How a Business Consultant Can Help You Derive More Value From the Sale of Your Farm

The farm business is often sold, as the next generation is not keen on taking over a risky business. Additionally, the cyclicality of farming forces most farmers to sell, especially when the going gets tough due to poor yields, higher production costs, or pricing pressure from excess perishable supply. But selling a farm business is not simple. It involves the sale of land, intellectual property, water rights, equipment, homes, crop and livestock inventory, inputs, corporate structures, employees, supplier contacts, and a complete working infrastructure. A readily available business commands a premium price, which most small farmers can’t afford. But then finding a large corporate buyer is no easy task either, and farmers end up compromising on the price.

A Common Mistake Most Farm Owners Make When Selling Farmland

The most common mistake farm owners make when selling their farm business is simply listing their farmland for sale. They call a real estate agent and sell the land, without considering the sale and payment structure or tax implications. They hire an accountant to value the asset and apply necessary taxes, and a lawyer to prepare the contract. Each professional plays a key role in selling the farmland in compliance with the law.

What Business Advisors Bring to The Table?

A business advisor helps farmers sell farms not as a part of succession planning or crisis management, but as an exit strategy, which means selling on your terms. An exit strategy is a well-thought-out, structured approach to selling a farm business at its cyclical peak, when it can secure a good price from a strategic buyer. The sale is well timed, the transaction is optimized for tax efficiency, and the proceeds are structured to meet your financial goals.

The business advisor works with professionals from corporate finance, accounting, tax, legal, and farm management to ensure the sale is successful for both the buyer and the seller.

Now the question is, what do you want to achieve from your farmland? Do you want to sell the farm for maximum cash and exit the industry, or sell it to your successors? Do you want to sell all the assets, or keep the house or storage? Will it matter who the buyer is and how they will use the land? Answers to these questions will set the tone for whom to sell the farm to, how, and at what price.

Once the business consultant knows your goal, they will take the following steps to design and execute the sales roadmap.

Setting the Right Sale Structure

Selling an asset is straightforward, but not the most tax-efficient. For instance, the sale of your principal residence in the farm has a different tax treatment, while the sale of land has a different treatment. Standing crops and grains in the inventory are valued separately. Then the sale of old equipment and farm infrastructure has a different tax treatment. If the farm is incorporated, then the sale of shares is taxed differently.

How you structure the sale of all these assets will determine your tax liability. A business advisor can bring that knowledge to the table, do the math, and design different sales structures according to your financial needs.

Unlocking More Value

Once the sale structure is determined, the next step is to maximize the farm’s value by identifying areas that need some work.

• Well-Kept Operations Records: While land is the core asset, operations records also carry value. Farm owners should keep records of production history, farming practices, soil quality, the area’s average yield, and herd information. These records are your research on the local soil. It can give the new farm owner an edge by allowing them to skip the learning curve and achieve a better yield. A business consultant can help you organize and prepare such records.
• Financial and Other Records for Due Diligence: There are certain standard records the buyer needs for due diligence. For instance, arable farms should keep records of the last five years of crop information, yield analysis of the last three years, and soil-test results to assess land fertility and potential. These documents can attract sophisticated buyers by building confidence in the farmland. Financial statements of the last three years can smooth the due diligence process.

Packaging the Business for Better Value

Some farmers might bundle all their land and sell their assets in a lump sum. While this might look easy, as everything will be sold in one sales effort, it may not be value-generative. The bigger the estate or asset, the smaller the buyer pool, as not many companies can afford large tracts of land. And even if you find a buyer, they may not pay the right price for assets they don’t need.

The business advisor will study the market and the investor’s needs, and pitch a single asset or bundle that the buyer wants and is willing to pay for.

Keeping Farm Infrastructure Ready for Buyer

Remember, when selling the farm business, you also must think from the buyer’s perspective and make your business appealing to them.

• Maintenance: Ensure the farm’s maintenance is up to date: gates, fencing, and fields are in good shape, potholes are filled, and the drainage system is working well.
• Infrastructure Improvements: If certain infrastructure improvements can significantly enhance the farm’s value, such as installing a new irrigation system or replacing old equipment, treat that cost as an investment, as it will help you charge a higher price.
• Transparency around ongoing problems: While some problems can be solved, some issues are stuck in long-term disputes. Be transparent with the buyer, because if they find out about these problems during due diligence, you might lose qualified buyers.

Access to Qualified Buyers

With your business ready for the buyer and your sale structure in place, the business advisor will look for qualified buyers who are interested in your farm business and pitch them accordingly. Suppose you want the farm business to continue; the advisor will pitch the local farm operators looking to expand their farm operations. If your end goal is a lump-sum cash payout at a premium price, an advisor may pitch a corporation looking to enter the region. The advisor ensures that the deal is sweet for both parties and delivers the desired outcomes.

Payment Structure and Tax Considerations

The desired outcome may not have the desired tax implications. The advisor will structure the payment while considering tax implications.

Full payment in one go could attract alternative minimum tax and capital gains tax. The business advisor will work along with the tax advisor to design a structure that can preserve this payment and defer taxes.

Installment payments or rent-to-own agreements can help the seller secure regular payments, reduce tax liability, and ensure they don’t affect your Old Age Security (OAS) payments. Even the buyer can get the gradual ownership of the farmland.

Contact KSSP Partners LLP in York Region to Help Support the Sale of Your Farm Business

A business advisor can bring strategy and structure to your farm sale. Instead of jumping outright to sale, consider talking to an advisor to understand how you can make your business more appealing to the buyer. At KSSP Partners LLP, our accountants and business consultants can provide services such as valuing your business, preparing tax strategies, and financial statements. To learn more about how KSSP Partners LLP can provide you with the best accounting and business consultation services, contact us online or by telephone at 289-554-5997.