When it comes to farm and ranch ownership, determining value isn’t always about what the property would bring on the open market. For families focused on long-term ownership, generational continuity or internal buyouts, a more practical approach to valuation often lies in how the operation performs as a business.
One such method that has gained traction is the EBITDA valuation approach. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. In simple terms, it measures how much cash a business is generating before non-cash expenses and financing costs. It’s commonly used in business valuations across many industries and increasingly applied to agriculture.
To use the EBITDA approach for internal and succession planning:
Step 1. Estimate Your EBITDA. Start with your gross income. In one recent case, a ranch I worked with generated about $5,000,000 in gross income. An accurate EBITDA can be calculated by your CPA or tax professional, but generally the industry-average earnings margin is 15% to 25%. This margin will vary depending on your crop or livestock mix, efficiency, and operating structure. Using a margin of 20%, this operation’s estimated EBITDA profit is $1,000,000.
Step 2. Apply an EBITDA Multiple Next, multiply your EBITDA by a factor that reflects your business’s risk, scale, and regional value. This is known as the EBITDA multiple, and in agriculture, it typically ranges from 3x to 7x
In this case, we applied an EBITDA multiple of 5x: $1,000,000 × 5 = $5,000,000 estimated business value
This number gives you a working value of the operation as a going concern, meaning it’s an active business with infrastructure, earnings, and continuity—not just bare land.
Weigh in transfer restrictions
Although comparable ranches in this area have sold for $7 to $10 million or more, those market values only apply if the ranch is being sold. In reality, many family operations are not for sale. Instead, they are owned by trusts or LLCs with strict transfer restrictions, including:
- Long-term ownership intent (i.e., never to be sold)
- Ownership interests held in partnerships, LLCs, & irrevocable trusts
- Transfer terms like seller-financed installments over 20-30 years.
- Minority interest and lack of marketability discounts
These conditions make a big difference. They reduce liquidity and make it difficult for an owner to convert their share into cash. So, it makes sense that the value of an interest in the ranch would be significantly lower than a market-based sale price.
A tool for succession planning
This approach is especially valuable when planning transitions between generations. If the ranch is going to stay in the family, you want a fair valuation that:
- Reflects the economic value of the business
- Is defensible for IRS and estate planning purposes
- Doesn’t inflate values based on hypothetical market conditions
For example, if you’re transferring interests to the next generation through gifts or buy-sell agreements, a $5 million EBITDA-based value is far more practical than $10 million+ based on a speculative sale and other external factors.
An approach endorsed by experts
The American Society of Farm Managers and Rural Appraisers (ASFMRA) recognizes EBITDA as a valid approach for valuing agricultural operations:
“Valuing agricultural operations as going concerns often includes using income approaches such as EBITDA, especially when business continuity and restricted marketability are major factors.” — ASFMRA Appraisal Journal, 2023
Final thoughts
Whether you’re planning a succession, updating estate documents, or rebalancing ownership, remember this: the value of your farm or ranch depends on its purpose. If it’s going to the market, fair market comps apply. If it’s staying in the family, the EBITDA approach can provide a fair, functional and flexible basis for decision-making.
Need help applying this method to your own operation? Consult a farm succession specialist, appraiser or CPA familiar with agricultural businesses and closely held entities.
Downey has been consulting with farmers, landowners and their advisors for nearly 25 years. He is a farm business coach and the succession planning lead at UnCommon Farms. Reach Mike at mdowney@uncommonfarms.com.