Selling a Crop Farming Operation

What a buyer is paying for

A buyer is paying for acres they can farm and the yield those acres have produced. The first question is which acres are owned and which are rented, because the answer shapes the entire deal. Owned ground has value that does not depend on the operator. Rented ground only has value if the landlord is willing to rent to the new owner, and plenty of farm leases are year to year, or a handshake that goes back two generations. A buyer who finds that half the acres could walk away at the end of the season will lower the price or ask for signed leases as a condition of closing.

Next comes the crop mix and the history. Buyers want yields by field and by year, along with the prices received, so they can separate a farm that produces well from one that had a few lucky markets. Soil type, drainage, field size and distance between fields matter as well, since a tractor spends hours moving between scattered parcels. Permanent plantings such as orchards, vineyards and nut trees are valued differently from annual crops. Their age, variety and remaining productive years are part of the price, and a buyer will walk the blocks with a grower who can tell what is coming.

Water gets its own review in dry regions. A buyer will ask how the farm gets water, whether through wells, a district, a ditch company or a shared system, what share you hold, and how reliable that share has been. The right to water often matters more than the land it irrigates, and the paperwork behind it needs to be in order. Rules vary by state and your attorney confirms what applies to your water.

Turning farm books into earnings a buyer can use

Most farms keep their books for taxes, and often on a cash basis. That means income shows up when the grain is sold and expenses when they are paid, so a farm that held its corn into the next year looks poor in one year and rich in the next. A buyer's accountant will restate several years on a basis that matches crops to the costs of growing them. Your accountant can start that work, and our post on getting your financials ready shows what a buyer expects to see.

Then come the adjustments. Family members who work the farm without a regular wage, an owner who takes no salary, equipment bought through the business for personal use and a house that the operation maintains all need to be sorted out. A buyer will place a market wage on the owner's labor and on any family labor they would have to replace. Our post on add-backs explains what a buyer accepts and what it rejects.

Government program payments and crop insurance proceeds need attention too. Buyers include steady payments and exclude one-time disaster payments, and they will ask which of the farm's income depends on a program that the new owner may or may not qualify for. Bring the records for each.

Equipment, storage and labor

Equipment can be the largest asset the operation owns besides the land. A buyer will want a list with year, hours, condition and any liens. Planters, sprayers, combines, tractors, trucks, irrigation pivots or drip systems, pumps, cold storage and grain bins all go on the list. Machines that are old but kept up are worth more than newer ones that were run hard, and a buyer will often hire an appraiser to look at the major pieces. Leased equipment should be listed apart from owned equipment, with the lease terms.

Labor is the other half. Crop work is seasonal, and a buyer wants to know who does it. Is it family, year-round employees, a crew that comes back every season, a labor contractor? A farm that relies on one foreman who knows every field is a farm where the foreman matters to the buyer, and the buyer will want to meet him. Payroll records, wage rates and any housing provided to workers should be ready to show. If part of your labor comes through a contractor, the contractor's agreements and compliance records become part of the review.

Contracts, buyers of your crop and the paperwork

If the farm sells to a processor, a packer, a cooperative or an elevator, the contracts matter. A buyer will read them for price, volume, term and whether they can be assigned to a new owner. Farms with long standing relationships and written contracts usually sell better than farms that sell on the spot market each fall, though some crops only move that way. A buyer also wants to see any organic or other certifications, because those can take years to earn and the certifier decides whether they carry over.

Then there are the applicator licenses, pesticide records, food safety audits and permits for water use, fuel storage and wells. Which of these transfer and which the new owner has to obtain again depends on the state and the crop. Keep the records current and in one place. A buyer who sees tidy spray logs and audit reports starts to believe the rest of the file.

What has to transfer

Land leases are first, as covered above. Water rights or shares and well permits come next. Then equipment titles, crop marketing contracts, input supplier accounts, crop insurance policies, the farm's registration with programs it participates in, and any easements or access agreements with neighbors. A buyer's lender will ask for title work on owned ground and, for leased ground, written confirmation from each landlord.

Timing is its own question in farming. If the sale closes in the middle of a growing season, someone owns the crop in the field, and someone paid for the seed, fertilizer and labor that went into it. The contract needs to say who gets the harvest and who reimburses the costs. Stored grain and other inventory are handled in a similar way. Many farm sales are set to close after harvest or just before planting for this reason, and we plan the calendar with that in mind.

What tends to sink these sales

In most of the farm deals we see, the trouble starts with the landlords. A rented field was promised verbally and the landlord has a nephew who wants it. Water allocation turns out to be less certain than the owner said. The books show a profit that the buyer's accountant cannot reproduce. The equipment is worth less than the loans against it. An owner who is the only person who knows what to do on each field cannot or will not stay long enough to teach someone. And a family that has not decided who inherits what finds out in the middle of a sale that two relatives disagree.

How to get ready

Start with the leases and get them in writing, with terms long enough for a lender to count on. Collect yield and price records for each field going back several years. Ask your accountant to prepare an accrual version of your recent statements. Put your equipment list together and fix the machines that need it. Write down what you do each season, field by field, so a new owner can pick it up.

We value crop operations from your own numbers, prepare the file a buyer and lender will ask for, and screen buyers for the money and the farming experience to run it. If you want to see how buyers approach selling a crop production business, that page is a good place to begin, and we are glad to talk through your farm with you.

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.