Treating a farm as a business makes for a great lifestyle, but farming as a lifestyle often results in a poor business.
A management axiom states that businesses are built to be sold, but farms are not typically sold as businesses. The assets are sold separately, assuming an arm’s length sale.
But let’s assume that farms are regularly sold as a going concern, where someone takes over at a particular point – lock, stock and barrel.
Would you buy your farm business?
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If you are selling the farm assets at arm’s length, the health of the business as a going concern is not important.
The only issues are whether you receive enough after-tax dollars to fund your retirement and any desired estate distribution to children or other beneficiaries.
It is a different situation if you want to transfer the farm intergenerationally – to sell the farm to family at some point.
Why would family want to take over a business that you would not want to buy yourself?
Some farmers might not know if they would want to buy their business, perhaps because they are not sure how to go about answering the question.
It can be more difficult than what may appear at first glance.
Operations
- How does your farm compare against industry standards for yield?
- Are standard operating procedures developed and printed?
- Are safety plans and protocols in place?
Marketing
- Are contracts in place for suppliers and vendors?
Human Resources
- Is there an organizational chart?
- Are there job descriptions?
- Is there a formal performance review process?
- Does a professional development plan exist?
Finance
- Do you monitor financial performance, minimally checking working capital availability, relationship between debt and equity and the earned ability to repay debt, return on equity and gross margin efficiency?
- Is bookkeeping updated monthly?
- Is the business adequately financed?
Ownership
- Do you have a printed strategic business plan and is it reviewed annually?
- Are regular monthly business meetings held, complete with agendas and documented notes from prior meetings?
- Are annual ownership meetings held that review capital investment objectives and decisions?
- Does the business have a five-year capital budget in place?
- Is there an opportunity for growth?
Relationships
- What is the status of relationships with key business partners, such as landlords, suppliers and vendors, lenders, professionals such as accountants and lawyers and nonfarming children or siblings?
Administration
- Are legal documents and important papers up to date?
- Are they stored in a safe and accessible place?
- Are processes in place to manage information and data, including sourcing and storing the appropriate information?
Technology
- Does the farm use new technologies in operations and other management areas?
Assets
- What is the condition of production-related assets such as equipment and buildings?
- Do redundant assets exist that could be converted to cash?
Other
- Has a risk management plan been developed and implemented?
- Has an environmental plan been developed and implemented?
- Answering each of the applicable questions will provide insight into the health of your farm business.
- It is a long list but not necessarily exhaustive, and while it is unlikely that any farm will be able to answer all questions positively, it will help determine whether you would want to buy your farm business.
- It will also show areas to work on that could help improve the business and make it more
salable.
Terry Betker is a partner with Meyers Norris Penny LLP in Winnipeg. Contact: 204-782-8200.
