Rob Hitch is a partner with Dodd & Co chartered accountants. He works almost exclusively with farmers, most of whom are dairy businesses. He also chairs a Princes Trust group providing support to new entrants in Cumbria and Yorkshire. Rob has advised many joint ventures in the dairy sector over the last 18 years. You can follow Rob Hitch on twitter @rob__hitch or call 01228 530913.
fully. That said, care should be taken in writing an agreement and sticking to its contents.
But one of the key assets I have seen protected, both in share farming agreements and partnerships, is people’s dairy herds. Retaining the breeding and families you have devoted a working life to has been a driving reason behind several of the joint ventures I have been involved with.
Drive and enthusiasm We all like to think we can go on forever. But most business owners reach a stage in their lives when they are comfortable and not driving their business forward as quickly as they did when they were younger. Joint ventures can bring in young farmers to drive the business forward. However you structure your joint venture having a partner who wants to grow the business, rather than hit the comfort zone, offers benefits to both parties. I act for a joint venture dairy business which has grown from 400 to 700 cows, the landowning partner has taken in a 50% shareholder, but still retains, in his half share, a business almost as big as he had originally. Without the drive of the younger partner he may well have reduced or even disposed of his cows.
Equity raising
Joint ventures often provide cash to those reducing their business. In many cases farmers can raise cash by selling cows to a partner, or joint venture business. Often a proportion of cows are sold to the new party to the arrangement. This provides a cash sum to the farmer, but doesn’t reduce the size of the business. I have been involved with several joint venture businesses set up from scratch, using two parties to spread the investment risk and provide the capital needed. These often involve developing greenfield units.
So, what options are available to businesses considering joint ventures? There are three main options that provide
varying degrees of risk, but all involve a continuing involvement in the management of the business.
Share farming
Share farming is a term popularised in New Zealand and many grazing dairy businesses understand how it works. I would best describe it as being like a partnership, but with individual businesses. The key point is that income, i.e. milk sales, are split in some agreed proportion, with costs apportioned in either the same proportions or to individual parties.
Both parties prepare their own accounts, VAT and tax returns, although both contribute to an agreed plan. In most cases the younger member provides all the labour. Share farming arrangements should be written agreements and they should be adhered to in order to prevent the arrangements becoming a partnership.
I have seen this work successfully where a farmer placed his cows on another farm in return for a share of the milk cheque. He retained the breeding decisions over his cows and maintained his pedigree status and herd prefix while getting rid of all of the day-to- day work. His partner benefited from spreading his fixed costs over an additional 80 cows and while not getting the full benefit of the milk price benefited from producing marginal litres.
Contract Farming
Contract farming is generally a child of arable farming. The farmer continues to farm and simply engages a contractor who provides all of the labour, machinery and management in return for a fee. Normally initial fees to both parties are fixed with any surplus or deficit being split in agreed proportions. In most cases the contractor gets the largest share of any divisible surplus in return for their management input.
Again, contract farming arrangements mean that there are two distinct businesses in operation.
Care should be taken by the landowning party that they are actually exposing themselves to risk. A guaranteed first charge, rolled forward when losses are made, can be viewed as tantamount to a rent, at a stroke removing valuable capital gains and inheritance tax reliefs.
Of all the options contract farming is probably best suited to those that don’t want to be as actively involved in the future running of the business.
Joint venture partnerships or companies
These are pretty much ‘full fat’ ventures, often used for joint equity raising and collaboration. In these all parties are fully committed to the venture, generally providing joint funding and management. It doesn’t matter whether these are set up as partnerships or companies, in most cases this is driven by the individual partners’ existing trading status.
Where two, or more, parties are committed to the same venture these structures fully integrate everything. In recent years there have
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