Lease Management for a Farm
Question
I am interested in buying a farm worth $4.3 million. I know the Seller well, but I do not have much to invest. Would the lease management buy-out structure work for this kind of transaction?Answer
My fear is that the value of the farm ($4.3M) will far exceed the ability for you to create enough annual cash flow (CF) to pay the Seller a sufficient share of the CF in order to make the deal work. The value of agricultural land often far outstrips the value of any underlying CF it may be able to produce and it has almost always been the case. Therefore, I do not feel that a lease mgmt structure would work in the case you described. In other words, unless the farm can produce around $1M per year in CF, there is no hope in my mind of the Seller getting his $4.3M in value out in five years or less. It is my guess that it is highly unlikely that the farm produces that kind of CF. Also, the Seller could most likely easily sell the farm to a developer or other buyer for full value and get all the cash value at Closing.
- November 14, 2011
- Buying a Company
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Robert & Theresa Gould July 26, 2008
This is such a sad fact.
Tyler Mitchell April 4, 2011
Old question, but thought I'd say that if you have time to work together in such a relationship, perhaps in this situation you could also look at it with your personal developer hat on to maximize returns in non-farming or related income on the land as well. Work with the seller to start reducing his costs, dig into some new areas for revenue (using his assets) generation then the cash flow question might improve. Any similar examples to this?
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