So Crazy It Could Work – Can Farms Trade on Multiples?

Tesla is now the world’s most valuable company, following a one trillion dollar valuation. 

They don’t sell the most cars, and they are not the highest quality product, but they have a leader that is considered one of the most influential and forward-thinking people of our time. 

Heck, he has made his way into the White House without ever having to be elected. Somebody once put it “he is playing 4D chess while we are all playing checkers”.

I like to believe that the impossible is possible. In this case, I am just creating a precursor for those who cannot look far enough outside the box. The title is probably inaccurate, as the question is not can, it is when. 

Every other industry has created valuations based on multiples of income and at the same time built goodwill values in companies based on people, processes, and agreements. Why would agriculture be different? Please don’t say because we are, because that ship sailed a long time ago.

Ponder the following case study:

• A company that has built a team that outpaces all of its competitors. They have a C-suite of leaders and management has bought into the vision, values, and legacy of the business. The staff loves the culture and is a referral system for the business. All members have an interest in the business through phantom stock options or a profit-based bonus system. Everybody is on the boat and rowing in the same direction.
• The same company has also built strategic operating procedures (SOPs) for every process. The products only turn once a year but the act of production, marketing, and sales is no different year over year, just timing fluctuates. The human resource processes are built, including benefits, pensions, career progression, and goals held by all employees. The business is both self-managing as well as self-multiplying as the ownership can or may not be part of the operations moving forward.
• From a legal standpoint, the business is bulletproof. They have long-term real estate contracts on production, they have air-tight shareholder agreements and employment contracts, and they have clauses identifying succession and transition into the future. The insurance of the business is stronger than its competitors and ensures minimal volatility at the bottom end with the ability to hit “grand slams” when things go well. The largest risk is not internal but external in terms of the industry, geopolitical landscape, and government policy.

Now tell me if this business is more valuable than its competitor which has a focus on production and no people, processes, or agreements locked in place. 

The answer is simple: it is considerably more valuable. 

The above is a true example of many of the farms that we work with today. They are “built to sell” even though the ownership never has any intention of such. They are a legacy farm business and as such they can outlast those that choose to continue as a lifestyle and not a business. 

So why in agriculture do we place no value on this? 

Why do we only look at hard assets such as land, equipment, and inventory to perform a merger or acquisition? 

I will be the first to say that joining the Hebert Group makes this a reality. Our business model is built to sell (even though it never will be) and as such it is worth considerably more than a large majority of current farm businesses in the industry. Yet, my balance sheet still does not have a goodwill portion recorded for the value our “soft assets” held.

You can quote me on this, we will see farm businesses sell for a multiple. 

It may be to a Cargill or a Richardson to vertically integrate the food chain, or it may be to a mass conglomerate of farms that believe a group is stronger than individuals. 

The real estate will stay separate and segregated from operations, but when farms are successful at actually “farming” it makes this a reality. Over the last few years we have seen returns on farms above 20% after paying rent on their land, so why wouldn’t somebody want a piece of this pie? 

With margins where they are, we may also see some of the strongest insurance in areas that has ever been between government and private. This is not a fairy tale, this is an introduction to a novel.

Call me crazy, but fight back against something that threatens the “family farm” narrative, I am over letting this bother me. I believe in industry growth and being better generation after generation so this to me brings capital into the industry that is needed right now. The days of growing just on land equity are gone as the 10X has already occurred. 

We better learn to farm, or we better learn to get outside the box. I think it would be nice to see a farm on the Forbes list.