Preparing an AgTech or Precision Ag Company for Sale

Hardware, software and service each get valued differently

A company that earns most of its money from hardware is valued like a manufacturer or a distributor. Buyers look at gross margin per unit, warranty returns, the cost of parts and how much inventory the company has to hold ahead of planting season. A company that earns most of its money from software subscriptions is valued on recurring revenue, how many customers cancel and how much it costs to win a new one. A company that sells services, such as scouting, mapping or application by drone and ground rig, is valued on the crews, the equipment and the contracts that keep them busy.

Most agtech firms are a mix, and the mix is what a buyer wants to see broken out. Hardware sold once with a subscription that renews each year is attractive, because the hardware gets the grower in the door and the subscription keeps paying. If the subscription is bundled into the hardware price with no separate renewal, a buyer will ask how you know customers value it. Our post on recurring revenue and contracts explains why buyers care about this split.

Buyers will ask for revenue by product line, by month and by customer, with a clear line between one-time sales, annual renewals and services. They will also ask how much of the revenue came from products that are more than a few years old. Agricultural technology moves quickly, and a buyer wants to know whether the product line is aging out.

The dealer channel and the grower relationship

Many precision ag companies sell through equipment dealers, co-ops and input retailers instead of selling to farms directly. Those channel partners are an asset and a risk. A strong dealer network gives reach that a small company could not build alone, and buyers will ask how long each dealer has been selling your line, how much of your sales each one controls and whether they sell competing products too. A dealer agreement that ends when the company changes hands is a problem, so buyers read those contracts closely.

Direct relationships with growers matter as well. Buyers will want to know who owns the customer: your company, the dealer or the equipment manufacturer whose machines your product plugs into. If your product depends on an integration with a major tractor, sprayer or planter manufacturer, they will ask about the terms. A change in that partner's software or a decision to build a competing feature can end a product line, and a buyer will price in the chance.

Data, intellectual property and who owns what

Data is where agtech sales get complicated. Field boundaries, yield maps, soil samples, imagery and machine logs belong to someone, and growers care about who sees them. Buyers will ask what your terms of service and customer agreements say about data ownership, how the data is stored and whether any of it is shared with third parties or used to train models. Growers have grown more cautious about this, and a buyer's lawyer will read your terms with care.

The same attention goes to intellectual property. Buyers ask who wrote the code and the firmware, whether any of it was written by contractors without a signed assignment of rights, and which open source components are inside the product and under what terms. Patents, trademarks and any licenses in from a university or a research lab go on the list. If a founder wrote the first version of the software before the company existed, the assignment of that work to the company needs to be in the file. We see this missing more often than owners expect, and it is cheap to fix before a buyer finds it and expensive afterward.

Hardware companies add a second layer. Buyers want to know who builds the product, whether the manufacturing is in-house or outsourced, what the contract manufacturer's terms are and whether a single supplier controls a key part. A radio module or sensor chip that comes from one source and has a long lead time is a risk buyers will ask about.

Seasonal cash and working capital

Agricultural technology sells on the farming calendar. Orders and deposits come in ahead of planting, cash goes out for inventory in the winter, and receivables from dealers can stretch into the fall. A company that looks fine in June may be short of cash in January, and a buyer will study the cash flow by month for several years to see the pattern. They will set the working capital target for the closing based on it. Our post on earnouts, holdbacks and working capital pegs covers how that works.

Weather, commodity prices and farm income change what growers will spend. A buyer will ask how the company did in a weak crop year and how much of the revenue comes from crops or regions that are under stress. A company that grew during a good stretch needs an explanation of what its customers will do when margins are tight. Grants, cost-share programs and conservation payments that help customers buy the product are also worth describing, along with how much of your sales depend on them.

Certifications, regulations and what has to transfer

Rules depend on what the company does. Drone application services need aircraft and pesticide credentials for the pilots and the company. Equipment that connects to a radio network may need equipment authorizations. Soil and tissue labs may hold accreditations that depend on named staff and procedures. Companies handling seed or chemicals have their own rules on storage, labeling and recordkeeping. Rules vary by state and your attorney confirms what applies, and a buyer will want a clear list of every license and authorization the company holds, who holds it and whether it moves with the business.

Beyond licenses, a buyer checks the dealer agreements, integration agreements, cloud hosting contracts, the lease on the shop or lab and any key engineers or agronomists. If a few people know how the product works, buyers will want those people to sign on after the sale. Our post on owner dependency applies to technical founders just as it does to the owner of a plumbing company.

What tends to sink a sale

The problems we see most often are unclear data rights, a single dealer or manufacturer partner that can walk away, code written by someone without a signed agreement, revenue recognized in a way that does not match how customers were billed, and a product line that has not been updated in a long time. Founders who have been the main salesperson and the chief engineer at once also leave a gap a buyer has to fill.

How to prepare

Break your revenue into hardware, subscription and service, month by month. Collect every dealer, partner and supplier agreement in one place and read them for change-of-control language. Get signed rights assignments from everyone who wrote code or designed the hardware. Write down the data terms you offer customers and make sure the product follows them. Build a cash forecast around the farming calendar so the working capital conversation starts from your numbers.

Business Advisors of America builds a valuation from your records, prepares the materials a buyer will request and screens buyers for the funding and the fit. The page on selling an agtech or precision ag company shows how we approach it, and a call with us is a good next step.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.