Your Time is Worth Something
As a CPA, I get asked many times by small business owners what their business is worth. As part of calculating that value we usually work up what the net bottom line earnings of the business is. To detemine that, we take the profit and loss of the company and make certain adjustments. Normally, we add back interest paid, depreciation and amortization and other one-time items.
From this number, we then make various deductions, of which, usually the major one is the deduction for compensating the owner for their time and effort in running the business. In some cases, we actually need to add back an amount since the owner has taken out to much compensation, but in most cases, we need to deduct owner’s compensation.
In many cases, after deducting a fair amount for the value of the services provided by the owner to the business, we can end up with negative income. When this happens, we usually tell the client that they do not have a valuable business, but rather a job. It may be a well paying job, but for business valuation purposes, it is just a job.
For farmers, in arriving at the bottom line profit of the business, many do not deduct a fair value for their services provided to the farm. You need to do this in order to detemine if the farm is profitable and by how much. Many farm decisions are made based upon erroneous data and this mistake can be huge.
For example, the Center for Farm Financial Management provides an excellent database of what various farm operations are earning per year since 1993. In all cases, these farm returns include an allocation for labor and management charge for the owners. For corn production, this charge was in the $30 to $40 range per acre and for soybeans, it was about $10 per acre lower. If you do not make this allocation, then you will think your farm was more profitable than it actually was.
For either very large or very small farms, this allocation could be distorted. If the farm is very large, but managed very efficiently, then the charge per acre may be smaller. If the farm is only 500 acres and the farmer is working it full time, then this charge could easily be $100 per acre or greater.
You need to review this closely to see how profitable you really are.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
Comments are closed.