Edition #7

August 19, 2023

Good morning and welcome to the Braintrust Ag newsletter. Where we’re fueling your ag business success like a State Fair corn dog…

A few notes to begin:

• Thank you to those who have been exploring and engaging on the new website platform.

• Don’t forget to Click Here to unlock Lifetime Access to all the resources, content, connections, and discussions we’ve got to offer… if you haven’t already done so.

• Interested in a small to medium side hustle? Send me a message, as I could use some help on an outreach project: [email protected]

Alright, let’s get to the topics that will help you build a strong, sustainable agri-business.

-Clint

Here’s what we have this week:

• 📃 Business Plan: Uses & Sources

• 🌱 Ag Employer Resources

• 🤝 ROFR

• 💡 Business Transfer Phases

BUSINESS PLAN SERIES

As a refresher, successful farms and ranches don’t just happen by mistake.

They are the result of a well thought out plan that allows for growth and flexibility designed to reach a distant goal.

Whether you have been running a farm for years, are looking to start one from scratch, or are somewhere in between, you ought to have a business plan.

To get everyone up to speed, here’s the previous installments of the series:

Here’s Part 1: Business Description

Here’s Part 2: Products & Services

Here’s Part 3: Marketing & SWOT Analysis

Here’s Part 4: Operational Plan

Now, let’s look at the financial aspect of the business by building out our Farm Financial Proforma.

This week’s Part 5 focus is the Sources and Uses (also known as start-up costs).

For this part of the business plan, we’ll be using a simple Operating Proforma that shows our Sources, Uses, and 10 Year Cash Flow projections.

Access it under the Business Plans folder on the Resources Space: Click Here

First, we need to list out and itemize our “Uses”. These are all the upfront, start-up costs we are expecting to spend to get our first year’s crop planted, fertilized, sprayed, and harvested.

In other words, our initial investment.

To do so, we’re going to break the costs into two categories: 1) Land, and 2) Machinery, Inputs, & Other

Here’s our projected Soft Costs (fees to close on the land purchase) associated with purchasing 220 acres of land:

Here’s our projected Hard Costs and Total Farmland Uses:

Next, let’s look at how we’re going to pay for the land purchase. These are the Sources of funding. Notice for this scenario we’re using a standard senior loan and cash downpayment approach. However, there are many, creative ways to finance the purchase of land… with some of those listed in this Proforma.

To sum up the land purchase: We’ve got Total Uses equal to $2.25 million and Total Sources equal to $2.25 million. Uses and Sources must always match when creating your proforma.

Moving on to the Machinery, Inputs, and Other… We split these out, as it’s helpful to view the appreciating land assets separately since these assets will have much different funding sources, loan terms, ROI, and more.

Here’s the breakdown of our Sample Farms machinery needs (these are just estimates, and your proforma can go into much more detail and accuracy for your unique machinery needs):

Now, we have a total of $715,000 of costs to acquire the machinery & equipment. Each plan will be unique, and I would not expect a new operation to be purchasing all this equipment when renting and leasing are viable options. For our purposes, we’re buying a complete line of 5-15 year old equipment.

Rounding out our Uses is the first year’s inputs and other costs:

For Sample Farms, we end up with $1 million of machinery & operating costs to get through the first year. Note: we’re assuming to rent an additional 380 acres more than our 220 acres we purchased.

Here’s how we expect to fund our Machinery, Input, & Other Costs:

In summary, for total start-up costs we’re projecting:

• Land………………..$2,250,000

• Machinery……..…..$715,000

• Inputs & Other…..$295,000

• Grand Total: $3,260,000

That’s a tough pill to swallow. So, as we further develop our financial projections, we will look at some alternative ways to either fund or accomplish the same objectives (production farming) while minimizing those upfront costs.

Next week, we will look at how this traditionally financed model works from a year to year cash flow standpoint. After all, cash is king and if we can’t make our payments… our farming/ranching career will be short lived.

RESOURCES UPDATE

Here’s a couple of the resources available to download on the website I’d like to highlight:

Employer Resources

A Braintrust Ag member reached out asking for some resources for ag employers. There are some unique considerations for employing ag workers, so I came across:

• Ag Employer Checklist from Iowa State

• Template/Sample Ag Employee Handbook

They are located under the Miscellaneous folder on the Resources Space as shown here:

18 Farm Financial Ratios eBook + Calculator

Use the explanations, formulas, and recommendations in this eBook to better understand and manage your operation’s financial health. Plus, there’s a Calculator spreadsheet available to help you crunch your numbers.

Complete Business Finance Series (By ESP Joey DeWit)

This series breaks down how to look at your operation’s finances as a CFO through a complete .pdf guide, video explanations, and templates. Access them in the “Resources” space on the website.

I’d encourage you to look at the other resources available on the site, and check back from time to time as new tools get uploaded.

LEGAL

Right of First Refusal (ROFR)

What is ROFR?

Right of First Refusal, commonly known as ROFR, is a contractual agreement that provides a party (often a tenant) with the opportunity to purchase a property before the owner sells that property to an unrelated third party. In the context of farmland, this is a significant provision that is often incorporated into farming leases or may stand as a separate agreement between a landowner and a tenant or a neighboring farmer.

When a landowner decides to sell the property, the ROFR stipulates that the holder of this right has the option to purchase the property on the same terms and conditions offered by a prospective third-party buyer (bonafide offer). If the holder of the ROFR is not interested in purchasing the property under those terms, the owner is then free to sell the property to that third-party buyer.

How ROFR can be used:

1. Lease Provision: A ROFR clause can be integrated directly into a farmland lease agreement. This is common in long-term lease agreements between a landowner and a farmer. The clause specifies that if the landowner decides to sell the property, the tenant has the first opportunity to purchase it under the terms and conditions that a third-party buyer has offered.

2. Separate Agreement: ROFR can also be a stand-alone agreement, independent of a lease. This might occur in cases where a neighbor, rather than a tenant, is granted the ROFR, or where the owner and tenant prefer to keep the leasing and potential selling arrangements separate.

3. Terms and Conditions: The ROFR clause or agreement must clearly outline the terms and conditions under which this right can be exercised. For instance, it should specify the timeframe within which the holder of the ROFR must decide to exercise the option to purchase the property once notified of a third-party offer, and the manner in which they must be notified of the impending sale.

In summary, ROFR is a contractual agreement that grants a designated party the option to purchase a property under the same terms and conditions as a bonafide third-party offer before the owner can sell the property to that third-party buyer, and this right can be incorporated into a farmland lease agreement or exist as a separate, standalone agreement.

Next week, we’ll look at some of the benefits and drawbacks of ROFR and an example.

SUCCESSION/TRANSITION

One of the key components of a comprehensive succession plan is the Farm Business Transfer.

The process of transferring the farm business to a successor can take a little as a few months, but commonly, requires a much longer period, lasting up to several years. How quickly the transfer occurs will depend on the skills, needs and motivation of those involved, as well as the current and projected financial condition of the business. Treating the business transfer plan as a process occurring over an adequate time period, rather than at a set date, will ensure greater success.

It may be helpful to have specific goals for the four phases of the business transfer plan: testing, commitment, establishment and withdrawal.

• The testing phase is a trial period for all involved to decide if this transfer is what they truly want.

• The commitment phase is when all parties make a commitment to the process initiating management and asset transfer to the successor.

• The establishment phase is when the successor has a greater role in business decisions with at least an equal voice in management and ownership of key assets.

• The withdrawal phase is when the original owner eventually retires from the business.

In summary, a comprehensive succession plan needs to include the smooth transition of the farm business through a phased approach—testing, commitment, establishment, and withdrawal—that spans over an extended period. This allows all parties involved to adapt and make decisions based on their skills, needs, and the financial condition of the business, rather than adhering to a fixed date.

MEME OF THE WEEK

That’s a wrap, folks.

Until next week, thank you to everyone involved in ag. Come engage on the new platform & let’s grow profitable ag businesses together.

DISCLAIMER: All content, communications, and resources provided by Braintrust Ag, its principals, operators, or members is intended to merely be educational and entertaining. Nothing published by Braintrust Ag should be relied on as legal, financial, investment, or other professional advice. Investments and legal matters involve substantial risk and are not suitable for all individuals. It is recommended to enter into a client relationship with an ESP for obtaining professional advice.