Selling a Farm; An Asset or a Going Concern? The Distinction Has Very Different Value and Marketing Implications

Usually when selling a farm, one discusses comparable values of other farms in the area, and as a result, most acreage is valued close to others in the region.  However, when considering a sale, owners should ask themselves “Do we have a farm asset or a going concern (i.e., an operating business)?”

A small farm seller may have a difficult time convincing a buyer they have a discernable going concern because there will be little “blue sky” or differentiation in a small farm as an operation.  But if the farm is large, complex, or produces high value- or value-added products, it is likely to have a stable labor force, modern equipment, a shop and shop foreman, special irrigation systems, good production and cost records, possibly even processing equipment, and a sales team and administrative staff.  Most importantly, there is a reservoir of knowledge, business reputation, and brand/goodwill that indicates a “blue sky” value. 

When selling such an operation, as opposed to just the farmland, why would the owners consider simple comparables?  It should be sold like a business--applying price to earnings multiples, financial ratios, analysis of EBITDA, ROI, ROE, ROA, growth history, expertise in the industry, depth of management, and most importantly, projections of future performance.  Consider the stock market.  Companies are usually compared on multiples of FUTURE earnings or discounted cash flows.  After all, farm debt will be paid off by future cash flow, and often new management (or new farm owners) can, or believe they can, do much better than the exiting owners.

Selling a going concern with “blue sky” value is far more difficult than merely selling an asset, in this case farmland, based on comparable sales data.  The seller should have at least 3 years of financial and operating history to build a case.  If an agent is hired, they should be well-versed on the complexity of this business, the opportunities for improvement, and the weaknesses of current management.  Rather than a simple real estate sale agreement, a sales/play “book” as well as an executive summary of that sales book should be prepared, which would include: a write up on the business highlighting the unrealized opportunities, exhibits outlining the operations, descriptions of the management team, why it is unique, and support for multiple of earnings and/or discounted cash flow valuations.  One might even discuss where current ownership has positioned the entity to grow and take advantage of future opportunities.

Because the farmer is now selling a business instead of an asset, they should look far and wide for potential buyers, and not simply focus on neighbors, funds, or other local farmers.  Strategic buyers are sometimes better targets than financial investors because they will see the acquisition as a way to extend or strengthen their existing business.  Alternatively, financial investors looking for higher returns than those available from passive farmland ownership are increasingly looking for operating entities that need additional capital and/or management expertise to take the business to the next level.  After building a list of potential buyers, and sending them executive summaries of the business, interested parties should be required to sign a confidentiality agreement before being sent the sales book. 

Now the job is to “sell the dream.”  There will always be push back from potential buyers, but if a convincing case can be made for a “unique” operation, there will be many differing views of value.  When simply selling real estate, offers are normally within a 10-20% price range, however, when selling a unique business, offers often have a much larger range of prices.  Those submitting often see something in the business that provides extra value to the buyer.  It is the job of the seller’s representative to identify what that value is as well as potential buyers who might see that value.  This requires specific knowledge, expertise, and often licensing.  We are no longer simply selling commodity farmland.

Unfortunately, this opportunity of selling a farming operation based on future earnings can be considered “pie in the sky” because it is not normal industry practice and because most farms do not have a large and complicated infrastructure.  One of the best methods to start differentiating a going concern from an ordinary farm is superior record keeping.  Bare land has an inherent value, while a going concern has years of detailed sales records, a professional staff, precision farming data files, and a documented history of good management decisions.  Whether a landowner has a sale on the horizon or far off into the future, the best time to increase your record keeping is now.  There are many industry-leading software tools on the market to help.  Talking to an expert in this field can help you determine the right software for your farm. 

Regardless, owners should ask themselves today how they can create and increase the “going concern” value of the operation for the future.