BY: PETER FLANNERY
For the 20 years from about 1995 through to 2015 a huge number of dairy farm equity partnerships were put together. Some were spectacularly successful and others spectacularly disastrous.
I’ll come to the “why” in a moment.
Dairy equity partnerships were possible partly because of the profitability within them. With profitability and a strong commodity outlook, they were seen as a good passive investment for those with capital, and a good career progression for those with limited capital but good expertise, i.e. sharemilkers.
Equity partnerships in sheep and beef were less common, partly because of the lack of profitability and the lack of young people with both capital and expertise. There have been a few, but the numbers pale into insignificance compared with the dairy industry.
Equity partnerships have also played a role in business succession. When a family member is brought into part ownership of the farm they are effectively forming an equity partnership. Sure, there is no outside investor but they are equity partnerships nonetheless (although sometimes there is also an opportunity for a non-family member to buy into the business).
It gives a young couple a start and it retains family investment/interest in the property. So, no family involved but business succession nonetheless. This actually raises a point. We all refer to “family succession”, whereas we really should be talking “business succession”.
Equity partnerships and business succession can, and do, overlap.
Profitability in sheep and beef farming has improved. Sure, right at the moment Covid-19 is creating uncertainty but it has also led to historically low interest rates. Capital at the moment is cheap, and a well run sheep and beef unit can generate good returns if lamb can stay above $6.50/kg and beef $5.50/kg.
The average age of farmers continues to rise, and business succession continues to be a challenge. An equity partnership can be a viable and good option for succession. It may or may not involve a family member, and the passive investors may or may not be family members.
As I said, with low interest rates and reasonable returns there is a case to be made for non-farming family members to keep their money “in the farm”. And just like the dairy equity partnerships, some of these will be spectacularly successful and others will be spectacularly disastrous.
Why?
As any successful property investor will tell you, the first three considerations for property investment are Location, Location, Location. Similarly, the first three considerations for an equity partnership are People, People, People.
I often think I keep beating the same drum but that is because it is important. Success in any business, and indeed any relationship, is enhanced by having alignment on values, purpose and vision.
Like it or not, we all have an inherent set of core values. Values influence our behaviour and it is our behaviour, or what we do, that influences our results. When the pressure comes on we will revert to our core values.
Here are some examples.
Someone who values honesty will revert to the truth under pressure, whereas someone who does not will revert to lying. Someone who values self over others will be first in the lifeboat when the ship starts going down. Someone who values teamwork and collaboration will work well together when the pressure comes on, whereas someone who doesn’t is likely to head off in their own direction and make decisions without consultation, which impact on others.
So, back to People, People, People. The first person to analyse is yourself. Have a good long and honest look in the mirror and answer this question truthfully. “Am I the right person to be going into partnership with?” If you put too much value in control, independence and self, then you are definitely not the right person.
The second group to analyse are those you are potentially going into business with. What are their values? They do not have to have the same values as you but their values must at least be complementary. For example, you may value big picture thinking whereas your business partner may value detail. So, while you may find each other frustrating, if you both value teamwork and collaboration you can combine to get good synergy.
The third group is the partnership as a whole. The partnership is a group of individuals, with their own set of core values, coming together to form a business partnership. Under what set of core values will they agree to do business with each other?
You can agree to a set of business core values, but if those values are in conflict with any of the individuals’ own values they will struggle to adhere to them. That will be the root cause of the start of a relationship breakdown. Once the relationship starts to break down it can be difficult to stem the tide.
Values are one thing, but purpose also plays a part. Other than making money, what is the purpose of the new partnership and what are the reasons for investing?
Consider the following two examples:
- A retiring farmer wants a young couple with energy, enthusiasm and capital to do the work and provide some capital he can remove from the business for his own purpose. That is fine, but if he wants to remain firmly in control and still sees the property as “my farm”, then he is not entering the partnership with the right purpose and it will most likely fail.
- A young driven and enthusiastic couple wants to find a retiring farmer to leave money in the farm and expects him to then just sit quietly in the corner with no input while they run the farm to their own agenda, it will also most likely fail. Once again, the wrong purpose.
There needs to be clarity why the partnership is being formed, and there needs to be something in it for everyone. Everyone needs to win.
Finally, you need to have alignment and clarity of vision. How do you see this business looking in five years time, and in 10 years time? What is the end game, and then what? How do you exit?
It is easy to gain agreement on the vision at the start. The trick is agreeing on the plan to achieve the vision and then implementing it.
Values and purpose will most likely remain constant but the vision and plan to achieve the vision will constantly change. Therefore it needs to be constantly reviewed and revised. The vision needs to be designed and agreed to by the partnership’s directors – governance.
The plan to achieve the vision needs to be designed by management and agreed to by the directors and, once agreed, needs to be implemented by management. This gets complicated and murky because often the management team is also part of the governance team. The lines of responsibility get blurred, and it is common for governance to interfere with management and management to interfere in governance. Unless there is a very special relationship with each other this will not bring out the best in the individuals and the partnership.
If you get all of the above right the probability of success will be enhanced: get it wrong and it will undoubtedly fail.
How do you get it right? Sort it out at the start, and, in my view, there has not been enough of this done. Do your due diligence, take your time and get someone to help you, and be prepared to walk away before it starts.
Marry in haste and repent at leisure.
- Peter Flannery is a Southland-based farm consultant who started Farm Plan 10 years ago after five years as a stock agent and 20 years as a rural banker. Farm Plan specialises in business planning, financial management, business succession and equity partnership facilitation. Find out more at www.farm-plan.co.nz
