#14 acCOUNTING for SHEEP (Part 3)

The final instalment of my examination into the valuation of livestock farming businesses will bring to attention the key focus areas one should consider when they have an asset rich, cash poor business like a livestock farming enterprise.

You have probably heard the term thrown around, but what does ‘asset rich, cash poor’ actually mean?

Generally speaking, an asset rich, cash poor business is one whereby the income generation is significantly exceeded by the current market value of the asset (or group of assets) employed in the deriving of that income. 

And how does this arise?

Most commonly, this arises when a particular high-value asset (or group of high-value assets) is intrinsically linked to the revenue generation of the business in which the revenue generation is not reflective of the current market value of that high-value asset.

Basically, you do not generate enough revenue from the use of a particular asset that would be considered 'a reasonable return'.

In the context of a livestock farming business, the most common high-value asset causing a business to be asset rich, cash poor is farmland. 

It is important to note that livestock farming businesses are not the only asset rich, cash poor businesses – but (in my experience) livestock farming businesses are disproportionately asset rich, cash poor when compared to other business types.

Take this example, a cattle grazier in Central Victoria who runs more than 500 cattle. The annual income of the enterprise is approximately $550,000, whereas the market value of the land is in the order of $8 million. 

In most circumstances, asset rich, cash poor business won’t have any value above its net tangible assets – but this doesn’t mean you should blindly accept the financial position of the business at the end of the most recent financial year. 

In these type of businesses, it’s critical that you get the ‘current value’ of the net tangible assets right, this may mean obtaining independent valuations of:

• real property, including any water rights that may be attached to the land
• plant & equipment
• livestock and/or other trading stock

In some instances, if there is poor record-keeping within the business, it may be prudent to:

• examine any recent sale(s) of livestock to ensure they have been sold at ‘market value’
• seek from the bank and/or financiers a list of loans and/or hire purchase arrangements
• seek from the accountant verification of the ATO liabilities

The identification of the issue(s) above demonstrates why it is critical for any business valuation involving livestock (or agriculture more generally) should be undertaken by a forensic accounting with significant experience and knowledge of the industry and its nuances.  

For more information on the services we provide to lawyers involved in agricultural matters, please contact me or your local Grant Thornton Australia forensic accounting expert.