Elaine writes: “Fair family price” versus “fair market value price” (or FFP vs. FMV) is often a tense conversation between a farm’s founders, needing to sell assets for their personal income stream, and a buyer, often the cash-strapped successor on the farm. To offer readers some wisdom on this conversation I asked our coaching teammate Glenn Dogterom, CPA, to offer his experience and insights. Here’s some food for thought from Glenn’s and my coaching experience.
Appraisal
Start with determining the FMV by using a certified appraiser. If you want to find a local appraiser you can ask your lender for referrals, and/or you can search up “agricultural appraiser.” One of the members on our membership site gathered two appraisals for her farm, so she was confident she had a good number to start the conversation of transition with her successor.
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What is the nature of the farming operation and its size? Is it a large, highly profitable enterprise or a smaller family operation with marginal profitability? This is a viability question and relates to our coaching queries about how many families the farm’s cash flow or income stream can support.
What is the nature of the assets being purchased — is it actual farmland, equipment and buildings (infrastructure), or shares in a farming company? This is where a current asset list is helpful. Some folks are visual learners and to make good decisions they want to see data and facts. How much of the actual farmland is for crops or pasture? What kind of market value does the equipment have? Do the buildings need a lot of upgrading? How many shares in the farming company are available for purchase? By when? Are the shares growth shares for the next generation? Are the founders wanting preferred shares for future income? Do non-farming siblings have access to farm shares?
Family discount
The successor needs to prepare a business plan that can be presented to the finance company as part of an application, when determining how much the finance company is willing to provide toward the purchase.
There is always going to be a collateral requirement, which could be in the range of 20 to 25 per cent of the FMV. This may dictate just how much it is practical to expect as a family discount. As a young farmer, what kind of collateral are you bringing to the table?
Often discounts have a very wide range based on family dynamics; however, it’s not uncommon for the discount to be in the range of 15 per cent, which can lead to a shortfall of five to 10 per cent of the amount that may be available from financing. There are several ways that shortfall might be addressed, depending on the specific circumstances. For example, it may take the form of a promissory note to make up the difference. Due to the extremely high price of farmland, there is often a gifting component to enable a successor to take up the operation.
The other issue: what protections are there for the seller (founders), in the event of an early sale by the successor? One of several options may take the form of a graduated retention by the successor, in which they receive no advantage if they sell within one year, increasing as the agreement reaches maturity in 10 to 20 years (as determined by the parties).
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Lawyer Mona Brown in Manitoba has used the term “poison pill” to describe legal agreements which prevent the successor from farming for just a few years and then selling out. Brown uses a pro-rated agreement that protects other non-farm heirs from having a sibling who “cashes out” a farm in five years.
Remember, it likely took the parents 40-plus years to achieve what they have built up and it is not unreasonable for the successor to be looking at a long term for the purchase. (Keep the expectations realistic.)
For more on these topics, visit the Country Guide website for its November 2023 digital edition, called “This New Land: The Challenge of High Prices.”
Show your work
See the relationship manager at your local FCC, bank or credit union to share your current net worth statement, find appraiser referrals, and build your business plan for your vision of the farm. Advisors want to see your farm family succeed but they cannot “do the pushups for you,” as Stu McLaren, my mentor for our membership site, has said.
Doing the work of having emotionally laden conversations about buying land and equipment can be hard, but you can do hard things with facilitation, using experienced coaches who know how to keep the conversations safe and respectful, to create solutions that are win/win for each generation.
As we mention above, family dynamics play a role in the agreed-upon discounted prices. Make sure you keep financial transparency with both your farm heirs and your non-farm heirs. When folks understand why certain decisions are made, they are more likely to come to peace with the outcomes.
Your discussions about fair family price and expectations about not using fair market value will set the tone of relationships for harmony in your family and business. You get to choose to be cowardly and not do the work on appraisal, asset lists and debt servicing expectations — or you get to embrace the tools mentioned and have peaceful sleep at night.
ALSO: Roster changes
Elaine writes: Many folks on our weekly group coaching calls appreciate Glenn’s years of wisdom from all the farm scenarios he has seen in over 30 years of advising farm families. Glenn is going to be missed when he retires from our coaching team in January, so we have welcomed Alyssa Brown, CPA, from Olds, Alta., who will continue to take on coaching queries related to farm accounting and transition in our breakout rooms on Zoom.
If you would like to be part of our group coaching three times a month, sign up at www.elainefroese.com/membership. Learn from our coaches and each other as farmers in transition. Your whole family is welcome to be part of the learning journey.
