Prep to Sell: Value Versus Valuation

February 11, 2017 02:06 AM
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By Peter Martin

If you’re thinking about selling your farm, ranch, feed-yard or dairy, your first question probably is: “What is my business worth?” 

In trying to figure out the answer, you might be told to get a valuation, or a third-party appraisal of business value. Think twice. A valuation generally has little impact because there can be a huge difference between valuation and value. If you look beyond a valuation report and measure the value drivers buyers find important, you’ll come closer to understanding the real worth of your operation and determine a meaningful asking price. Remember, value is what buyers perceive and are willing to pay for, not what a report says.

Historically, agriculture has valued businesses differently than other industries. Ag operations traded hands on the value of hard assets, particularly land and equipment. But today, forward-looking operators are exploring an enhanced “enterprise value” based on a variety of factors that impact profitability. The idea is a profitable business with above-market performance, strong cash flow and certain characteristics and systems is more valuable than just its assets.  

How do you measure enterprise value? Other industries use “multiples” of an index, commonly revenue or EBITDA (earnings before interest taxes depreciation amortization), averaged over three to five years. With positive and growing earnings, you can ask for a greater multiple of the index when you sell. If earnings are low, falling or volatile, your asking multiple is lower. For agriculture, the difference is built-in volatility due to weather, commodity prices, etc. When reviewing earnings fluctuations in your operation, you’ll have volatility. The key is to be consistently more stable and profitable than peers.

Once you identify your index number, the question becomes “How many multiples can I demand?” That’s trickier. Focus on the following list of value drivers to enhance your enterprise value multiple:

  • a reputable brand derived from your special or highly-valued, recognized products or service
  • a land base that would be hard to replicate from scratch, whether owned or leased 
  • policies and procedures that ensure your business constantly operates with the same level of effectiveness regardless of whether you oversee each task  
  • a powerful culture and great team is worth more than your ground and machinery 
  • customer base, special contracts or arrangements that are difficult to achieve or bring higher margins
  • intellectual property such as patents, trade secrets and unique processes in your operation 
  • day-to-day operations that yield better results and profits than your peers
  • businesses or markets where your position would be tough competition 

Once you’ve evaluated the strength of your value drivers, consider how much you’d need to sell for in order to feel good about the price. Does your “number” capture your perceived value of the farm? Does it accurately capture your value drivers? Do your value drivers support the increase over the market value of your assets?  

Once you have a price in mind, look at your operation from the buyer’s eyes. Do you have revenue, profits and value drivers that support that price? Can they support the debt they’d need in order to buy your farm? Can they recognize a return on investment? If answers are “no,” you’ll have to rethink the deal.

Every farm is different, and there are dozens of factors that affect value. Even if you’re just thinking about a sale, involve trusted advisers in making decisions. Determining value and price can be a complex activity that’s best handled with a great team behind you.

This column is not a substitute for financial advice. 

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