August 30, 2023
A recent event spurred a question from one of the young farmers and ranchers in attendance. He and his spouse have an opportunity to purchase his retiring parents’ machinery and equipment worth $900,000. The parents want to sell it on contract over seven years at five percent interest at approximately 50 percent of the value. This came with no down payment and $80,000 annual payments of principal and interest. Should they do it?
At first glance, this deal sounds like the deal of a lifetime. However, one needs to critically think through the process of acquisition. First, what is the condition of the equipment? How much additional life does it possess? One needs to examine the repair costs on this line of machinery in recent years and determine whether any major upgrades or repairs need to be made.
No down payment is an attractive option which would require no draws on working capital or cash. The timing of the payment would need to be considered and determine if it aligns with cash flows. A comparison of this line of equipment to a comparable line on the market would be an appropriate analysis. Of course, the effect of depreciation on income taxes would need to be considered in the assessment. Tax depreciation rules may be changing in the next few years, which could impact the bottom line.
Will there be underutilized equipment that could be sold to reduce the payment burden? In this scenario, one must consider whether the equipment has any sentimental value such as an old tractor or truck which may ruffle some of the feathers of family members if it was sold.
One major consideration is whether other children, not involved with the farm, have any strong feelings towards the obvious discount advantage given to the couple. Many holidays and family gatherings can be disrupted when jealousy and issues concerning fairness are brought up.
In this case, the financials and economics appear to make sense. However, when making an investment decision, particularly when dealing with family members, one must weigh the nonfinancial factors in the decision-making process. Nonfinancial factors can sometimes counter what seems to be a very obvious economic decision.
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