Friday, March 29, 2024

Beware of peaks and pitfalls

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If you can’t sit down and have a drink with your equity partners then you shouldn’t be doing business with them, Justin Geddes of Crowe Horwath says.
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“Peaks and pitfalls in equity partnerships is just another way to look at risks and returns,” he told a SIDE workshop.

“The peak is increasing your return and lowering your risk and the pitfalls are being exposed to risk but not achieving any great return.”

He said there were three key areas to look at – the board, finance and reporting, and the quality of the investment.

“You have to tick all the boxes to get it right. Solicitors love equity partnerships because they get a lot of work out of winding them up when they don’t work out.”

Geddes said boards were essential to successful equity partnerships.

“The main role of the board is to govern. This means managing risks and directing activity to produce high long-term returns for all the stakeholders, which include the shareholders, the sharemilkers, farm workers, suppliers, the dairy company, regional councils, the bank, insurers, and the community.

“The board will not be milking the cows but instead ensuring the business complies with all legal obligations as well as budgeting, investing capital, looking after compliance, and it will have the oversight into the efficient operation of the farm.

“And the discussion that happens in the boardroom stays in the boardroom and never gets taken out on to the farm.”

When choosing equity partners, look for specialists, he said.

“Get references, ask other people about them, be brave enough to challenge them and their thinking.

“You don’t know what you don’t know about someone.”

The partnership agreement was the most important document as it was “the rules of the game”.

“If circumstances change it says how things are done. Dairy equity partnerships were a relatively new vehicle and they’ve had teething problems in the past. But there is now enough knowledge about them to get them right first time.”

He knew of equity partnerships still going after 20 years and many were giving double-digit returns.

“You don’t want to rely on capital growth to give you an adequate return on your investment but when setting them up everyone has it in the back of their minds,” he said.

“It should be returning way more than if the money was in the bank because of the risk involved and then capital gain is on top of that. if it happens.”

Communication between board members was crucial.

“Regular contact by email is easy to do,” he said.

“Some of the partners will not be part of the day-to-day running of the farm, or understand somatic cell counts or grass covers, but by telling them about it you are involving them in the business and people like to be involved.”

Equity partnerships were a valid way to progress through the industry and recently, with votes being allocated on a per person basis rather than a per share basis, they were allowing young people and those with lower amounts of capital to become involved in dairying.

“Investors need skills and talent more than they do money,” he said.

“They have the money but they don’t know how to run a dairy farm. Don’t focus on how much cash you can offer but what skills and knowledge you have.”

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