• 10Nov

    Small Farm Business Advice for Beginning Farmers includes thinking about a potentialexit strategy“. This doesn’t necessarily mean that you are planning on leaving the farm business, but is an important consideration when planning a new farm, and in recommended in the original business plan.

    Exit Strategies for the Small Farm: “Exit strategy” is a term for the process by which a business is sold. Eventually every business goes through an ownership transition. With family farms the situation is highly unique and if you’re thinking of starting a farm it’s worth some thought before devoting your life (and your savings) to it.

    Why Does an Exit Strategy Matter? Having confidence that a business can be sold provides owners with a substantial amount of security should an unexpected situation develop. If for whatever reason the owners of a business need to sell that ownership it helps to know that potential buyers are readily available. Broadly speaking, this concept is referred to as “liquidity”. For instance, most investments in the stock market are highly “liquid”, meaning they can be bought and sold with relative ease and there’s a high level of certainty that someone else will buy your shares. Investments in privately held businesses tend to be “illiquid”. Illiquid investments require a longer amount of time to find a buyer and generally involve more paperwork and negotiations. You can’t log on to etrade and sell your ownership. For this reason (among others) ownership in privately-held companies is generally more risky. Owning a family farm, I would argue, is even more risky and more illiquid than a typical investment in a private business.

    Are There Exit Strategies for Small Farm Owners? The average company pursuing an exit will seek out a larger company or a group of investors that would be happy to buy it for the right price. Investors might include venture capitalists, private equity investors, wealthy individuals, or even family and friends. It’s rarely the case that a business can’t be integrated into a larger organization or run by a new management team. However, small, diversified farms are not like other businesses.

    Small farm businesses are almost always highly dependent on the family that owns the farm. This puts the business in a precarious situation should the owners want to exit. Not only are they the owners, they’re also the operators. It’s not so easy to just bring in a new CEO and corral the troops forward. A group of investors can’t come in and buy the company, hire some people to operate it and plan on earning a decent return. Almost by definition the farm has to be run by people that own it. Most small farms just don’t earn a high enough return for the owners to be separate from the management.

    What this means is that most small farms get passed on to the kids or turned into a hobby farm for retirement. On other occasions it might be sold to existing (or aspiring) farmers, but rarely will it be for a price that the owners truly think the business is worth. That’s pretty much it. There is a highly limited set of potential exit strategies.

    If you’re like us and you don’t have kids and you’re nowhere near retirement age it pretty much means you better be right about wanting to farm. When I think about quitting my job and starting a career in farming I wonder what would happen if I ended up wanting to get out. I think I want to farm, in fact, I know I want to farm, but there’s still no guarantee that I’ll truly be happy. It’s just one of the risks we’re willing to take to do what we believe is right.

    -Scrapple is a regular contributor to beginning farmers
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