What's your nursery worth?

Editor's note: This article originally appeared in our 2017 State of the Industry report. Read more from that report here, and watch for the 2018 State of the Industry report this November.

The storm clouds on the horizon tell the nursery owner that something is about to happen. Something that could mean rain or wind or hail or worse. When that happens, they are going to need a defensible valuation of the stock on their property. What is that number? What if it’s challenged?

An adjuster will try to offer his opinion, while the nursery owner will offer another. Unlike crop insurance, which values a crop that will be sold in a few months, nursery stock ranges from newly planted liners to mature trees. And there are qualitative differences from nursery to nursery. Trees and shrubs are not commodity items or cookie-cutter, exact duplicates of one another. From block to block there can be great disparity.

When you need to find the value of a nursery’s inventory or even the value of the whole business, choosing someone who do not understand the nursery business is not a reliable assessment for multiple reasons. When appraisers come in with tunnel vision and place a value on the inventory or enterprise, there are problems lurking that can cause heartache later.

In my appraisal work I have seen every variation of attempts to place value on nursery stock. The most common is to take the selling price of the stock in the ground and do some bulk discount on the price for digging costs. This approach is flawed because it does not take into consideration other factors such as:

• What is the market like for this line of product right now?
• What percentage of the crop will be lost to external damage before harvest (i.e. deer and equipment)?
• How healthy and vigorous is the crop?
• Is the quality of the plants equal or better to like product in the marketplace?

No matter the book pricing or the health of the marketplace in which the nursery sells, no one operates in a vacuum. Nurseries fight for the dollar.

Valuing an inventory requires asking hard questions. What is the actual value likely to be realized by this block of trees or shrubs (not potential)? That value must reflect the as-is, where-it-is-at-this-point-in-time snapshot value. A true fair market value, where if someone were to walk in and want to buy the whole of the inventory with one check, is the number we’re looking for. Fair market values assume the seller is under no pressure to sell and is well informed of the nature of the transaction, and the buyer is under no pressure to buy and is well informed of the nature of the transaction. All at arms length.

More than cash flow

The capacity to discern this number is more art than science in many ways. It requires a measured consideration of all the factors that lead up to the value that can be defended. Unfortunately, many valuations are done by companies who have a vested interest in an outcome. If an auction house does a valuation, sometimes that can lead toward creating a value that if accepted may lead to an auction. That is not an independent valuation. There is a potential vested interest.

The value of the nursery stock is a part of what can lead to a full business valuation. There are business valuation experts in the field, and most are certified public accountants. They have been taught well how to use a discounted cash flow multiple to arrive at a business value. If a business valuation expert is valuing a hot dog stand, that works very well. The question is, what does the business spin off in cash flow each year, and use a multiple of that. That’s accurate for hot dogs.

Nurseries are very different. The inventory is the wild card. I have seen valuations on nursery enterprises created by CPAs that ignore the huge and growing inventory. In one case, a business valuation firm put a value of $700,000 on a large nursery based on the cash flow alone. The nursery actually had more than $6 million in saleable inventory. The value the CPA put on the firm was thrown out in court.

When a true value for a nursery business is developed, there are intangible factors that must be measured to place an accurate value on the business. Cash flow is a big part of the value of the business, but other considerations include inventory, equipment, land and buildings.

Besides those assets, the balance sheet must be modified by debt and other encumbrances that influence the value of the business. The inventory value then becomes part of that balance sheet. Many nurseries do not show inventory value on their balance sheet, but a court of law will.

Once all the numbers to consider have been determined, there are several intangibles that affect the value assumed. By this point, you should already have a hard number on the whole of the inventory.

• Is there enough inventory in the pipeline to sustain the cash flow demonstrated for the last five years and forecasted?
• How deep is management? If a few of the top people in the company were to die or walk away, how does that affect the value of the business? Is there enough depth to keep it going at current levels?
• How well positioned is the nursery in the market space it occupies? What does the competitive landscape look like? In view of that, how stable is the nursery? What does the future look like? What are their price points and can they be maintained or increased? How does the market look at them? What’s their reputation?
• How good are the records they keep? Can they prove the assumptions that are being made to support the valuation of the business?
• What are the barriers to entry from a new competitor? This is particularly true of container nurseries. A well capitalized container grower can enter a market and quickly carve out a piece that historically belonged to the company in question.
• What percentage of their business is done with one customer? I once had a company that did 90 percent of its business with one big-box store. Sales were nearly $10 million dollars. The bank called me in because the company had just lost that large customer. The discounted cash flow meant nothing. Only the inventory and facilities could be valued. More than 10 percent with any one customer is a danger signal.
• Do their customers pay on time? Is bad debt a problem? What strata of customer are they reaching? Are their supplier relationships intact? Will they be maintained in the event of a sale?
• Is the location of the nursery conducive to serving the marketplace they seek to sell into?

These are all factors that any banker, buyer or estate lawyer will take into consideration when making any business valuation. If you are hiring someone for this type of complex valuation, make certain they can defend the valuation in front of an adversarial attorney, if it comes to that. If there is a challenge, the judge must answer the question, “What is the right number?”

Gene is a certified personal property appraiser specializing in nursery business appraisals; generedlin@att.net