The Sale of a Dairy Operation with the Conversion to an Orchard

Two California Dairy farmers wanted to sell their dairy assets and convert the land to an orchard.Two California Dairy farmers wanted to sell their dairy assets and convert the land to an orchard.

A conventional sale would have yielded the following results:

Prospective sale price           $3.0 million

Less taxes on sale                $1.2 million 

Net on sale                            $1.8 million 

The conventional solution would have left just $1.8MM for ongoing living expenses and the orchard conversion.   It was estimated that doing the dairy to orchard conversion that way was going to take a minimum of ten years.  Although workable, it would have meant a very long, multi-stepped conversion process, with little margin for error and virtually no money in reserve.

By using a Structured Sale Strategy, the farmers sold their dairy assets and spread the payments over 8 years.

• After closing the sale, they took a tax-free pledge loan of $2.25 million up front
• The bank offered a low fixed rate with corresponding fixed interest paid on all funds held on deposit with the bank
• This provided considerably more money and an incredibly low cost of funds for their orchard conversion project.

Because the farmers had such substantial tax-free liquidity, they were able to accelerate the orchard conversion process by 5 years

• By accelerating the process, the start up and cultivation expenses for the orchard conversion offset the annual income from the Structured Installment Sale.
• This eliminated the entire $1.2 million tax bill that would have been due on a conventional sale.

Benefits of Using a Structured Sale Strategy:

• They were able to sell their dairy assets and do the orchard conversion and pay no taxes in the process.
• They increased the effective yield on the sale of their dairy assets by 40% from the tax savings alone
• They accelerated the conversion to orchards producing $4MM more in crop income vs the income forecast in the original 10-year plan
• Between the tax savings and the additional crop income, they enjoyed a net gain of $5.2MM on a $3MM sale.