Farmers wear many hats. They are engineers constructing infrastructure, creating irrigation ditches and using resources to grow crops. They are scientists and nutritionists. And they are veterinarians, meteorologists, and mechanics.

One of the farmer’s most important roles, however, is that of business manager. Farmers are required to balance accounts, sell produce to market, coordinate payroll, and generally manage the day-to-day operations of the farm. Part of the farmer’s job includes attention and detail to the business side of the farm operations.

Time for a Chat on Value

Attorneys who represent farmers and their organizations have a number of tools available to assist farmers in their business practices. Year after year, farmers file tax returns and review balance sheets and profit and loss statements. Year-end is a perfect opportunity to chat with their farm clients about obtaining a true fair market value of the farm’s assets.

Whether you are working with a farm that has been in existence since the 1960s, or assisting in the formation of a new enterprise, the importance of a proper business valuation is the same.

Establishing the farm’s value, and creating a methodology for future valuation is beneficial for a variety of reasons, including planning and facilitating intrafamily transitions, creating estate plans for the owners, planning for long-term care needs, and establishing and maintaining the farm’s Buy-Sell Agreement.

The Buy-Sell Agreement in Valuation

The Buy-Sell Agreement is a major piece of the valuation puzzle. It is an arrangement among the owners and the entity, outlining restrictions on one’s ability to own and transfer ownership in the company.

Buy-Sell Agreements are sometimes viewed as cookie-cutter forms. However, farmers generally are not aware of the options available and the flexibility and specificity that a Buy-Sell Agreement can contain.

The Buy-Sell plans for certain triggering events, what I refer to with clients as the “four D’s” – death, disability, divorce, and disagreement. Business valuation is key in this regard.

The Buy-Sell is useful to prevent undesired transfers, and also can establish the true value of the business – not the book value. Attorneys may structure valuations differently for varying trigger events, i.e., the reason for exit. The agreement can include discounting provisions and lack of marketability discounts, as well.

It is often helpful for an attorney to run through the potential scenarios with the clients before the signing the Buy-Sell Agreement. Often times, owner’s decisions change when the attorney puts real dollar amounts to the hypothetical scenarios, which is where a solid valuation becomes important.

With documented valuations, a Buy-Sell can minimize discord if a triggering event occurs. The reason for this is because all of the owners will know how and when the departing owner gets compensated for his or her ownership interest.

The Importance of Keeping Valuations Current

Conducting valuations on a consistent basis also avoids big swings in valuation, leaving owners with inadequate life insurance coverage or other complications.

In addition, from a lending perspective, the banker will often be interested in making sure valuations are current. Sometimes lenders require full appraisals. If that is the case, once the client has paid for the detailed documentation, it makes sense for the attorney to get as much mileage out of the appraisals as possible.

Documenting values for land, livestock, machinery, and equipment isn’t an automatic process. Efforts must be made to make the valuations current.

Making an Accurate Valuation

There are a number of ways to value business assets.

The most accurate is a full appraisal of all business assets. Appraisals are certainly the preference from the attorney’s perspective, as opposed to balance sheet numbers. But the cost of an appraisal is sometimes too much for the client. Book-value analyses are less desirable, because the numbers often do not represent the true fair market value of the assets.

If the client is not interested in obtaining an appraisal, hope is not lost, however. Farmers can utilize certificates of value to establish the per-share/per-unit price for the farm assets. Provided all of the owners sign the certificate on an annual basis, its value can govern for Buy-Sell purposes. The certificate of value is a great document to add to the annual meeting agenda.

Conclusion: Preparing Clients for the Unexpected

Business is about protecting against risks. As attorneys, we make recommendations to our clients about obtaining necessary insurance coverage, organizing the appropriate business entity, and hiring the required professionals to assist in the business administration.

Implementing proper business valuation methodologies allows farmers to plan for the uncertainties that life may bring.