In these times of structural upheaval and stress for farming, joint ventures can be a great way to spread risk, share expertise, and foster innovation. They can help businesses grow faster, increase productivity and generate greater profit. This quick guide will help show you how to set up your joint venture to succeed.
Planning joint ventures – set objectives, build frameworks
It can be tempting to set up a joint venture with goodwill and trust alone, particularly if you know and get on well with the people that you wish to work with.
However, our experience has shown that the more rigorously they are set up, the better they perform. Taking a detailed approach from the outset might sound pedantic, but it helps to foster
trust and clarity by establishing a recorded method of working, evaluation and action. It is also essential in case there is a dispute or disagreement.
This allows business arrangements to maintain order and focus by establishing measurable outcomes such as targets, budgets and even qualitative aims such as communication styles.
Many good relationships fall apart because the intended outcomes are not realised, and having formal reference points, goals and benchmarks helps to keep things on track.
Enlist the help of a third party
Modern farming tends towards complexity, so what may seem like a brilliantly simple idea can carry deep implications for joint ventures, such as tax burdens. It pays to enlist an independent expert at the outset.
Independent farm business advisors will help you to assess the robustness of your ideas objectively and will advise you on ways that you could improve them. Get them to crunch the numbers, to make sure the venture is financially realistic.
A third-party advisor will help you to see your ideas from different viewpoints and in the light of possible changes in circumstance. Their input will help you appreciate all the possible pitfalls so that you can avoid them.
Get it all in writing
All joint ventures need a written document detailing agreements and objectives. These need to be precise, and should ideally include details of how the venture will be managed, costs apportioned, disputes resolved, and more.
An independent expert will generate a practical form of words and figures for you to refer to. Their input will save you the time and hassle of creating it yourself, leaving you to check it with clear eyes.
Aim for a Heads of Terms document, which sets out a commercial transaction agreed in principle between parties in the course of negotiations.
Once you have your agreement in writing and you’re ready to get going, it’s really important to make sure that the document is legally sound.
It is important to obtain qualified legal advice as creating a legal framework for your JV is essential. It will save you all sorts of headaches if your relationship sours.
Consult a joint ventures specialist
Once the joint venture is up and running, your independent advisor’s input remains important. They will act as an interpreter of your business’ data, as a stress-tester of new ideas and initiatives, and even as an arbiter if there is a dispute.
This will save you hours of discussion and draw you away from potentially expensive and nerve-wracking mistakes. They will be able to see things that you may not even consider.
Record, review, refine, repeat
It’s really important to keep good records of your venture, just as you would with any of your farm businesses.
Agree on a time to go over your figures, review your results, and decide on your next moves. Again, having a third-party involved can allow you to concentrate on the decision making, and takes some of the weight off your shoulders.
Depending on your requirements, they can act as an arbiter, a goal-setter or a chair of your meetings. They could even serve as a note keeper/minute taker, and issue agreed minutes of your meetings.
This will provide clarity and certainty and will allow your business relationship to stay as informal and relaxed as possible because you know that there is much less room for misunderstanding or misinterpretation.
If you use farm management services you will already have an established method of recording data for analysis. Extend that service to your new business too. Also, use business software such as Agstute, which will allow you to interrogate data anywhere and in real-time.
Conclusion – it’s all about control
With the right planning and frameworks in place, joint ventures can be a great option for farm businesses.
They enable combinations of expertise, risk sharing and innovation that single companies often struggle to achieve. Your aim should be to base your venture on clear frameworks, which you should stress test objectively before you go live. Don’t trust things to luck and goodwill.
Contact me, Mark Wheeler, by email at Mark.Wheeler@genusplc.com or by phone on 07966 839802 to discuss joint ventures. I’ve set up and helped manage a variety of agreements during my 12-year career in farm consultancy, from pooling ventures to tenancy agreements, and from CFAs to share-farming operations. With no obligation, I will help set you on the right path toward a joint venture that will work for you and your prospective partners.
Different joint ventures
Here’s a quick guide to three types of joint venture that are popular with farmers.
Share farming
Share farming is a contract between two or more farmers in which inputs and gross production from the same agricultural unit are shared.
Each partner owns and operates a separate business, has their own bank account and is responsible for filing their own tax and VAT.
There is no partnership and no contract of employment. Instead, the partners have a business agreement that spells out who is accountable for specific inputs and how the joint venture’s sales are split.
A very adaptable approach that allows for levels of participation and commitment, based on what each party desires. The participants must have an active agricultural contribution and take on the risks of the JV.
Great for:
• almost any farming situation, as it allows for different levels of involvement and investment, depending on each party’s aspirations. Potentially is a low entry-cost option for new farmers.
Partnership
A partnership is automatically created when two or more people decide to farm together for profit. A legally binding document that establishes ownership of assets and business roles of partners is really important – although not actually required by law.
A partnership should set out the ownership of valuable assets such as land, and equipment. It should also include a schedule of assets that relate to the land capital account, detailing the land owned by the partnership and its value, as drawn up by the partnership’s accountant. It also requires terms for the dissolution of the partnership or the inclusion of additional partners. Note that a partnership does not have to own land – it is a structure that is commonly used across all forms of farming.
Great for:
• giving clarity of role to a younger farmer wanting to gain management experience, as it gives partial responsibility without taking full control from the owner.
Contract Farming Agreement
A Contract Farming Agreement (CFA) consists of an agreement between a contractor and a farmer.
At its simplest, it is an agreement where one party consents to deliver a service or product in exchange for a consideration (usually money). However, complexity can be added, for example, if the needs and risks of both parties are included
This type of JV can be used to rationalise the operational side of a business while allowing the landowner to still be considered a farmer. This is an advantage compared to, say, a Farming Business
Tenancy, in which the landowner loses their farming credential and becomes a landlord, which has tax implications.
Great for:
• a contractor wishing to provide specialist skills for a business, achieve efficiencies of scale and margin and guarantee continuity of service
• a landowning farmer who wishes to release capital, lower their involvement in day-to-day decisions and yet maintain their ongoing farming status.
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