Realising the value of Agri

Article

Realising the value of Agri: Setting up realisation events for success

Agribusiness Bulletin

What are the four critical areas that are key to planning and delivering successful realisation events?

Agribusiness continues to grow as a key contributor to the Australian economy, despite facing a number of unique challenges.  With export demand for Australian products still on the rise, agribusinesses will continue to attract interest from offshore capital and high net worth groups1 – meaning continued opportunity for a change of economic ownership. This could be through a trade sale, inbound investment from private equity, management buy-out or a desire to finally implement family succession plans. These are collectively referred to as ‘realisation events’. According to Colliers International analysis, Australian farmland sold in 2018 totalled $3.3 billion in 2018 (for sales above $5 million), fuelled by cheap debt and higher commodity prices.2

Australian Agribusinesses are truly unique from a planning perspective when it comes to a realisation event. Unless conscious planning has already been undertaken, it is quite common for these businesses to be owned by a mix of sole traders and partnerships (often across a number of generations), companies and trusts. An exotic mix of ownership structures is often further complicated by the wide-ranging assets used in the business – including real estate, goodwill, intellectual property, leases, licences and permits, plant, equipment and trading stock.

This agribusiness bulletin explores four critical areas that are consistent across agribusiness realisation events, and are key to planning and delivering a successful realisation event.

  1. Advanced planning is key
  2. Value is tied to individuals
  3. Appreciating different tax profiles
  4. Acknowledging opposing forces that exist between buyers and sellers.

Advanced planning is key

The starting point for any agribusiness realisation event must be the accurate identification of the different ownership structures, resources and relationships. This due diligence ensures that you have what you say you have, and that they do what you say they do.

This is particularly important in an agribusiness context where the mix of ownership structures and resources can produce anomalies that are required to be resolved prior to a realisation event.  Simple examples are entitlements owing to a broad range of family members from a trading trust, Farm Management Deposits (FMD) that are held by non-contributors, or the business or trading stock being held in partnerships with recalcitrant family members.

Whilst advisers may be able to deal with standard due diligence requirements that arise in ordinary commercial transactions, others cannot be dealt with at the door step of a deal.

Value is tied individuals

Often an agribusiness will rely on a number of related individuals and the relationships and dynamics that exist between them. These stakeholders are also not always in the same place at the same time. This gives rise to another important, but often overlooked, aspect of the broader due diligence process – ‘family’ due diligence.

Recognition and understanding of this is critical as, without it, you are simply left with structures and assets that will not necessarily have the same value when separated from the individuals who manage them.

Recognising the value tied to individuals is typical in a corporate environment where it is common to think in terms of executive personnel, each with their own clearly defined performance expectations. Such rigidity is, however, not prevalent in a family or closely held agribusiness group where relationships and dynamics dull the edge of a corporate KPI.  It is naïve, though, to think that such an enterprise exists without an equivalent to a corporate structure. In our experience, there will always be the individuals responsible for brand, those responsible for quality, those responsible for customer service and those keeping the other three in check.

As part of the planning process, it is important to identify and properly understand these roles and the persons who fall within them. This will ensure roles are readily transferable.

Appreciating different tax profiles

The importance of identifying the resources used in the business cannot be understated given that tax outcomes are dictated by the tax profiles of those assets.  Assets such as real estate and goodwill are capital assets and, subject to meeting a number of conditions, can be realised in a way that is free of income tax.

By comparison, other assets such as livestock (trading stock) and plant and equipment are revenue assets meaning that gains are taxed at the ordinary income tax rates of the entity that holds it.  Capital assets tend to be held in the names of individuals, trusts or partnerships of them where they can access very generous capital gains tax concessions.  On the contrary, revenue assets are often held in companies.

Clearly, how particular assets are held will have a significant impact on planning for the most tax effective way to realise that asset’s value.

Acknowledging opposing forces that exist between buyers and sellers

From a seller’s perspective, the most favorable position boils down to revenue assets held in a company and capital assets held by a non-corporate – trust or individual. Conversely, for a buyer, the ideal is quite the opposite.

As a general rule, most sellers would seek to make a capital gain when dealing with a realisation event, given the existence of the generous capital gains tax concessions.  Buyers, on the other hand, prefer revenue assets as they allow for immediate deductions.

In an agribusiness context this is particularly important as a seller’s value is likely to reside in trading stock and specialised plant and equipment which, if disposed of, will not benefit from being taxed as capital.

Any planning needs to take these opposing forces into account; an all-or-nothing approach usually does not work.

Conclusion

Overall, each of these key considerations highlight the importance of becoming familiar with the affairs and business dynamics in the sense of – do you know what assets you have, who owns them, what are the liabilities, to whom are they owed and have you identified and locked in key persons and contracts? Business owners are ultimately responsible for understanding and educating advisers on each of these nuances when preparing for a realisation event. Failing to do so squarely puts at risk the opportunity to realise the full value of the business and family’s legacy.

Authors

John Ioannou – Partner, Deloitte Private
Tegan Dawney – Senior Analyst, Deloitte Private
Melissa Davidson – Personal Assistant, Deloitte Private

References

1. Colliers International Agribusiness 2019 Research and Forecast Report, dated 30 April 2019, p. 5.
2. Ibid, p. 34.

The Agribusiness Bulletin

The Agribusiness Bulletin focuses on national and local industry, as well as cross-industry insights and trends. This includes some of the drivers we expect to shape the future of the industry and potential challenges that may arise. To get more articles like this delivered straight to your inbox, subscribe to the Agribusiness Bulletin.


Published: May 2019

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