Pitfalls of equity partnerships
Last week Nicole Godber wrote about Equity Partnerships and the benefit of this governance structure for farmers, especially dairy farmers. This week I will explore some of the pitfalls of Equity Partnerships (and why these can actually burden ownership rights) and explain some other ways of acquiring farm ownership.
In order to be a part of an Equity Partnership, a farmer must bring some equity/capital to the arrangement. They will then get a portion of ownership of the farm, depending on how much equity they bring to the arrangement. If a farmer has a small percentage of equity in comparison to the other partners, they can lose autonomy over their equity and decision making powers to the larger investors, with the effect that they lose their owner operator benefits completely.
When an investor who is working on the farm (as a manager, contract milker, sharemilker or by some other contacted arrangement) does not achieve the results that was hoped for by the other investors, resentment between investors can occur. The ongoing farming structure then needs to be revisited and realigned to ensure that what the majority investor wants is achieved.
As time passes, investors to the Equity Partnership can have a shift in long term goals and objectives, and they no longer relate to one another. This can cause an investor to want to exit the Equity Partnership, but is unable to do so because they may not have made enough capital gains or profit to move on.
When there is an extended downturn in the dairy industry, obtaining farm ownership through any means is tough, especially when lenders tighten criteria on low equity borrowing. However, there are other structures available to work towards sole ownership, and sole control of a farming business.
50/50 share milking is a structure that is still working, and still being commonly used. If there is a well-planned out agreement between the landowner and the sharemilker, (with professional advice from both a lawyer and an accountant), then a competent sharemilker has a real opportunity to build up stock numbers and cash to sell down for a farm deposit. Albeit this is a process that would need to happen over some time, and perhaps go from a big sharemilking job, or multiple sharemilking jobs to a small farm. However, it is a way to gain complete owner operator control of your own farm.
Leasing a farm is also an option that is becoming popular. The landowner would still retain ownership of the land, but the lessee (dairy farmer) would own the plant, stock and all farming equipment. It would be prudent to engage a lawyer to ensure your lease agreement sets out exactly what you and the landowner agree to. Terms such as the lease period, right of renewal and upkeep of the land are some of the aspects that will need to be carefully considered.
The content of this document is necessarily general and readers should seek specific advice on particular matters and not rely solely on this document.
If you would like more information on any of the topics in this document, please contact your usual Auld Brewer Mazengarb & McEwen adviser.