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Why Do I Need a Valuation of My Farm Business?

Why Do I Need a Valuation of My Farm Business?

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Whether or not you need a valuation of your farm business depends on what you want to accomplish. For example, if you are thinking of selling your business, advisers may rely on a limited amount of information and prepare a calculation of value as a summary report. Or if you are gifting a large amount of ownership interests or one of the owners passes away, you will need to file a “Conclusion of Value” with the Internal Revenue Service. This Conclusion of Value is provided on a full valuation report which determines the fair market value of the business. 

Fair Market Value

So what is considered a fair market value? A fair market value is generally defined by Revenue Ruling 59-60 as, “…the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

Your valuation then is more than just the value of your farmland and equipment, especially if it is in an entity such as a partnership, LLC or corporation. There can be premiums for being the 100% owner or discounts for smaller or minority ownership percentages. There can also be a discount for the inability to quickly convert your investment in the farm to cash which is referred to as a lack of marketability discount.

The Valuation Process

Step 1: The valuation would start with obtaining an appraisal of the farmland and equipment. Your adviser would then need to look at the last five years of financial records and organization history and also consult with management. It is important to keep accurate and up-to-date records of the income and expenses as well as the inventory and equipment in the business.

Step 2: From this information, your adviser would search for trends and any unusual items, then make normalizing adjustments as necessary to the balance sheet and income statement to remove these unusual items. An analysis of these trends are then used to attempt to project what will occur in the future. Your adviser will also examine the dividend paying history and/or the cash flow available after paying the expenses each year. All this information is then compared to what the industry standards are based on either the gross receipts or the gross assets of the business. 

Step 3: All of this information is then aggregated to arrive at a total value of the business. Discounts and/or premiums based on the above referenced information and any comparable sales available are then added to this value. 

The above is just a glimpse at what is fully involved in a valuation. Please contact us if you would like to discuss your situation or if you have any questions.

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