Over the last year I have seen an increase in farmers coming to my office looking for help and information on joint ventures.
What is driving farmers into examining this type of business structure, and what is a joint venture?
A joint venture is any business venture where two partners share capital and risk. This can be contract farming, share farming or any hybrid of these structures. Don’t get confused by these definitions as most times they are incorrectly used and described, even amongst people who claim to know what they are talking about! More on this later….
There are many reasons why farmers are looking to change their business. The primary driver is lack of quality labour that will have any level of commitment to a business. This high level of turnover is a major cause of stress within any organisation. Traditionally, farms have tended to pass to offspring who have apprenticed themselves after school and/or college on their own farm. This is now no longer as common as it used to be, as children feel less bound to come back to the family farm, and parents don’t expect them to. On the other side of the farm gate, we have a number of college leavers who have no family farm to return to and want something more in a career than to just be an employee.
Tenancies used to be the entry point for many, with County Council farms providing that first stepping stone. The move to sell these farms by cash strapped local authorities will only increase in this climate of austerity. Private tenancies are tending to be offered to existing businesses who present a low level of risk to the landlord and, more importantly, his agent. The situation we have ended up with is on one side existing businesses with a level of capital and hopefully a successful business, but limited succession choices, and a generation of potential entrants with little choice in traditional tenancies and a lack of capital.
The joint venture attempts to solve this to the benefit of both parties. The current taxation system also favours this type of operation as it allows the party who owns the property to maintain its tax allowances.
As a farmer, if you are thinking of this type of venture, what are the key considerations?
The main change that may be needed is mindset. Your potential partner may well be interested in running a different system than your current one. As a new entrant who lacks capital, one of the main drivers will be growth in capital. In a lot of cases, this may mean change of cow breed, calving pattern, feeding system etc. This may seem in the first instance off-putting, but do not discount this approach as if both sides are to gain, in most circumstances, changes will need to be made. If your partner wants to make radical changes, seek advice and go and see similar operations to examine the viability. The reluctance to change is often the greatest barrier to the establishment and success of joint ventures. Having seen many of these agreements, I can say that this catalyst for change in the first instance will be unsettling and worrying, however the success it usually brings gives the farm a whole new lease of life.
The other barrier is also the concern on the farm owner’s part that the new partner will make too much money from the agreement. A well set up agreement ensures both parties grow net worth and if your net worth is growing why worry that your partner’s is too? Generally, these types of structures provide more income and capital growth than land rented out, as well as the taxation advantages.
A further advantage is that as your new partner invests part of their profit in your business, it allows you to release some of your capital that is tied up within the operation. For entrants without the necessary capital, arrangements can be made for a gradual buy in of the assets that are to be in common ownership. The entrant may forgo some profit to gradually buy cows and machinery etc. It is the business assets such as livestock, machinery and deadstock which tend to be shared. The owner would normally take a payment for use of the land and buildings. The owner and the entrant would then charge their labour, then the margin could be split according to the ownership of the shared assets.
Due to the flexibility of these arrangements each one tends to be bespoke and they can be tailored to suit what each party can offer. For many farmers who are in their late middle age, this type of system allows them to consider reinvestment in what may be a tired unit in the knowledge that their investment will be covered and their unit a viable production facility which can act as a source of income after they wish to physically retire from farming.
If you would like to discuss this further, or, would like to put together a joint venture agreement, contact James at firstname.lastname@example.org or your local FCG office.