Preferred Stock Farm Finance Model

Exclude from the Tools list. This is "sandboxed".: 
Wiki Editors: Dorn (2 edits)

The Need/Problem Addressed

Financing new farming operations is a challenge. Debt financing has historically been the only available approach, but when a farm is trying to build the soil, build the market, and build infrastructure all at the same time early debt and interest payments can be counter productive to growing a healthy enterprise. This tool wiki is designed to explore an alternative farm financing approach that bridges the gap between debt and equity financing by developing a type of preferred stock investment which would pay dividends rather than interest, but not have a voting share in the operation. In some ways this is a variation on the CSA approach, but enables the payback to be in a form other than the direct produce of the land and over a longer term. The tool wiki is the refinement of the discussion that happens in the forums.

How it works

An investor would be able to get repaid on an investment in a farm though dividends as a form of profit sharing once the farm becomes profitable. Because the investor only gets paid dividends if the farm is profitable the interests of both parties are more aligned than with typical debt secured by collateral/assets. If a farm enterprise does go bankrupt the preferred stock holder would have priority above debt holders. It is not clear that debt holders would be excited about having someone in front of them, which has been an issue with creative financing approaches for clean energy investments like PACE. An investor would enter into a preferred stock contract just as they would in a typical private equity investment, but the terms of the investment would largely be based on repayment of the investment through the dividends rather than through resale of the shares. Like debt, the investor would nt have a direct say in the operation once the investment is made. Dividend repayment might also be capped at a total effective interest rate once the initial investment is recouped. This would create the potential for a buyback plan for the farmer.

How to use the tool

Farm Business Evaluation from the investor side
Developing standardized methods for evaluating farm businesses would be crucial for making investors and farmers comfortable with using any sort of non-traditional financing, however, there are now enough viable direct market value added operations that are viable concerns that some standardized templates could be developed based on studies of those farm businesses. This would provide a benchmark for investors to use when evaluating farm business plans.

Business Plan Development from the farmer side
The skills to develop and pitch a farm business are clearly not the same skills that are required to grow and market excellent crops, however, if a third party were to take on the task of assisting the development of these structures and provide assistance in building a plan, then it might be viable. In this case the farmer would work through a non-profit or community investment corporation which would broker the transaction with potential investors.

Construction/how to build

This wiki section would provide contract and business plan templates and investment return spreadsheet models/worksheets

Next Steps

This section is to highlight what next steps are needed for documentation or construction to move the project along. This might contain a link to a kickstarter campaign or to a forum discussion of documentation or prototype needs etc.

Next steps
Develop a dialog on the forums to discuss the viability of the concept
Develop Contract templates
Develop spreadsheet models/workbooks
Solicit input on types of operations that might fit

Marketplace

This marketplace might be with entities that are willing to explore creative financing approaches.