Ownership models for farming businesses have changed over the years. Transfer of ownership within families from one generation to the next is a traditional model but not available to everyone. For those without family in farming, it can mean that growth and wealth creation can stall without careful planning. Even with family in farming, given the amount of capital tied up in farming businesses today, executing family succession needs to be well thought out especially if there is a desire for farms to stay in the family and provide for non-farming family members in some way.
This has been made more difficult as we experienced assets values increasing aggressively over the past 20 years in the core agricultural industries and these have not always been directly linked to increased income or profitability on farm. It has become very challenging to save or increase your asset base to the point where you are in a position to purchase a farm of scale on your own. Naturally when a market evolves like that new vehicles for ownership are explored and hence equity partnerships were created.
Given there is a wide spectrum of people involved in agriculture at various ages and stages, Equity Partnerships can be a good way for:
- Sharemilkers and managers who have built some wealth and need to partner up to make that first step into farm ownership.
- Farm owners who want to grow their business and see that an investment in a larger property is opportunity to move forward.
- Farmers to retire but remain involved in the industry and see their business continuing with a sound succession plan in place.
- Allow people to have an agricultural investment without requiring the on farm day to day operational skills.
What is an equity partnership?
- A group of Individuals who pool their capital, skills and resources with others in order to gain an ownership interest in a property/business.
- The ownership entity is typically a Limited Partnership or a Company. This entity owns all key farming assets – Land, Livestock, plant and machinery, (supply shares – if needed depending on the agricultural industry).
- Ownership is determined by the amount of capital contributed at the outset of the partnership.
- Usually there will also be a component of bank debt as the equity partnership borrows funds to purchase the farm.
- Often one of the investors is the operator known as the equity manager. This gives that person/couple the opportunity to get into farm ownership and provides the other investors certainty around the day to day operations. An individual employment contract is put in place outlining roles and responsibilities.
- A governance team or board is recommended to ensure all aspects of the business are managed appropriately, all investors are fully informed and all are held accountable for roles within the business.
- A comprehensive shareholders or partnership agreement is needed which covers such things as entry, exit and sunset clause, authority to make commitments, voting rights, meetings, reporting standards etc.
Keys to success:
- Essential that all investors have aligned needs and goals from the equity partnership – this is a key part that needs to be deeply explored prior to entering into an equity partnership.
- All roles within the business need to be agreed with strong governance a key to ongoing success.
- All meaningful work needs to be rewarded and remunerated otherwise this can create frustration and division within the partners.
- Choose partners wisely – as mentioned alignment of needs and goals are essential but also everyone needs to be able to build strong relationships and work together through the highs and lows that any business experiences.
What are the benefits for equity partners?
- Pool capital.
- Share the risk.
- Leverage specialist skills and/or capital assets.
- Improve business performance with efficiencies of scale.
How would you go about it?
Often individuals who already know each other agree to set up an equity partnership. Your individual network is an obvious place to start, think about industry professionals who may be able to connect you with potential partners.
Contact us if you want to explore the possibility of an equity partnership further. We can meet with you to analyse what would work best for you to achieve your goals, liaise with other specialists on your behalf and prepare the appropriate key documentation.
Article by Nick Lawn