|
SW MN | This is a great thread. I appreciate the thought process, and it is interesting to see the responses.
Being that farmers are hard pressed to sell land, you have to lay out the scenario for him that it makes financial sense. If his current payment was north of $600/A, he could improve his cash flow by selling and renting back the land, with putting the provision of a right of refusal if it goes to sell again. By renting back for say, $250-300/A, he improves his current situation by $300-400/A (payment and taxes). On the 155 acres, that $46k-62k in an improved cash flow with no changes to his income base. He held on for 5 years, and while the land market has drifted lower, he will likely recoup a large portion of his down payment, and eliminate the debt. His debt load drops from $474k to $370k ($104k payment). This gets him back to nearly 1:1 on his DSC. His excess cash from the sale and debt repayment is approximately $250-275k that can go to working capital or debt retirement. Being that his working capital is $600k negative, it begets to ask: is that his operating line of credit stale debt that doesn't get paid off after selling to crop, or is it the balance sheet WC that shows next years payments needing to be serviced, but will come from the upcoming crop?
This is just the RE side of the scenario, but it would need to happen for this operation to have a chance of recovery. Unfortunately the land purchase has become a boat anchor to the operation. The next thing I would look to tackle is machinery. If he has some good equity in equipment, he should sell it and buy back something less expensive. If he has invested a lot into buildings/bins/tile, those are likely sunk costs that are not saleable for recovery.
Next bucket is to look at land that is not making money. Is it too far away, highly variable ground (i.e. not consistent yields because of wet/dry, soil type), high cash rent?
There are some great places/companies that can help this guy get direction and make some decisions to help him get out of the situation he finds himself in.
We still don't know what the debt structure looks like. In 5 years, he was able to only eliminate $42k of payments. This either means he has a lot of LT debt or excessively long IT debt, or the lender(s) didn't cut him off from purchasing new assets. RE debt cannot be depreciated (only expense the interest and RE taxes) so he may not have any NOL to offset gains.
Based on what I know, if I was the banker, I would look for the operator to come to me with the changes that he is going to make to rectify the operation going forward. I would have this list of suggestions for him, but if he told me that selling the ground was off the table, I would wish him well because I cannot help someone who doesn't want to help themselves.
1. Sell the RE bought 5 years ago, take the excess and either apply to WC shortfall, or elimination of other term debt. There likely will be no capital gain, and quite possibly a capital loss, and can offset some income (just not SS/Medicare tax owed)
2. Sell high priced equipment and under utilized equipment and replace with less expensive equipment. This can eliminate large debt payments and/or provide cash for WC shortfall.
3. Eliminate marginal ground/non profitable ground and be better with the remaining land
4. Finally, after all those items, I would look at restructuring the remaining debt to improve DSC/Cash flow because profitable times will come again, but it helps get through the tough ones.
I would have those scenarios laid out for him to show him how things will look going forward.
| |
|
Real World/Real life Financials Course 102
