Equity Partnerships
Ownership models for farming businesses have changed over the years. Family ownership is the traditional model but, given the amount of capital tied up in farming businesses today, family ownership may not be the main model going forward.
Various factors shape this. Some business owners want to plan for their own retirement while wanting to provide for the business to continue. Other farm owners want to grow their business and see that an investment in a larger property is necessary to move forward.
Equity partnerships are an option which can work well, particularly if you want to grow your business.
What is an equity partnership?
Individuals pool their capital with others in order to gain an ownership interest in a larger property. Quite often there will also be a component of bank debt as the partners borrow funds to purchase the farm.
What are the benefits?
Equity partners:
– Pool their capital
– Share the risk
– Leverage specialist skills and/or capital assets
– Improve business performance with efficiencies of scale
It can be good a way for:
Managers and sharemilkers to progress to farm ownership or Farmers to retire but remain involved in the industry and see their business continuing with a sound succession plan in place.
How would we go about it?
Often individuals who already know each other agree to set up an equity partnership. Or you can be put in touch with other people who might be interested in this kind of investment opportunity.
How would it work?
The preferred ownership structure for an equity partnership is usually a company. The company has a number of shareholders, with shareholding based on the amount of share capital that individuals contribute to the partnership. One shareholder generally takes the role of farm manager, on salary.
Other possible structures include trusts and limited partnerships to establish the joint venture arrangements. It’s important to work through the structuring options to establish what best suits your situation and what you want to achieve.
What would we need?
A due diligence process is critical, to assess the potential risks and benefits.
If you decide that a company structure works best for your purpose, then all shareholders will sign a Shareholders’ Agreement setting out how the venture will work. If you decide on a different ownership structure, then there needs to be equivalent documents such as a Trust Deed or Partnership Agreement.
There also needs to be an Individual Employment Contract for the farm manager.
If you’re trying to attract investors into a joint venture with you, it’s a good idea to put together an Information Memorandum which makes it clear why your proposed venture stands out.