Purchasing a Farm: Land Depreciation vs. Amortization

Jared Faltys

Financial planning, business tax planning, investment advisory services

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Purchasing a farm may seem like a good investment opportunity. However, with further analysis, the net return is often much lower than anticipated. This typically happens because investors also view agricultural land as a stable investment. Not to worry — there are ways to immediately improve the ROI on the land through potential tax benefits. When you purchase farmland, you may be able to depreciate or amortize various aspects of the farm. 

Amortization vs. Depreciation

When purchasing farmland, you will acquire not only the land but other assets that accompany it as well. Since many of these assets will eventually deteriorate and become unusable, their cost can be expensed based on their life expectancy. Amortization and depreciation are ways to calculate the value of these assets. 

Depreciation

Depreciation is a way to calculate the total cost of an asset over its useful life. It is used to establish the cost of obtaining the asset compared to the income it provides. Depreciation is used for tangible assets, such as buildings, machinery, or equipment. 

Amortization

Amortization is also a way to calculate the total cost of an asset over its useful life. However, amortization is used for intangible assets, unlike depreciation. Examples of intangible assets include trademarks, patents, and nutrients within the soil. 

Understanding these terms will help you during the prospecting phase of purchasing a farm, so you can be on the lookout for specific assets that you will be able to write off and gain a higher return on your investment. 

Depreciating Farm Assets

When considering a farm to purchase, you should be looking for specific structures that you file as depreciating assets to provide savings on your tax bill. Some of these structures may include fences, grain bins, farm sheds, irrigation systems, and other tools and equipment. Having the ability to write off these assets when tax season rolls around will help you offset the amount you are paying for the farm. 

Amortizing Farm Assets

Did you know that in certain instances you are able to amortize part of the physical dirt on your farmland? While uncommon, this is an approach that some choose to take and the return can be substantial. 

Overall, the general understanding of buying dirt is that you are unable to depreciate it until you sell the ground.  However, since farmland is commonly passed down throughout generations, farmers typically won’t ever see this value. 

How to Amortize Farm Assets

To amortize dirt on your land, the first step is to determine if there are more fertilizer nutrients in the ground than what is considered average. To check the levels of your land, you can hire an agronomist to collect soil samples from areas around the farm to analyze the nutrient values. 

Once you have this analysis, you can reach out to your local university’s agriculture department. Typically, they will perform studies to determine what is considered average for the embedded nutrients within their local soil. You can compare your specific dirt to the average values collected by the university to determine whether or not your land’s nutrient values are above average. If you have any values over the baseline, you can make a case that the ground can be amortized over the lifetime of those nutrients. 

McMill Can Help

Although the initial net return on farmland may not appear to be as high as you would expect, there are plenty of options to help increase your return on investment. Utilizing depreciating and amortizing assets will help you balance your return against your investment. 

McMill CPAs and Advisors are here to answer any other questions you still have about purchasing farmland. As your local experts in Norfolk, Nebraska, we can’t wait to assist you in your farming business along with other areas like tax planning, retirement planning, and risk management. Reach out to us today for more information.

Business Valuation Methods for Optometrist Practices

Jared Faltys

Financial planning, business tax planning, investment advisory services

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“What is my optometrist practice worth?”

This is a question we get frequently from the medical community, and optometrists are no different.  Today and in the near future, there are a large number of professionals retiring nationwide who are curious about the worth of their business.

The unfortunate part is that most optometrists don’t know what their practice is worth or don’t follow the right business valuation methods to make their practice more valuable when it comes to retirement. The value of the practice in many cases is the largest piece of the retirement nest egg. 

You may evaluate the retirement statements from month to month but don’t take the time to stop and analyze the value of the largest asset — your practice. Many times, we get the phone call from the optometrist saying, “Hey, I’m ready to retire…” and they simply haven’t thought about implementing the steps to make their practice more valuable.

Here at McMill Advisors and CPAs, we believe it takes at least two years to maximize the value and make the practice desirable to buyers. If you’re planning your retirement throughout Northeast Nebraska, take the time to plan ahead and make your practice more valuable with these tips.

  1. Focus on EBITDA

The definition of value can come in different forms. One obvious form that most buyers will use to measure is by evaluating your EBITDA. EBITDA stands for earnings before interest, taxes, depreciation, and amortization and is a comprehensive measure of a business’ worth.

Interest, taxes, depreciation, and amortization are called “add-backs.” These are numbers that are technically expenses when it comes to your tax return and financials, but they are added back to get a better understanding of cash flow. As you get closer to selling your practice, you need to look yourself in the mirror and say this three times, “I want to increase my EBITDA, I want to increase my EBITDA, I want to increase my EBITDA!” 

There are many variables that go into the valuation of practices, but EBITDA is the one that is focused on throughout negotiations. Later, I will describe why EBITDA is so important when it comes to selling the business.

  1. Compare Yourself to Your Peers

How well do you look compared to your peers? Benchmark yourself against competitors and work on the areas that need improvement. Ratios of wages to revenue, cost of goods sold to sale of goods, and profit to revenue are all good metrics to analyze compared to the industry. Your associations have great statistics to work with and you need to know how you stack up against them.

  1. Prepare to Sell Your Business

Don’t just show up and think you will sell your business overnight. It’s a preparation over time.   Determine what kind of business you have to offer for sale. There are many things a buyer will look for: 

  • Is this a mom & pop shop?
  • Is this a sole doctor’s office?
  • Is this a multi-doctor office? 

The more and more you can get away from “John/Jane Doe Optometrist Office” versus a generic name of a clinic, the better off you typically are. Buyers want to buy a franchise or an enterprise. Buyers are less likely to pay more for a mom & pop shop that is tied solely to a single doctor.

  1. Organize Your Financial House

Are your financials and tax returns easy to understand and do they both tell the same story?  Sometimes there can be a difference between the financials you use internally, to the tax return, to the information reported to the bank, depending on how information is prepared. 

We want to make sure there is consistency on reporting the operations. If there is inconsistency, then the buyers start to wonder what they’re actually buying when they don’t know for sure what the numbers are. The buyers look for consistency and they want to trust the numbers ideally over a period of three to five years.

  1. Diversify Services and Products

How many of your services are related to the elderly? How many of your services are related to families? Are you a practice known for a certain area or are you well-diversified across the community? Do you take on all insurances? Do you take on some insurances that aren’t profitable? Are you taking on Medicaid patients? All of these questions should also be factored into the valuation of your practice.

  1. Consider Your Internal Infrastructure and Climate

Do you have the personnel to run the business without much oversight and are there talents within the clinic that can be utilized for a buyer that might be attractive? These talents may include a billing specialist, a frame specialist, a lab specialist, and so forth. Having these additional weapons at your disposal can make your practice more valuable.

Diving Into EBITDA

Now that you have the various items that buyers look at, let’s talk about the term EBITDA and why that is so important. 

EBITDA is the typical measurement of the success of the organization from year to year. Buyers will typically want three to five years of history to see what the overall trend of the business is and if it’s trending upward. 

They look for variances and relationships between some key areas, including:

  • If cost goods go up on frames, why did that happen if sales didn’t go up?
  • What is your gross profit margin? Has it stayed the same?
  • Based on the industry, how do your wages compare to your overall gross sales?
  • How does your cost of goods sold compare to merchandise sales, and how does that compare to the industry standards?
  • How does the bottom line compare to the industry standards? Is it in the range of roughly around 13-16% of revenue? 
  • What are you paying your doctors? Is it around 17-20% of overall production? 

You want to set yourself to become profitable, as much as you can, before the sale so that you show a trend of profitability.  It is also ideal if you meet or exceed industry benchmarks. 

Breaking Down Multiples

Once the numbers are compared to the benchmarks, the industry, other similar practices, then EBITDA tends to come into play to where a “multiple” is applied. What I refer to as the multiple is a runway of time. This is the amount a buyer is willing to pay for a business based on EBITDA, typically anywhere from two to nine times EBITDA, as the multiple. 

What that really means is the buyer is willing to pay two to nine years worth of earnings (or cash flow) that the company has historically generated. The obvious statement would be the higher the multiple, the more runway a doctor gets for the value of the clinic. 

The easiest and the most widely used valuation method is the multiple of EBITDA. As you generate higher cash flow, then the multiple goes up to where it is more attractive for larger clinics to acquire.  Whether it’s strategic that they want that location in a specified area, it’s a nice product mix that fits their offering, or they are going after an overall large EBITDA to blend into their operations these are all factors that come into play. 

Why Are You Selling? 

Once all of this is determined, the seller needs to step back and ask the question, “Why am I selling?” If it’s for retirement, then it’s an obvious reason — you’ve worked hard and want to enjoy the fruits of your labor.  If you’re looking at getting a high price tag or a high multiple, I would ask the questions, “Are you still having fun at your job?” or “Do you think the future of your industry is positive, the future of your business in your location is promising, and you can continue to keep growing the practice?” 

If you’re still having fun or if you still feel that the future of your company is extremely positive, then I want you to take a step back and just do a soul search to determine if this is the right decision of going down the road of merging with a practice or selling.

When you do sell out and after you receive those funds, what do you do next mentally and physically?  That’s what you must answer before you go down the road of selling the business. You must understand that once that money hits your account, you will have some form of loss of control.

Control of a company will exchange hands. There could be a consolidation of operations and you must understand that there may be long-term employees that no longer are employed after day one when the new clinic is formed. Will you be able to serve patients and for how long?

If you did a soul search and you like the looks of that future — having money in hand without the risk of ownership — then maybe that fits you. Or you can exit the industry entirely and do something else with your life. I think business owners that want to sell never sit down and think, “Yeah, the money is nice, but what is my next step in life?” That’s the biggest thing that gets missed and it’s the decision that should have the largest amount of time spent before being made.

What’s Next? 

To conclude, start getting your ducks in a row. Prepare your practice for sale by getting your finances in order, setting up more of a clinic atmosphere, a solid positive culture, and a business that can run without you making daily decisions. That is what is attractive to a buyer. All of this doesn’t happen overnight. You must start planning for the exit of yourself out of a business and start asking these questions earlier rather than later.

I think Warren Buffet said it best when he said, “Valuing a business is part art and part science.” The science is just looking at the pure numbers, whether it’s a calculation of the EBITDA, looking at the value of the assets, or looking at the hard data.

Where the art comes into play is all the intangibles, like I described above — location, culture, staff in place, multi-doctor clinic/single-doctor clinic, type of revenue, insurance or private pay, the volume of frames and other incidentals being sold to patients, or the average age of patients and how this plays into the buyer’s desires.

When you’re looking to understand business valuation methods, it can be for various reasons. Regardless of the reason you’re selling, the main point remains the same —  getting a proper valuation of your practice can provide the knowledge of what it takes to make your practice more valuable over time.

There really is no hurry, as you should remember that the value of this business will always be there in some fashion. There is talk lately with all of the stimulus money and additional money out there, that it is assisting other clinics in acquiring businesses. 

With low capital gain rates and low interest rates, it’s the perfect environment to sell. I’m here to say that that is probably all true, but it’s not the perfect time to sell if you’re mentally not ready, if you’re still having fun, or if you don’t want to lose control.

Take a deep breath, take your time, and know that this is the most important asset in your financial picture and you need to do it right. If you have questions about this article or want to talk further on how this can apply to your practice in Northeast Nebraska, give us a call.

Business Valuation Services: Why You Need to Know Your Value?

Clint Weeder

Business tax planning, investment advisory services, business valuations

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The COVID-19 pandemic, uncertain market conditions, and potential tax law changes continue to impact small business owners and their families nationwide, and our community is no different. It has left many owners unsure of what the future may hold for their business and what planning they should consider to keep their business viable for years to come.

Business valuation services will help you get your footing as we slowly but surely put the pandemic behind us and as we learn more about the potential tax law changes. A business valuation gives you the state and health of your business and can assist you with many planning tools as you continue to grow your business and as you start to plan for your exit. 

Most importantly, it can provide an essential component of your legacy planning for you and your family.  

Warren Buffet quotes that “valuing a business is part art and part science.” Here at McMill CPAs & Advisors, we’re proud to combine art and science to offer complete business valuation services to business owners in Norfolk and throughout Northeast Nebraska. 

What Are Business Valuation Services?

A business valuation is a process of evaluating the economic value of a company. Business valuation services come into play to find the true value of a business due to several reasons.

Determining The Sale Value

A business valuation protects you from short-changing yourself during a company sale. It ensures that the asking price is ideal for prospective buyers while you receive the best return on your investment as possible. We’ll help you analyze your business compared to peers, including metrics that set you apart so you can negotiate favorable terms.

Estate Planning

In the uncertain tax world today, it will be as important as ever to understand how your business will be treated as part of your estate, to ensure the legacy you want to leave behind holds intact. A business valuation can provide an estimated value of your business, so you can make the appropriate decisions when planning for the future and potentially avoid a costly estate tax bill. 

Litigation

During court cases such as divorce or injury, where settlements are due, a business valuation is vital. You will need to determine the company’s value to avoid an unfair determination.

Planning an Exit Strategy

If you are looking to sell your company, establishing a base value is important. It helps you understand the financial strengths and weaknesses of your company so you can plan on how to increase the company’s overall value. We can assist in generating a plan forward, including tracking key performance indicators (KPIs) that are essential in your industry.

Business Buying

Buyers and sellers may voice different opinions on the true value of a business. A business valuation indicates the amount a potential buyer should pay for a business. The valuation looks at potential income and market conditions to ensure you don’t get overcharged.

Partnerships

When you want to incorporate with other members, a business valuation helps determine the value of your ownership. A valuation is an essential component of any buy-sell agreement, and it should be one that is easy to understand. This will avoid potential disputes in the future between members. It will provide for the smooth transition of new members into the company and the exit of existing members. It will also protect the families of those members on both sides of the table. 

Strategic Planning

A business valuation helps entrepreneurs come up with a plan to boost their ventures. Present-day valuations will help you determine the business’s state and the decisions you need to make to improve it.

Funding

Before facing investors and banks for funds, you need a business valuation to enhance your credibility. It helps gain investor’s trust when they know how much your company is worth and it will help the bank better understand your financial position. 

How Is a Business Valued?

There are various elements of a business valuation that establish the worth of a business. They include the following:

Net Assets

Valuators use the asset-based approach to gauge the value of a business that is asset-intensive. Under this valuation method, the spotlight is shined on the business’s net asset value. The value is determined by assessing the fair market value of all assets less liabilities.

The Market Value Compared to Peers

The market value approach method entails assigning the business a value comparable to that of similar businesses in the market (relative to size, sales, and industry). The transactions used for comparison can be a previous transaction with the same company, transfer of ownership involving comparable companies, and a market quotation from listed securities by a company in a similar industry. 

An Analysis of Cash Flow

The discounted cash flow method (DCF) method is one of the most effective approaches to a business valuation. It looks at the potential future earnings of the business to establish worth. The approach can either analyze historical cash flows, or forecasted/budgeted cash flows to estimate the future cash flows of the company. The method is widely used for service-oriented businesses, and with businesses where cash flows can be projected with a higher degree of certainty. 

The McMill Way

McMill CPAs & Advisors use the above methods to estimate your company’s business value. A business valuation helps you to assess the current “health” of your business, assess the viability of business deals, and plan for the future. Our professional team will help you understand your business and its value so you can make the best decisions for you and your family. Contact us with any questions you may have regarding our business valuation services and how they can assist you and your business in Norfolk and surrounding communities today!