Analysing a Farm Business

The owner was a proud farmer who has been cultivating the land for 40 years. He told me he made a million dollars as an electrician in his twenties and bought his first piece of land here to start his farming business. He emphasized back in his days, sparkies were paid the lowest among the tradesman in Australia as opposed to the situation it is today. If so, how he made his million from his trade, I'll never know. Through the 40 decades, he bought another 4 plots of land in the region and grew his citrus business into what it is today, a notable name in Perth.

He told me his farm was considered a boutique farm in Australia terms. A hobby farm or a veggie patch as compared to the massive citrus farms much further north. He mentioned one of the biggest in WA is owned by a Singaporean or Malaysian and explained the differences about the farms owned by the big boys and his. 

First, the soil mechanics. The big farms up north are on sandy soil while his is on clayey soil, which gives him some advantages. The less draining soil enables him to water less frequently and retains favourable biological conditions in the soil better, resulting in very good quality of produce. According to him, that gives him a competitive edge because he does not have to sell his oranges at a low price to match the big boys. I cannot verify it because he does not have the books to show for it. However, he said he'll send it over by email.

Second, he claimed to be the only citrus farm in Perth that allows the public to pick fruits from his farm. Over the years, it gained a lot of popularity and publicity such that he gets a constant, growing base of customers. That is verified. 

Third, he has a couple of small side businesses within the core business, which is never a bad thing especially if it is profitable and do not get in the way of the daily business. He rents out a small pad for an astrology club for a token sum. He holds functions for groups about once a week on average, serving them meat and juice on a package. He rents the place out for fee for mountain biking groups about once a year and this enhanced business and publicity of his farm when attendees hang around and buy produce after the event. He does farm tours for visitors. The facility has a powerful juicing machine and sells 100% pure bottled juice to public. There are about 400 chickens running about free range and the organic are in demand. 500 sheep are kept to graze and provide meat for events.

Fourth, infrastructure appears to be in proper condition for any farming activities. 120,000L of water storage, plentiful rainfall in the valley, 5 unmetered boreholes without usage restriction, spring water never been used, piped water from a lake and river nearby. Reticulation is set up and running automatically. There is electricity from the grid and ADSL broadband. 

There are potential for growth in this farm. Farmstay is a possibility. An unused warehouse ready for new purposes. Their website was mediocre and can be reworked to bring it a lot more opportunities, such as a booking system for facilities and online ordering of produce. They do not have a Facebook page yet. There is room on the land for growing a different crop, though the owner insists they have been to busy coping with demand that they do not have time to explore new crops.

Unfortunately, without the books open, there is no way to conclude if this is a viable business to takeover. Even if the business is very profitable, I have highlighted a few important issues with this farm. The issues generally stems from the fact that the owner had 5 plots of land and is selling them plot by plot.

At the moment he has sold 2 plots of land. The new owner of the land is unable and unwilling to take care of the trees on his land. So an arrangement is made for the current farmer to pocket all the yield from the trees on the condition he pays the utilities, rates and take care of his land. If this business is bought over, what will be the arrangement ? Will the neighbour be willing to carry on the same arrangement with a new owner? Will the neighbour decide to come back and be a competitor? That needs to be ironed out.

The owner is trying to retire and he can do so only after selling all his land. He is willing to stay on the business for the handover for a year. However, this brings the following questions:

- if this business is bought, he will have 2 remaining plots unsold. What will his role be, in regards to the neighbouring lots, while waiting for buyers to buy up the remaining 2 lots?

- if we buy over his trucks and tractors, how is he going to maintain the trees at the other lots?

- does he plan to pull up the trees at the other 2 lots after 1 year, in which he plans to retire?

- if not, what will does he has in mind? 

- as the business is an establish name with the Perth community, new potential buyers of the remaining lots may be deterred from coming in to wrest a foothold against someone already established, which can be a good thing. However, the risk of someone forcing his way in to compete is there.

- the remaining plots may actually be worth to acquire. The answers all lie in the books, I reckon. I have made a request to be sent a copy of their P&L. I'm curious..... very curious.

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