By Nate Birt and Sara Schafer
Stay savvy and inquisitive while growing through mergers, acquisitions and more
If you enter into a business partnership with another farm that isn’t compatible with your own, you might as well be walking into a cave without a flashlight. In the best-case scenario, you’ll run into a wall. In the worst-case scenario, you’ll tumble over a cliff.
“Make sure you join forces with people you can get along with,” advises Scott Burroughs, a Morton, Ill., producer who, with other farmers, set up a custom harvesting LLC that has rapidly grown its acreage. “No contract you can write can be strong enough to weather personality conflicts.”
As more operators seek to maximize their business investments through economies of scale, opportunities to expand through mergers, acquisitions, joint ventures and creative partnerships will flourish. The challenge for even the most business-savvy farmers is to fully calculate short- and long-term benefits and risks before diving headlong into an endeavor from which there might not be any turning back.
Great Expectations. Farmers must actively communicate their goals for growth internally and then be clear about those expectations with potential business partners, says Peter Martin, principal, K·Coe Isom. No question is too stupid to ask or too invasive to be ignored.
“To not have a conversation with someone who’s going to have a financial interest in your operation is insane,” Martin says.
Regardless of the mechanism you and your business partner end up choosing for growth, you need to decide where you want to go and why. Martin advises farmers to build out one-, five- and 10-year business plans. Such road maps add continuity, objectivity and measurement capabilities for both operations before and during a partnership.
Additionally, farmers should do a critical self-appraisal of their own operation before looking at such expansion opportunities, says Mike Boehlje, ag economist, Purdue University. This includes analyzing your managerial capacity, physical assets, capital access, staffing and personnel and risk tolerance.
“Too many businesses grow and acquire physical assets and then think about how they will run it—the managerial skill set,” he says. “The highest probability of business failure is during a fast-growth process. One of the reasons is because you don’t have the management team in place.”
Those kinds of conversations are particularly important because farms often involve family businesses that already come with expectations for what the future holds, says Kathleen Walton, principal, K·Coe Isom. Ask one another where returning or younger generations will fit into a newly merged operation, and bring stakeholders in early so expectations are clear and stated.
Take Your Time. The planning phase of mergers and acquisitions takes a substantial amount of time—four to six months, on average, Walton says—so use that time to be painstaking. That includes laying on the table your biggest fears about everything that could go wrong.
“You and your son’s deal-breaker may be two very different things,” Walton says. “Don’t jeopardize the family farm or legacy. Quantify how bad things could get to make sure it’s actually a deal-breaker.”
The opportunity for failure is huge and deserves ample proactive planning to prevent. Organize your path forward by setting out three kinds of goals within your short-, mid- and long-range plans, Martin says. Financial goals can include things like achieving economies of scale, building cash flow or growing revenue. Personal goals might include creating new jobs in your community or building a legacy for your family. External goals could include fending off the competition, growing market share or expanding your land base.
Nuts And Bolts. No merger, acquisition or partnership would be complete without drilling down into the financial weeds. Each of you should talk through the capital you are willing to invest in the new business and the degree to which you are willing to be leveraged.
If a farmer has $4 million and is willing to be leveraged 50%, the maximum purchase or investment price would be $8 million. A bigger purchase price of $40 million would be possible for operators willing to be leveraged 90%. With most expansions, a business will face cash-flow constraints during the first 12 to 24 months, Boehlje says. “You almost always have to subsidize a new venture. That doesn’t mean it’s a bad decision, you just have to account for it.”
In some cases, operators will consider opening the door to non-traditional financing, such as private equity, venture capital, real estate investment trusts (REITs), private placements and hedge funds, to start a business.
Still other farmers might seek out dentists, doctors and other professionals with the capital to jointly invest in farmland. Whatever model you adopt, Martin says, be aware that some of the non-traditional funders will require a higher level of financial reporting and ROI than your local bank.
The End Game. As your farm’s leader, don’t underestimate the time, challenges or satisfaction from growing your operation.
“Expanding your business will take mental energy,” Boehlje acknowledges. “If it’s a new venture, it will take a big mental energy.”
Tim Richter, a Lime Springs, Iowa, producer and 2012 Top Producer of the Year finalist, purchased a farm in Missouri in 2012. Before buying it, Richter and his business partners spent two weeks
on the farm.
“We needed boots on the ground,” he says, noting they dug soil samples and met with people who knew the land better than anyone. “We know what we don’t know.”
Richter sees the financial benefits of partnerships as well as the more intangible opportunities they have created for his legacy. He’s seen other farms hold off on partnering until they have resolved every outstanding issue. In his experience, though, those things work themselves out.
Hang onto the negotiating power you possess and look ahead to the exciting opportunities you might encounter, say farmers experienced in this business arena.
“Don’t be afraid to walk away from the table, because the door may open back up,” Burroughs says.
Give, Take and Give Some More When Making Acquisitions
The act of acquiring another business might seem like a sure bet, but rarely is the process so simple.
“M&A is a mug’s game, in which typically 70% to 90% of acquisitions are abysmal failures,” writes business author Roger L. Martin in the Harvard Business Review. “Why? The answer is surprisingly simple: Companies focus on what they are going to get from an acquisition are less likely to succeed than those that focus on what they have to give it.”
Smart CEOs look to create value for target businesses that can’t be generated by either party alone, says Martin, a professor at the Rotman School of Management at the University of Toronto and a former dean.
“An acquirer can improve its target’s competitiveness in four ways: by being a smarter provider of growth capital, by providing better managerial oversight, by transferring valuable skills and by sharing valuable capabilities,” Martin explains.
5 Steps to Take When Considering a Business Merger
When weighing whether it makes sense for your farm operation to merge with, acquire or otherwise partner with another business, it’s important to keep everyone in the loop. That’s why Peter Martin, principal with K·Coe Isom, recommends taking the following steps to get the conversation off on the right foot.
1. Inform and involve all key parties in the planning process and identify stakeholders for ownership.
2. Talk about and share your goals for a merger or acquisition and how it will impact your operation.
3. Discuss existing roles on each operation and how they might change. You won’t know everything, but you can reduce anxiety by creating some certainty about the future.
4. Verbally and explicitly ask for support. Act like you’re signing your name to the agreement even though nothing formal is in writing.
5. Keep the communication process alive. Meet more often, communicate more than normal and ensure assumptions are on the same page.