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A Good Deal For Both Sides

Billy and Boss have never been in a dispute and they know nothing of each other’s finances. However they both have complementary interests — Boss needs cash and Billy needs a return on his investment.

My elevator agent often demonstrates a win-win situation to me when I get screwed with dockage and grade! But a win-win situation doesn’t mean someone has to lose twice. We recently experienced a true win-win agreement with Boss Hog and Billy Boughtnpaidfur.

Boss Hog is one our best hog production clients. He has made money in the past and always had excellent production. He has always lived modestly, spent wisely and was fiscally responsible. The past 18 months have been devastating to him — to say the least. He has eroded working capital with operating losses and extended trade payables and operating lines to their max. Boss is truly committed to the industry and is committed to continuing if at all possible. Boss has one ace in the hole: a bit of good land that is not very highly leveraged.

Boss has a good relationship with his banker, but was told that with the recent red ink in the hog industry and the drop in hog barn value, his banker is not in a position to do any more lending.

Billy Boughtnpaidfur is in a totally different situation. After two of his most profitable years farming, this grain farmer is sitting on a pile of cash. Billy has always had enough cash to operate with, but now he’s sitting on

close to $500,000 and it is earning him 0.25 per cent in his chequing account. He subscribes to Andy Sirski’s newsletter, but he has never had the courage to wade into the stock market and long-term GIC rates are horrible. Billy also hates risk. He would never consider lending his hard earned dollars to someone at the risk of becoming a unsecured creditor. He’s not even comfortable with a mortgage on someone else’s land. He is totally unfamiliar with debt and firm in his belief “Neither a borrower nor a lender be!”

Billy lives very close to Boss Hog and both are our clients. Both use our services however for very different reasons. One component of mediation is understanding client issues and digging deeper into problems to discover the issues. Finding common ground between parties in a dispute can lead to resolution and understanding of the other side’s issues. Now Billy and Boss have never been in a dispute and they know nothing of each other’s finances. However they both have complementary interests — Boss needs cash and Billy needs a return on his investment.

With a confidentiality agreement signed between Billy and Boss we brought them together. A solution to their problems was evident. Boss agreed to sell Billy his land for reasonable price — it’s assessment value. Boss wanted to rent the land back and agreed to pay an annual rate equivalent to the taxes and 9.0 per cent of the purchase price. This seems high, but he wanted something else. He wanted to be able to buy this land back within 10 years for the price he sold it. Boss figured hogs will have turned around by then, and in he meantime, the extra cash will allow him to weather the down turn. If the hogs haven’t turned around, he will be finished anyway and any equity in the land will have been eaten up by unsecured creditors.

What the two agreed upon was an option agreement registered against the title. The option agreement simply reads: Boss has the option to rent the land for a set amount and on condition the payments are all made, Boss has the option to purchase the land back for a set price within the 10 year time period. If things fall off the rails and Boss defaults on the payments, the option is invalid and Billy gets a great piece of land at a reasonable price. The advantage to Billy is that there are no collection costs and he doesn’t have to go through legal proceedings to get title to the land.

For Billy the win-win is simple. He makes nine per cent on his money and has only taken the risk of buying land at a great price. For Boss Hog the win-win is also simple. He now has the cash to make one last honest effort at hogs and if everything works great, he has not been forced to sell the land outright. If it doesn’t work out, Boss knows that his unsecured trade creditors would likely have forced him to sell this land regardless.

Andrew DeRuyck and Mark Sloane manage two farming operations in Southern Manitoba and are partners in Right Choice Management Consulting. With over 25 years of cumulative experience, they offer support in farm management, financial management, strategic planning, and mediation services. They can be reached at [email protected]and [email protected]or 204-825-7392 or 204-825-8443.

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