Strategic Business Planning for Commercial Producers
Alternative
Financial/Organizational
Structures: How Should I
Organize and Finance My
Farm Business?
Strategic Business Planning for Commercial Producers
Objectives
• Identify criteria for choosing a
financial/organizational structure
• Describe the options
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–
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–
–
Legal organization
Business arrangement
Leasing options
Equity
debt
Strategic Business Planning for Commercial Producers
Financial/Organizational Structure of the
Farm Firm: Choices and Options
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•
•
•
•
Legal organization
Business arrangement
Leasing options
Equity
Debt
Strategic Business Planning for Commercial Producers
Financial/Organizational Structure Alternatives
Legal
Organization
Business
Arrangement
Leasing
Options
•Sole
proprietorship
•Partnership
•Corporation
•Land trust
•Cooperative
•Independent
•Contract
•Subcontractor
•Joint venture
•Franchise
•Licensing
•Real estate
lease
•Facility/equi
pment
•Capital/financial
•Leveraged
•SaleLeasebacks
Equity
•Sources
–Initial capital
contributions
–Retained
earnings
–Stock
–External
equity
•Business
Practices
–Payout
policy
–Family
transfers
Debt
•Loans
–Maturity
–Interest rate
–Amortization
arrangements
–Collateral
–Conversions
•Bonds
–Convertible
–Callable
–Zero
coupon
Strategic Business Planning for Commercial Producers
Criteria for Choice
•
•
•
•
Control
Returns
Risk
Maturity/permanence/liquidity
Strategic Business Planning for Commercial Producers
Organizational Structure and ROE
Ownership
26%
Leverage
50%
70%
Mix of rent,
Mean
17.0%
20.1%
24.9%
share, own
Std. Dev.
5.3%
7.1%
10.0%
All owned
Mean
9.9%
10.7%
12.3%
Std. Dev.
2.4%
3.5%
5.5%
Rent
Mean
25.6%
30.7%
37.9%
$110/acre
Std. Dev.
11.8%
15.2%
20.0%
Share
Mean
20.3%
23.9%
28.9%
(50/50)
Std. Dev.
5.8%
7.5%
9.8%
Strategic Business Planning for Commercial Producers
Financial Performance of Pork
Production Units Financial Structure
0% Debt
40% Debt
Mean
Return
on
Equity
(%)
Probability of
Default
Independent farrow
to finish
17.0
0.0
23.5
Efficiency and
marketing
incentive contract
10.4
0.0
Death loss
incentive only
11.3
0.0
Pork Production
Business
Arrangement
finishing contract
Mean
ProbReturn on ability of
Equity (%) Default
80% Debt
Mean
Return
on
Equity
(%)
Probability of
Default
0.05
56.5
0.26
12.5
0.00
23.1
0.33
14.0
0.00
27.6
0.11
Strategic Business Planning for Commercial Producers
Legal Organization
• Sole proprietorship
• Partnership
– General
– Limited
• Corporation
– Regular
– Subchapter S
Strategic Business Planning for Commercial Producers
Legal Organization
• Limited liability company
• Land trust
• Cooperative
Strategic Business Planning for Commercial Producers
Business Arrangement
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•
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Independent producer
Contract producer
Subcontractor
Joint venture
Strategic alliance
Franchise agreement
Licensing
Strategic Business Planning for Commercial Producers
Contracting Options
• Marketing agreements
• Profit/Loss sharing
• Profit/Loss sharing with provided
resources
• Flat fee plus efficiency bonuses
Strategic Business Planning for Commercial Producers
What Do End Users Want From
Producers?
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Cost competitiveness
Consistent quality
Timely delivery
Predictability/reliability
Flexibility/adaptability
A qualified supplier
Strategic Business Planning for Commercial Producers
What Do Producers Want From
End Users?
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Equitable reward and risk allocation
market presence/position
Dependability
Access to innovation
– products
– markets
– technologies
Strategic Business Planning for Commercial Producers
Types of Networks:
• Information networks
• Marketing networks
• Production networks
Strategic Business Planning for Commercial Producers
Benefits of Networking
• Capture proven technology
• Capture real economies
• Improve product quality and market
access
• Utilize production, marketing, and
information systems
Strategic Business Planning for Commercial Producers
Limitations of Networking
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Commitment of people
Joint responsibility
Formal business procedures
Loss of markets and suppliers
Strategic Business Planning for Commercial Producers
Networking Questions:
1.
2.
3.
4.
5.
6.
7.
Who to partner with?
How do I identify?
How to negotiate?
How to govern?
How to manage?
How to finance?
How to exit?
Strategic Business Planning for Commercial Producers
Leasing Options
Real Estate Lease
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Cash lease
Share lease
Flexible cash base
Shared appreciation lease
Strategic Business Planning for Commercial Producers
Leasing Options
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Facility/Equipment operating lease
Capital/Financial lease
Leveraged lease
Leaseback
Strategic Business Planning for Commercial Producers
Equity
Sources
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Initial capital contributions
Retained earnings
Valuation Equity
Stock
• common stock
• preferred stock
– “External” equity/contributions
– Warrants or options
– Venture capital
Strategic Business Planning for Commercial Producers
Equity
Business Practices
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Payout (dividend or withdrawal) policy
Intrafamily transfers
ESOPs and stock options
“Buyout” policies
Strategic Business Planning for Commercial Producers
Debt
Loans
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Maturity
Interest rate
Amortization arrangements
Prepayment features
Security/collateral
Conversion of terms
Strategic Business Planning for Commercial Producers
Debt
Loans
– Shared appreciation mortgages
– Reverse mortgages
– Interest rate strips, futures, options, swaps
Strategic Business Planning for Commercial Producers
Debt
Bonds
– Convertible bonds
– Callable bonds
– “Zero coupon” or deep discount bonds
Strategic Business Planning for Commercial Producers
Conclusions – Financial/Organizational
Structure
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•
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Critical strategic decisions
Significant impact on ROE
Numerous alternatives
Diversification
Strategic Business Planning for Commercial Producers
Strategic Business Planning for
Commercial Producers