Recently, I was teaching at the Advanced Agricultural Lending School in the “Little Apple,” or Manhattan, Kansas. Kansas State University, better known as K State, was our host. After class, a young lady attending the school politely asked if she and her husband should purchase a near-by farm that had become available, or wait to let the land further correct in value. Well, in the next session, we anonymously used her question to challenge other attending producers and lenders, which spurred quite an energetic discussion.
One attendee said they should consider the area. Will the land values in the area continue to decline? He also asked if there were other interested buyers with buying power. Others asked if the additional land would complement the existing operation, as well as the couple’s short and long term goals.
Next, the discussion turned to economics and finance. This young lady currently worked off-farm and one attendee raised the possibility of the off-farm income supplementing the investment. Additionally, if needed, how long would supplemental income be required, and how leveraged would the balance sheet become after the purchase? If the farm debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) exceeds six times, the acquisition may place the business in a vulnerable position long term.
One lender offered a candid and practical assessment of the operational impact. Would the young couple need to upgrade their equipment to accommodate the land purchase, and if so, what was their plan for capital expenditures? Another lender stated that he would want to know what impact the purchase would have on working capital and liquidity. After the purchase, could the business maintain a reserve of 20 percent of working capital to expenses, or at least half of their annual payment on the new land?
Finally, one of the producers in attendance asked whether the young couple would be willing to sacrifice personal expenses in order to accommodate the new investment. In other words, was this young couple able to tighten their personal living budget to offset the additional expense?
Throughout the discussion, the young lady that posed the question took extensive notes, and did not reveal the question was her own. However, at the conclusion, she thanked the group for the lively and valuable discussion and said it most certainly raised some crucial points for conversation with her husband. Well, they certainly are starting out with the right questions to ask and we wish for them success!