Equity partnerships
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3 min read
Equity partnerships offer the opportunity to take an ownership stake in a farm business, with lower outlay required to purchase a business outright. Such partnerships can provide an alternative pathway for people to work towards farm ownership.
What are equity partnerships?
An equity partnership is a joint business venture between two or more individuals who have come together to pool their capital, and often their skill, to enable the partners to gain a greater return than each party could achieve alone.
Who do equity partnerships appeal to?
Young farmers – equity partnerships provide a path to ownership with a lower outlay than when purchasing the business outright. It can also provide a great learning experience through accessing the skills other investors bring to the partnership.
Established operators – entering an equity partnership can provide access to both capital and talent to grow your business. Investors – allows for diversity in investments within the rural sector without having to be a hands-on farmer.
Keys to success in an equity partnership
Experienced equity partners highlight these keys to success:
- Undertake due diligence on both the potential business/farm and the potential partners. The partnership will only work when all the partners align their objectives and outlook.
- Partnerships should have an end date reflective of the goals of the partnership. At this time it can either be dissolved or reset to achieve new goals. This helps partners understand how long they are in business together and helps with exiting partners.
- It’s easy to start business together but harder to stay in business together. Good communication and governance throughout the agreement is critical.
- You need clear agreement on how farm management and capital purchasing decisions will be made, how disagreements will be dealt with and who has the final say. The more partners you have, the more important this is.
- You must agree on how dividends will be paid. If a partner needs regular cashflow a different approach will be required to investors prepared to reinvest profit into the business.
- A clear dispute resolution process and a means for a partner to exit if they require is critical, just in case things don’t work out as planned. It also needs to be clearly understood it can take time to sell the business, especially if a minimum price is required to return an overall profit.
Financial returns on equity partnerships
The returns to an equity partner come from:
- Business profit
- Growth in capital value of the business.
Returns to the managing equity partner will also include a salary for the services they provide to the partnership, which will often include day-to-day management of the business.
Returns may come periodically during the term of the partnership or may be reinvested and paid at the end of the partnership.
Return on investment can vary depending on the farm management ability, the timing of entering or exiting a partnership, as well as the quality and value of the asset purchased. And it can be negative.
Equity partnerships will generally be formed to invest in one of three farm business types:
Herd owning sharemilking
An equity partnership that owns a herd can enter a herd-owning sharemilking agreement (HOSM). This structure is more common when the farm owner also owns the herd and sells the cows to the sharemilker as part of the sharemilking agreement, buying them back at the end of the agreement. However, the partnership may also form and then look for a sharemilking job.
This structure has similar risks to sharemilking around fixed sharemilking agreement terms and the implications for asset value if the sharemilker is forced to sell cows.
Land owning
This is where the partnership owns land, the herd, machinery, and dairy company shares. Typically, the young and or progressing farmer in the partnership would also operate the farm as a variable order sharemilker, contract milker, or a manager as well as an investor in the farm.
While returns to land owning equity partners are steadier, they are less dynamic than for sharemilking. This means partners with lower equity may struggle to see the same equity growth as in a herd owning sharemilking partnership.
Farm trading company
In this structure, there are two separate equality partnerships. The land-owning, and the farm trading business. with separate revenue streams.
Let’s look at Land Co and Trade Co as a hypothetical example. Land Co owns the land and buildings and leases the land to Trade Co. The investors in Land Co get a steady return from the lease and any benefit of capital gain. Trade Co owns all the operating assets, including cows, plant and equipment and dairy company shares. The progressing farmer would typically operate Trade Co. They would be paid a management salary and a return related to their capital stake in Trade Co based on the profit generated in the farming business.
There may be opportunities for the partners in Trade Co to purchase a stake in Land Co, however, this would be a separate business arrangement. It could continue even if they were no longer running Trade Co.
For more information
Because the form of equity partnerships can vary it is critical you get advice on each individual proposal. Talk to your bank manager, chartered accountant, and your farm management consultant as they will all have valuable perspectives. Also, ask them to put you in touch with experienced equity partners who may be able to mentor you through the process.