About This Episode
A listener is buying out a retiring neighbor — 1,200 acres that come with sheds, bins, and any or all of the equipment — and asks what to consider while the two of them talk. Shay Foulk answers solo in this mailbag episode. He notes that acreage now changes hands in big chunks — 400, 1,000, even 3,000 acres at a time — and that buildings and bins are the easy part: appraise them and decide whether the site adds to your operation or distracts from it. Equipment is where deals get tricky.
Start with a market valuation of the fleet from an equipment dealer both parties trust, then discount it — typically 15 to 30%, sometimes down to 60% of assessed value. The buyer inherits a wearing fleet and future trades, and one $50,000 engine repair can set a long buyout way back. The seller often needs the discount too: the 'final crop' problem means years of prepaid expenses and deferred grain income arrive at once, and a reduced buyout spread over time can keep taxable income in a lower bracket.
On land, lock in a 5-, 7-, or 10-year lease — fixed cash rent, crop share, or a flex lease with a base and a cap — so the seller can project retirement income. Another option combines land and equipment into one per-acre number, his example being $200 for land plus $100 for equipment across the 1,200 acres, with a balloon buyout at the end. Ask what retirement actually looks like — financial and managerial transition are different things — then communicate and reassess the agreement every year.
“There is a difference between financial transition and managerial transition.”
— Shay Foulk
Key Takeaways
Get a market valuation of the equipment fleet from a dealer both parties trust — what the machinery is worth today, agreed on before buyout talks go further.
Discount the equipment 15-30% on a multi-year buyout — sometimes to 60% of assessed value on a $1-2 million fleet — because the buyer is paying full price for iron that wears down before it is paid off.
The seller's 'final crop' matters: years of prepaid expenses and deferred grain income hit at once at retirement, so a smaller buyout spread over more years can keep the seller in a lower tax bracket.
Put a long-term lease on the land — 5, 7, or 10 years — as fixed cash, crop share, or a flex lease with base and cap; it commits the buyer and gives the seller predictable retirement income.
Consider one combined land-and-equipment per-acre rate (e.g., $200 land plus $100 equipment = $300/acre on 1,200 acres) with a balloon buyout at the end, with expectations written down clearly.
Ask the retiring farmer what retirement looks like — running a combine and hauling grain without the decisions is a real option — and reassess yearly; if the seller exits early, discount the remaining balance the buyer must finance at once.
Full Transcript
Shay: Welcome back everyone to another episode of the Ag View Pitch. Today you have just me, Shay Foulk, here coming to you from Fargo, North Dakota. And it's actually one of my more pleasant trips to Fargo in February. Normally when I'm up here, it's like -20 and the wind's blowing 100 miles an hour and snow everywhere. But it's 38 and sunny and just happy to be up in the region, I guess. Today's segment, it's going to be a little bit shorter, but it's a question that we got in an email that I thought would be a great one to look at from a case study perspective.
And as you're, as you're listening to the episode today, what I would encourage you to think about is if there's a question that you have, if you'd like for us to do similar case studies, or if you have a quote unquote theoretical question that you think would provide value to listeners, send it in to me, just shay@agviewsolutions.com. We'd be happy to field some of these questions and hopefully provide value back to you directly. So this email came from a gentleman we've worked with a couple years ago here. He said, Shay, I'm attempting to buy out a neighbor and take over 1,200 acres. This will come with sheds, bins, and any or all of the equipment if I want it. I was wondering what some things I should consider are while he and I are having conversations?
What are the best ways to handle the equipment and even the land rental agreement to ensure that I have the ground long enough to make the equipment purchases worth it? And then he went on to say, do you have any podcasts on the subject? Well, matter of fact, now we do. So first of all, great question. And the thing that came to mind immediately, why I wanted to do a case study on this is more often than not, It's not people calling us asking, you know, should we take on 160 acres? Should we take on 200 acres? It seems as this consolidation continues to occur, as you have an age group that is looking to retire and make changes, especially after a few years of higher profitability, that the acreage changes are coming in larger chunks—400, 500, 1,000, 1,500. Even 3,000 acres at a time. I mean, these are questions that we get from people of can we take this on?
And more importantly, how do we go about doing it? So the first thing that I would say in this scenario is equipment can be tricky. The land is a little bit more straightforward. The buildings and bins, you know, appraisals can be done on that, especially if there's value there. You have to decide if you're taking over this site, if it's something that is going to be a hindrance to your operation? You know, are the buildings being run down? Do the bins have life and viability left in them? Or is it going to be a distraction from your operation? But those are pretty easy to deal with. The equipment is where it can get really tricky. So the first thing that I would say here is get a good valuation of the equipment.
How we encourage people to do this is reach out to your local equipment dealers or an equipment dealer that you trust, maybe you're not even doing business with them currently and say, I need a market valuation of this fleet of equipment. And so since this gentleman had an opportunity from a retiring farmer or someone that's looking to transition out, find someone that both of you are comfortable with and get that market valuation in place. And what this needs to be is what that equipment is worth today. Now we are in an environment here at the beginning of 2023 where the equipment levels are pretty much at a record high. They've tapered off here a little bit in, in the last few months, but used value has retained and even increased in valuation over the last few years.
So I would caution for both parties to understand that you may need to do some discounting of this equipment when you go to transition out for buyout purposes. Now, You'd say, Shay, why do you say that? Why do I need to discount equipment if you're telling me that it's worth, you know, X number of dollars? The reason for that, especially if you're looking to do a transition over, you know, maybe 5 or 7 or 10 years on a buyout, is we get calls all the time from people saying, well, we're in this 10-year buyout. But what I've started to realize is now I'm buying used equipment and that's intuitive, but it's getting worn down. It's getting a lot of acres through it. I'm going to need to make trades along the way. So if you're buying it at full value right now, you're not going to be able to maybe do the replacement like you should down the road.
And if it's an older fleet of equipment, one $50,000 engine repair might set you way back as you go through this transition and taking things over, as opposed to having a little bit of a discount. The number 2 reason for taking a look at discounting valuations of equipment is probably the more important one in the aspect of, you know, there's going to be tax repercussions from an equipment buyout. 9 times out of 10, the senior partner that's transitioning out is facing some sort of tax implications, whether you've bulldozed deferred tax forward or haven't dealt with what we call and what others in the industry have aptly called You know, your final crop. How do you deal with this elephant in the room that is your final crop?
And that means, you know, for years you've prepaid your expenses, you've held on to grain, you've taken grain income in the next year instead of taking it in the current year for the crop growing conditions. And now all of a sudden you're left with a whole bunch of income staring you in the face. You may not want to take that higher level of income you would be better off having a reduced income over time to keep you within that lower tax bracket. Every situation is totally different. So if you're listening to this and you're a CPA or you're going through it or is a totally different situation for yourself, I get it. That's fine. But understand that it might come to a point where it makes more sense for you to have a reduced buyout. Generally speaking, you know, we will, we will do a discounted value on equipment or recommend a discounted value on equipment. Anywhere from 15 to 30%.
Sometimes it's higher than that. You know, sometimes we do it at 60% of the assessed equipment value because there might be a sizable amount of machinery. I mean, you might be looking at $1 million or $2 million or more million dollars of equipment that's being transitioned over. The other thing is, and, and I don't weight this as heavily necessarily, but you have someone there that's willing to buy it, that's willing to take it in one chunk. And sure, the values are high right now, but if you were to hang onto that equipment for a year or 2 years or 3 years, there's nothing that says it's not gonna fall off. And I don't know when the equipment market falls off. If you do, please write me an email. I would love to hear and have the crystal ball. I'll sell tickets and we can all go hang out on the beach together. But at some point, this is gonna fall off. So how do we handle that?
How do we manage those decisions that we need to make? Discounting is a way that we can take a look at that. The other thing is, you know, the question that was asked here, how do we handle this over a period of time? I agree wholeheartedly that you need to have a long-term rental agreement in place on that land. That's, that's for multiple reasons, though. That's not just for the person that's going to be doing the renting. That's for the person that is transitioning that land so that you know that you're transitioning, A, to someone that's committed to caring for your land. B, you can project your income. One of the hardest parts for people that are working on transition is what do I need for income into retirement? And more importantly, what is my steady source of income? Land is a great way to do that.
So if you map out a 5-year, a 7-year, a 10-year lease or rental agreement, that's great. And it doesn't have to be a fixed cash rent. It could be a share crop, it could be a flex lease scenario where you have a base and a cap, and you do some variation of price by yield in between or looking at it from a profitability standpoint. So having that long-term lease in place, I would agree, is a great idea. One other thing to think about here, you could also do it as part of a land and equipment rental lease over a period of time. You might have a balloon buyout at the end of that. That would allow you to have just a whole number over the 1,200 acres. Let's say just for simple math, you pay $200 for the land and you pay $100 an acre for the equipment usage.
That's $300 an acre, you know, 1,200 acres a year, you're gonna be contributing a fair amount of money, you know, over time to accomplish that buyout. Now you gotta be careful about how that's written and you gotta make sure that all parties understand exactly what the expectations are there. But that's really all there is to it. I mean, make sure that you have a good valuation of that equipment, consider a discount. And truly that's for both parties. We're not just saying that for the party that's gonna be doing the buyout. You need to seriously consider and understand what your tax implications are if you're the person making this transition. Also, just evaluating time. Time is a lot of your best resource and one of your best friends as you go through this.
If you can amortize it over a higher number of years or make it an easier bite to chew year over year, you're going to set up the next generation for success. And if you're the next generation that's taking over, it makes it much more palatable, it makes it much more easy to understand. So strongly look at extended timelines. And by the way, you know, one of the last things that I'm going to talk about here is, is expectations. So what are the expectations? You know, does the farmer want to continue to be involved? And have you asked that question? What does retirement look like for you? You know, what do you want to do? Do you still want to be involved in the farm? Do you want to show up? Do you want to do some tillage? You want to, you know, haul grain into town, run a combine? Do you have any expectations?
Because there is a difference between financial transition and managerial transition. And sometimes people after working their whole lives, they just want to show up and have fun farming and not have to worry about all the decisions. So maybe more importantly than all of this other stuff, all of the lease expectations or the timeline or the dollars that go into it is understanding, you know, is that person that's transitioning, are they gonna have a good sense of purpose in their life? Do they know that their legacy is in good hands and do they want to continue to be a part of that legacy? It's pretty powerful if you can offer someone that opportunity that still wants to be a part of it. I promise you'll see a sparkle in their eyes and you'll have gratitude shown and reflected as a result of just asking that question. My final comment here to all of you is communicate and reassess.
So just because you enter into a lease agreement doesn't mean it's done. You know, this is an evergreen process, not only for any other rental or lease agreement,, but especially when it comes to transition, reassess. Are you going to do a biannual review? Are you going to send quarterly updates on how things are going? Are there expectations on, you know, when the money is going to come in? Is it an annual payment? Is it biannual? Is there flexibility if you have a bad year? And reassess the situation, you know, go into it at the end of year 1 and say, hey, how's this working for you? Is this kind of what you expected? Is this okay? Do you want it to transition faster? A lot of times we'll have people that will enter into a 7 or a 10-year transition. And the senior partner is like, you know what, I thought this was going to be more fun than it is.
I kind of like to go spend more time in Arizona or go spend more time with the grandkids or, you know, just not have the stress of being involved in the farm operation. And that's okay, too. If that's the case, though, I want to make sure that you're protected in the lease, that you guys have a buyout agreement. And if a balloon is expected at some point in time, that's where the discount comes back in. If you enter into a 7-year agreement or a 10-year or whatever it is, and in year 4 the senior party decides that they're done, then there should definitely probably be, you know, a discount on the remainder dollars that have not been transitioned. Because the new, the new party is going to have to go get that lending or it's going to be a bigger, you know, chunk for them to bite off at that period of time. So those are my final comments here.
Get evaluation, think about a discount, understand the time, manage the expectations of the relationship, and communicate and reassess, reassess, reassess constantly. In everything that you do and with all of these relationships that you manage. If you guys like this segment, reach out, let me know if you have other case studies or other situations that you're facing. Doesn't matter if you're a client or working with us or not. Don't, don't even think about that. If you listen to this podcast, there's something that you want us to address, reach out to me, shay@agviewsolutions.com. Thanks for listening, everyone, and we will catch you next time on the Ag View Pitch.