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Why it's important to know the true value of your farm

  • 3 min read

Understanding the farm business value is useful for more than just sale situations. Financial experts say both general assessments and more in-depth business valuations are practical in multiple ways, including developing tax and transition plans.

Clearing-up discrepancies

Lise Deleurme, an accountant based in Notre-Dame-de-Lourdes, Man., says her experience shows most farmers and farm families have an accurate idea of what their farms are worth, whether or not they have actually totalled the numbers.

However, before making finance-related recommendations, on decisions like incorporation, gifting, bringing new people into the business, Deleurme generally works with her clients to put actual values to paper.

Formal numbers, she says, naturally inform better and more accurate advice. This is particularly true when it comes to evaluating businesses for tax exemptions, as well as in succession planning scenarios where parents are trying to address both farming and non-farming children fairly. 

The process can also uncover issues, such as discrepancies in ownership. In her experience, Deleurme says farm families sometimes believe an asset - usually land - is owned by one person, or jointly owned, only for a value assessment to reveal otherwise.

“A family may think they own everything jointly, but in reality, only a small portion of the land is under both names,” she says. “The documentation part is sometimes the weaker piece of the puzzle.”

Value of non-material assets

Deleurme reiterates that asset values offer a good starting point but adds more in-depth business valuations can also be worthwhile. This involves measuring not just assets, but also the concept of goodwill - the more intangible parts of a business, such as the value of a brand or client network. However, doing so involves analyzing many layers of the business.

Farm asset values and business valuations are key to determining the true value of a farm operation.

“It can be hard to put a dollar to it because there’s no fixed amount to attach to it," Deleurme says. "This is where business valuators can provide more accurate analyses."

Andrea Pontoni, a financial services expert based in Windsor, Ont., is one such valuator. Like Deleurme, he says putting a dollar value to more immaterial assets like company reputation can make a big difference in succession planning.

“Some might not be participating (in the business) so fair valuation is important to equalize all family members," Pontoni says. "If parents want to equalize non-participating kids in another way, they understand what the level is."

While tax rules for farms can often differ from other types of businesses, Pontoni also says the Canada Revenue Agency can sometimes require a business valuation to assess fair value. Valuations are also commonly looked to during litigation.

“At the end of the day, if you go to court, you have to have a proper business valuation,” Pontoni says.

In all scenarios, but particularly litigation proceedings, Pontoni stresses the importance of finding an impartial party to undertake valuations. He adds the many layers and considerations made during valuations of non-material assets make it a unique area of finance. Professionals specializing in this area should be consulted if a valuation is being sought.

Bottom line

While most farmers know the worth of their operation, determining asset values and business valuation show a truer picture of the value of the farm. Financial experts say it's important information to have when developing tax and transition plans, as it could be requested by CRA or the courts.

Article by: Matt McIntosh