This is part of a continuing series looking at succession planning.
Can you pay for a $600,000 combine with cash? If not, don’t fret — you’re not alone.
As equipment costs and the speed of technological change continue to increase, buying machinery outright is often not seen as a practical business strategy.
This is particularly true for farmers who are just starting out, and in situations where the value of existing farm equipment might be tied-up in the outgoing generation’s retirement plan.
As a result, leasing machinery is becoming a more-attractive option.
Why it matters: Leasing machinery provides more cash-flow flexibility than purchasing. It can be an attractive option for farmers involved in succession.
For Matt Glen, co-owner of Glen Isle Farms Ltd. — a mixed farm and agricultural products supply business near Keene — the need for cash-flow flexibility was a main factor in the decision to lease some of the farm’s machinery, as well as his family’s succession strategy as a whole.
Glen says his family transitioned the farm through an estate freeze, a process where current farm values are locked-in for the outgoing generation, but future growth is transferred to the incoming one. This can be implemented by exchanging property that is likely to grow in value for other property with less or no growth potential. In Glen’s case, the only assets exchanged were shares of the business, which allowed him to get financially involved without restricting the fluidity of his capital.
A similar approach was taken to ensure money wasn’t tied-up in machinery. Sinking significant amounts of money, from a loan or otherwise, into new equipment, he says, would have limited his family’s ability to adapt and act on business opportunities.
“It’s the flexibility …. It gives you the ability to stretch out the payment,” says Glen.
Leasing and wealth accrual
Jeff McGavin, chair of Canada East Equipment Dealers’ Association and co-owner of McGavin Farm Equipment in Walton, echoes Glen’s sentiments. According to him, leasing is becoming more popular because of the flexibility that predictable payments can provide. He says equipment dealers are also more focused on leasing and low-rate financing, while less focused on more historically common cash discounts.
McGavin adds people are keeping equipment for significantly shorter periods of time. This applies to those buying and selling, as well as leasing. Those who do lease often bundle payments with extended warranties, then replace the equipment once those warranties expire.
“The brutal part is there’s really no accumulation of equity this way,” he says.
While leasing forgoes the actual accumulation of a machine’s value, Glen says there are more indirect ways to view wealth accrual.
Buying a piece of machinery after a lease ends, for example, can gain the purchaser a lower purchase price. This is because the original price tag, which would have been agreed upon at the start of the lease, may be noticeably lower than the current price associated with an equivalent piece of machinery. Glen says he and his family are currently deciding whether to buy their leased planter.
Glen also says there’s tangible value in adaptability. If a farm gains or loses a substantial amount of rented land, for example, he says leasing makes it possible to more easily scale machinery up or down to match the change. Keeping pace with technological developments, too, can be easier for the same reason.
Efficiency and freeing-up time for other aspects of his family’s business is another factor.
“We went from being able to plant 60 acres a day to 200 acres a day. That’s time we can use to work on other things,” says Glen. “Bigger equipment can also give you an opportunity to do some custom work. There’s certainly demand for it.”
Differences in risk tolerance
Brent VanParys, a Woodstock-based business transition services partner with BDO Canada — an accounting and business advisory firm — says the business plans of the incoming generation are the real factor that determines how the question of machinery is approached.
Equipment, he says, is typically not dealt with separately in succession plans. It is lumped together with other farm assets, though often transferred before things like land and buildings, and augmented based on the levels of risk-tolerance expressed by both the incoming and outgoing generation. The latter tends to be more conservative, since there is inherently more need for financial security.
“There’s often a different tolerance for risk,” VanParys says.
“Both generations need to be somewhat aligned. They need to work together on business planning whether or not that plan is conservative or more aggressive. Typically we recommend the family go through a business planning exercise.”