Q: I’m 40-something and raise natural beef on 400 acres of owned/leased ground. I also work part time in town. No next-gen in sight. Got any advice on what to weigh if a merger opportunity comes up with a larger neighbor?
Mike Evanish: 11 merger considerations
Size matters in this economy. Margins are tight, so economies of scale must be utilized whenever possible. Here are 11 things to weigh when looking at any merger:
• How well do your goals and the goals of the other partner align?
• Since you’re unrelated, will you make your business structure a corporation, to offer maximum liability protection?
• Who owns what and what does each partner’s balance sheet look like?
• Who does what work in the business, and how is everyone compensated?
• What happens if it doesn’t work out or if there’s a disability, and an owner can’t work?
• How are profits-losses calculated?
• What are the rules for incurring debt, and who can buy what; up to what cost?
• Will your assets be contributed and will those assets be rented from you?
• How will valuations be set at the beginning and moving forward?
• How will disputes between owners be settled?
• Who will do employee hiring and firing, and day-to-day managing?
There’s much more to look at. But this will give you a good starting point.
Dale Johnson: Be cautious about merger
This sounds like a good opportunity for your larger neighbor to access more land and benefit from economies of scale. Maybe he/she has good equipment to cover the extra acres, but needs extra labor you could provide part time.
Your natural beef suggests that you have a niche market with higher prices that your neighbor might take advantage of if only currently getting auction prices. But what’s in it for you?
Perhaps your depreciated equipment and buildings are running up your repair costs, and your small operation can’t justify replacing them. Maybe you want to back away from the farm and get more hours in town.
If you and your neighbor get along well and have different assets and skills, a merger could synergize your operations. But make sure you’re compatible and both benefit.
Develop a business plan that includes production, marketing and financial components. Draft a fool-proof business agreement addressing contribution of assets and labor from each party and how debts will be handled and profits distributed.
Above all, work with a lawyer on that business agreement. Implement the best legal structure to deal with liability issues.
All that said, I’d still caution you against the merger. They often fail because of unforeseen or unintended consequences. Explore all options for improving your business before jumping in with your neighbor.
George Mueller: Both parties must win
Two thoughts jump out: Any business deal or transaction has to benefit both parties, or never be entered into. Both also must be better off because of the merger.
A written document should spell out responsibilities, expectations and revenue stream for each partner. You also should have a written document spelling out an equitable way to disband the merger if it’s not working out.
So what do you have to offer? While your question is shy on details, it sounds like you’ve developed a viable natural beef freezer trade for local folks that like to know where their beef comes from and are willing to pay a premium for it. With 20 or more years farming, you have some valuable experience to offer and the ability to work hard.
You could give up your part-time job and provide the neighbor some labor and management ability that may be needed in a larger operation. That 400 acres of land under your control might be useful in a merger. Your natural beef operation, if quite profitable, might be able to be expanded with a merger. If your profits are meager, perhaps you could offer the larger farm a very economical way to raise their livestock.
What does the larger farm have to offer you? Perhaps a way to expand your natural beef business? Perhaps a full-time job with benefits, vacation time and time off as needed?
Might it provide more productive use for your 400 acres? Or is it a chance to use your talents in supervising people? Maybe it’s a chance to build more equity that’ll be very useful in your retirement years.
Do your homework carefully and ahead of time to be sure a merger makes sense. I commend you for thinking of all possibilities as you advance your farming career.
Got a question? Our experts await!
Our Profit Planner panel would like to hear your question. The panel consists of Michael Evanish, farm business consultant and business services manager of Pennsylvania Farm Bureau’s Members’ Service Corp.; Dale Johnson, Extension farm management specialist at University of Maryland; George Mueller, dairy farmer from Clifton Springs, N.Y.; and Glenn Rogers, University of Vermont Extension professor emeritus and ag consultant (unavailable for this question).
Send your questions to Profit Planners, American Agriculturist, 5227B Baltimore Pike, Littlestown, PA 17340. Or email them to [email protected]. All are submitted to our panel without identification.