meet some other expense? The enterprise analysis can help determine whether you’re selling a gold mine to buy or save a sewage plant, or vice versa. Once you’ve determined whether the sale makes sense you’ll need an accurate assessment of value of the farm you’re selling, the liabilities that have to be paid off to convey clear title, and the costs of sale. Knowing the value will give you a good sense for how to price the farm, what offers to take and whether the liabilities and sale costs will net enough to accomplish your goals. We’ve had clients who didn’t have a solid understanding of their farm’s value reject good offers in the hope of getting more, and ending up selling for much less. Similarly, not understanding the farm’s value and the costs against it can lead to realizing you sold more or less land than was necessary to accomplish your goals.
On the flip side, as a potential buyer, will the infrastructure be adequate for what you want to do, or will it require improvements/additions/subtractions? Is the land enrolled in the Conservation Reserve Program and will you be locked into that agreement for years to come? Under CRP rules, you are limited in what you can do with the land. If you plan to raise livestock on the farm, does it come with an approved manure or nutrient management plan or will it need one? That can add another wrinkle. Ultimately, will the farm make enough money to justify the purchase when you factor in the other necessary costs and expenses? Just because you have money to spend and want to expand your operation doesn’t mean this farm, at this price, fits well with your plans to optimize your operation.
Cash In, or Cash Out?
An important consideration for a buyer is how much money they will need to free up to purchase a farm. If you’re using cash reserves will you have enough cushion left if an unexpected expense comes along? If you’re borrowing money will your post-purchase cash flows support the increased payments, especially if the loan terms (e.g. interest rate) aren’t fixed? These considerations all factor into whether it makes sense to buy the farm. If you buy too much and it works, you look smart. But if it doesn’t work you may find yourself in a different industry!
Finally, talk with other farmers in the area, especially if you aren’t local. What market values are they seeing? Are farms in the area turning profits or just barely getting by? Local farmers can provide valuable insights to both prospective buyers and sellers.
Taxes, too, are an important consideration – so important that we’re dedicating next month’s blog post to them.
Look Before You Leap
Farms traditionally are good investments, and the agricultural industry is better off when farms are owned by their operators. Farm buyers and sellers often spend a lot of time working through the whats and hows of farm sales without taking the time to consider the essential preliminary question: why? Take time to work through the whys before you buy or sell so you can make sure the transaction helps you achieve your goals instead of dragging you down
Our expert team stands ready to help you properly analyze the “why,” and then work through the “what” and “how.” Contact us today.
For part two, “Selling a farm: capital idea or capital gains tax?” see here.
At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help clients create and execute a business plan and, if necessary, assist with the legal, tax, and practical aspects of debt restructuring or bankruptcy.
Be proactive and anticipate problems instead of reactive to problems that have already arisen. Connect with someone you can trust today, not tomorrow.
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Categories: Economy, Farm Business, Financial