Is the price of entry too high in agriculture?
The price of land and equipment has increased dramatically over the last 50 years in Canada making traditional farm financing difficult. Increasingly, large corporate farms are buying out small family operations as farmers retire. It begs the question: Is the entry cost too high in agriculture for my generation to pursue farming?
Over ten years ago, my grandparents sold their farm. Like many owners, they sold the land, then auctioned off the equipment. Over the past two years, we’ve seen an increase in the number of agriculture members signing up on SuccessionMatching. This has given us the opportunity to better understand how the market responds to these higher costs as more farms look to transition.
Here are four of the biggest market challenges and opportunities our members are experiencing:
Less Family Transitions
We are seeing fewer second or third generation family members wanting to move back home and take over the family farm. In combination with an aging population, this is the main reason why people are increasingly looking to sell to a third party. But knowing they have to widen their market beyond family members, sellers generally have a willingness to train and mentor a buyer. In doing so, their buyer in many respects becomes a new addition to the family.
Access to Capital
Straight, traditional financing on land and equipment is too large of an entry barrier for new farmers. This poses a dilemma for retiring farmers; they need to pull money out of the farm to fund retirement, but subsequent generations often don’t have enough cash to pay the fair market value of the farm. And lending institutions often shy away from extending enough debt to cover the purchase price for a farmer just starting out. Buyers and sellers usually reach a purchase agreement involving some combination of cash, debt and possibly the vendor taking back a mortgage on a portion of the purchase price.
Importance of Legacy
Community is important to producers. There is a large difference in “being bought out” versus “selling out”. Finding a family that wants to live in and contribute to the community is important to many sellers. But as new relationships are built during the training and mentoring phase, finding the right buyer can provide rebirth for the farm. The right buyer can take the farm to the next level be a positive contributor to the community for many years to come.
Willingness to Mentor
No one knows the ground better than the person who farmed it for the last 30 or 40 years. All of the farm owners on our site are willing to stay on and mentor the buyer for a period of time. And while someone who grew up on a farm might not have any desire to take it over, a buyer seeking a change of lifestyle often has a willingness to learn the industry that trumps his or her minimal experience. Sellers recognize a buyer with a desire to succeed is an important part of the transition process. On the other side, buyers value the mentoring process and see it as helping to minimize risk as a result of buying an existing operation versus starting from scratch.
Over the past few months, I have had the opportunity to get to know one particular family that raises and shows purebred cattle in Alberta. This is a perfect opportunity for someone that cares about sustainable farming and wants a low cost entry point to the industry. This family is willing to have the potential buyer live on their land rent free. But more than that, the right person will have a chance to learn from many years experience and obtain valuable knowledge that can’t be found in a book or shown on a financial statement. What better way to learn a business than working within an existing one, being active within the operations and having the guidance and mentorship needed to succeed.
I often talk to Dan Ohler from ESOP Builders about this challenge. Here is his contribution that provides another approach.
The Emotional Sale
Selling a farm, or any business, can be an emotionally tough decision. Many retiring farm entrepreneurs have purchased their parent’s or even grandparent’s farm operation. Some have started from scratch. Regardless, these farmers have invested many years of hard work, dedication, sacrifice, and cash to grow their holdings. Their farm is like a child they have conceived, birthed, raised, and are now exploring how to cut the apron strings. There is often sentimental value that can complicate the selling process, or lead to seller’s remorse after the sale. And yet, if the farmer decides not to sell, eventually age and health may force the issue. And that doesn’t contribute to happiness either.
Whether the farmer sells outright, or agrees to a mentoring situation, it is extremely important that the emotional sale has happened before the signatures go on paper.
Another alternative – an Employee Share Ownership Plan (ESOP)
Many modern farms are large and labour intensive – and growing larger. Often there are employees who have been a part of the farm operation for many years. These employees have also contributed much to the success of the farm and know every acre (or hectare) equally as well as the retiring farmer. These may be the best people to purchase the farm, especially if the retiring farmer has not made the internal emotional sale, yet is willing to step back and structure the sale over a longer term.
The ESOP alternative allows the farmer to exit on his/her own terms - to leave with a sizeable retirement fund and leave a legacy intact. The ESOP can be designed so the owner can step back from some of the operational decisions and still maintain the controlling interest until the emotional sale has happened. Depending on how the ESOP is designed, the retiring farmer could maintain a small interest that provides a return indefinitely, yet without any work or involvement in the daily decisions.
When the ESOP is designed with employee engagement, education and effective communication, one of the most powerful benefits is that the employees begin to think and act like owners. They begin to view the business in a more accountable way and to make daily decisions that affect the bottom line profitability of the operation. Studies by the National Center for Employee Ownership (NCEO) show that participative ESOP companies grow 8 – 12% per annum over and above non-ESOP companies. Some of that growth can be used as employee bonuses. If set up correctly, these bonuses can support the employees to buy more shares on a pre-tax basis. In most ESOPs, employees are offered the opportunity to buy more shares annually.
Many business owners we work with are concerned that their employees could never afford to buy shares. There are 8 different ways that can be utilized to make the share purchase quite affordable and meaningful for the employees. The pre-tax bonus (as above) is one, along with cash, payroll deductions, dividends, RRSPs, TFSAs, company loans, or traditional bank loans.
As an added benefit, the ESOP model, when designed correctly, provides significant tax benefits for both the retiring owner and the employees. It keeps more jingle in everyone’s jeans.
Each business, regardless of the industry, is unique. It is critical that the ESOP is designed in a manner that meets the needs and desires of the seller, the company, and the employee-investors. Our ESOP Transformation Model does exactly that. It ensures the technical components fit, that the plan is accepted enthusiastically by employees, and that it is solidly embedded into the culture of the business for long-term success.
In closing, Dan’s comments (above) have given me a new perspective that can address all of the market challenges I spoke of. An ESOP can:
1) allow family members to maintain some level of ownership for a longer period, yet step away from the operations;
2) provide the retiring farmer with retirement funds, and possibly long-term investment returns;
3) maintain a legacy in the community; and
4) allow leverage of historical information
5) establish a mentorship agreement
6) ensure long-term success with a social conscience.
Yes, there is a conundrum. Yet with creativity and innovative thinking, there are always alternatives that can allow the transaction to occur so everyone wins.