Usually when selling a farm, you discuss comparable values of other farms in the area. 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?”

A small-farm seller may have a difficult time convincing a buyer that this is a going concern because there will be little “blue sky” in a small farm. But if the farm is large, it is likely to have a stable labor force, many pieces of equipment, a shop and shop foreman, special irrigation systems, processing equipment, good production and cost records, and perhaps even a sales team and administrative staff. Most important, there is a reservoir of knowledge, business reputation, and goodwill that has definite “blue sky” value.

When selling such an operation, why would the owners consider simply comparables? It should be sold like a business — applying price-earnings multiples, financial ratios, analysis of EBITDA, ROI, ROE, ROA, growth history, expertise in the industry, depth of management, and most important, projections of future performance.

Think about the stock market. Companies are usually compared on multiples of future earnings. After all, farm debt will be paid off by future cash flow, and often new management (or new farm owners) can do much better than original owners.

The trick always is to convince the buyer that he can increase future earnings of the farm. He might respond, “Why should I pay for what I am going to do to improve the business?” The seller’s answer would be that the infrastructure is already in place to grow volume and profitability. Stronger management can do it. History has usually shown that it is easier to buy than to build. It takes a long time and lots of cash to build a smooth-running organization.

Selling a going concern with blue-sky value is far more difficult than merely selling an asset on the basis of comparable sales data. The seller should have at least three years of financial and operating history to build a case. If an agent is hired, the agent should be well-versed on the complexity of this business, of the opportunity for improvement, and of weaknesses of current management. Rather than a simple real- estate sale agreement, a sales book should be prepared, and such a book would include a write-up on the business highlighting the unrealized opportunities, many exhibits outlining the operations, a description of the management team, why the business is unique, and support for the multiple of earnings value. You might even discuss where current ownership has missed out.

Because the farmer is now selling a business instead of an asset, he should look far and wide for potential buyers, not simply among local farmers. Strategic buyers are better targets than financial buyers, because they will see this as incremental to their existing business. After building a list of potential buyers, and sending them executive summaries of the business, interested parties should be required to sign confidentiality agreements, then send the sales book. Now the job is to “sell the dream.”

There will always be pushback 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 percent price range. When selling a unique business, offers often have a 100 percent range of prices. High offers come from people who see something in the business that has extra value to them.

The opportunity of selling a farm on the basis of future earnings can be “pie in the sky” because of normal industry practice, and because most farms do not have a large and complicated infrastructure. Nonetheless, sellers should always ask how they can increase the going-concern value of their operations.

Chas Bonner, vice president of business development, Scythe & Spade Co., Eagle. chasb@ag-management.com