The Basics of Valuation
One of the most frequently asked questions from farmers is the most obvious - “What’s my farm really worth?” My answer is always the same - “It depends on the farm, but I can tell you pretty quickly.” All farms are different, but when you understand how to use the financial and market data, the value can be an easy thing to calculate in just a few minutes. Poultry farm investment is similar to investing in the stock market or any other asset. In order to profit in a sale, investors must know how to assess the value of the real estate, whether that’s through income, equity gain, or both. In the poultry farm sales business, accurate valuations are paramount to helping farmers and investors make better decisions when it comes to buying and selling.
There are three real estate valuation methods used to predict value accurately:
Cost Approach
Sales Comparison Approach
Income Approach.
The Cost Approach is a real estate valuation method that estimates the price a buyer should pay for a piece of property is equal to the cost to build an equivalent building. In the cost approach, the property's value is equal to the cost of land, plus total costs of construction, less depreciation. In essence, the appraiser determines what your farm would cost to build, then discounts that number for the farm's age.
The Sales Comparison Approach compares one property to other recently sold properties in the area with similar characteristics. This method accounts for the effect that individual features have on the overall property value.
The Income Approach, sometimes referred to as the Income Capitalization Approach, allows investors to estimate the value of a property based on the gross income the property generates, with deductions for standardized estimates of taxes, insurance, maintenance, and labor costs.
All three approaches to value are important, but for a poultry farm buyer, the income approach, and more specifically the cash flow analysis, carry more weight than all the rest. The cash flow analysis is what tells us how much money a farmer will make per year of farming. It is a very straightforward calculation. However, the complexity lies in assessing accurate estimates for the individual components of the capitalization rate, lending terms, and operating expenses, which can be a challenge. For instance, if we can estimate a farmer’s net income, we can estimate how much he can afford to pay per year in debt service. Furthermore, if we know the amortization period that lenders will offer, we can now estimate the total loan amount and sales price that is possible. We can essentially work the purchase price into the equation as the last step. Of course, there are farmers that I talk with who disagree with the valuation that I estimate. In the end, it’s only my opinion. Sometimes farms have a higher value because they can be used for another purpose (or because I forgot to carry the one!). But in most cases, poultry farming is a business like many others and the math doesn’t lie. Probably the greatest benefit this approach provides, is accuracy. If I can calculate the cash flow analysis, then we can confidently say that the property was priced at the highest reasonable price that a bank would loan money to a Buyer to purchase the farm. In a transaction worth millions of dollars, being accurate is as important as it gets. That’s why I love this business so much. On a daily basis I get to help hardworking, genuine people retire, buy bigger farms, or just change gears in life. What a reward to be a part of that experience!
While other brokerages divide their time offering a variety of property types for sale, American Poultry focuses all of its resources on the sale of poultry farms. Our focus allows American Poultry to out-market and out-perform our competitors. American Poultry Company worked their way to the top, as an industry leader, by taking a very different approach to brokerage. They devote all of their team’s energy behind a singular task, brokering poultry farms between buyers and sellers.
Neel Gibson CEO/Broker
Article above from American Poultry Farmer magazine, c/o AmericanPoultryCompany,Inc
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