Selling Your Agribusiness: What to Expect
What is my business really worth?
Agreeing on the value of a business is one of the most sensitive parts of the sales process. As an owner, you know the strengths of your company and what you’ve put into it over the years. Buyers will have their own criteria for valuation — and often no two buyers’ views will be totally alike.
For more about the valuation process, check out this article by BDO Canada or read this handy checklist of mistakes to avoid from Confederation M&A.
Valuation Tips
Know your number
Work with an experienced investment advisor or other third party to calculate an objective value for your business. This will give you confidence you’re starting from a realistic and sound position for discussions with buyers.
Understand your value
Asset-intensive businesses are usually priced according to the sum total of all their assets. In real estate, income is often the basis of value — how much rent a property generates. In other cases, cash flow is what determines the value. That’s the approach we take at Market Maker Agriculture.
Don’t take it personally
Prospective buyers will base an offer on the value your business represents according to their needs and goals. It’s purely practical, and not a comment on your leadership or how successful your company has been.
What’s the difference between valuation and deal structure?
Valuation is a methodology for arriving at the purchase price for a business. The deal itself will have other components beyond price, including the buyer’s role and percentage of ownership, indemnification, post-closing obligations and more.
At Market Maker Agriculture, we base our valuations on a company’s cash flow and assume that all assets needed to generate that cash flow are included. We always buy a majority stake in the agribusinesses we acquire. We don’t buy cash, shares or redundant assets (assets that aren’t needed to generate cash flow).
Key terms and concepts
related to valuing your agribusiness
EBITDA
No single metric can determine the full value of a business, but earnings before interest, taxes, depreciation and amortization (EBITDA) is a quick way to ballpark profitability after the main liabilities are accounted for.
GROSS MARGIN
Business owners with relatively simple bookkeeping practices often have an incomplete understanding of the input costs that affect their profitability. Gross margin is a rigorous, technical way of determining all the direct costs that are required to produce a company’s goods or services.
WORKING CAPITAL
This is the difference between your current assets (cash, accounts receivable, unpaid bills, inventory) and your current liabilities (accounts payable and debts). The working capital calculation shows a business has enough cash and cash equivalents to meet its short-term obligations.
FREE CASH FLOW
Free cash flow is what’s left over after all expenses have been paid to run the company. It can be reinvested in the business, used to reduce long-term debt or be distributed to shareholders. Consistent cash flow is key to financial health, and buyers will want to understand any potential risks to it.
CASH FLOW SEASONALITY
Many agribusiness cash flows rise and fall throughout the year. This can often require relying on an operating line of credit, which adds business risk. Being part of a portfolio like ours at Market Maker Agriculture reduces that risk because seasonal cash needs are balanced out across the companies.
SUSTAINABLE CAPEX
Sometimes also called ‘sustaining CAPEX’ or ‘maintenance CAPEX’, this refers to the amount of money your business spends each year on its existing assets to maintain current operations.
Find more definitions of relevant terms in this glossary by Welch Capital Partners.
Big picture, long term
Some investors focus purely on numbers and returns when they value a company, often ‘buying and flipping’ for short-term gain instead of planning a long future for the business in question.
At Market Maker Agriculture, we look at the whole picture: how your company operates, its relationships and its people. We buy agribusinesses that are built to last — that complement our portfolio and have the potential for many more decades of success.
We want to understand what you hope to get out of the sale so that we can proceed fairly, with the goal of mutual success. If there’s a gap that’s not too wide between what you think your business is worth and the value we calculate, we’ll work to find flexible ways to close it. And if we can’t give you what you want, we’ll let you know straight up.
At the end of the day, we respect that selling your business is a big decision and you’re entitled to choose the buyer who’s right for you. Our promise is that we’ll be upfront, collaborative and transparent, and that our goal is a long, successful future for the business you’ve built.
What we look for
1. A seasonal cash profile that fits with our portfolio. Across our companies, we make sure seasonal ebbs and flows are balanced out so that the whole is stronger than the sum of its parts.
2. Strong margins, including well-defined and complete calculations of gross margin.
3. Stable income and recurring revenue that can be expected to continue and grow — supported by good relationships with customers, suppliers and employees. We also want to see a strong employee team that can keep the business going — and a healthy market. We buy great agribusinesses, not great ideas, which is why we don’t value companies based on futures.