A Guide for Assessing Agricultural Venturesas a blueprint as a producer implements his or her goals...

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A Guide for Assessing Agricultural Ventures UNP-2034 TUANR-1311-02 www.aces.edu www.tuskegee.edu/extension ARCHIVE

Transcript of A Guide for Assessing Agricultural Venturesas a blueprint as a producer implements his or her goals...

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A Guide for Assessing

Agricultural Ventures

UNP-2034 TUANR-1311-02 www.aces.edu www.tuskegee.edu/extension

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AcknowledgmentsThe constructive comments, suggestions and contributions by internal and external reviewers are acknowledged with great appreciation. Special appreciation is extended to Brenda Tuck, executive director of the Marengo County Economic Development Authority, Don Wambles, director of the Alabama Farmers Market Authority with the Alabama Department of Agriculture and Industries, and Karnita Golston-Garner, Extension environmental specialist with the Alabama Cooperative Extension System. Their meticulous review of this Guide greatly enhanced its quality and overall exposition.

This publication is a joint product of the Alabama Cooperative Extension System and the Tuskegee University Cooperative Extension through the efforts of a special ad hoc taskforce with members listed below.

Taskforce chair: Duncan M. Chembezi, PhD, Professor and Director,

Small Farms Research Center, Alabama A&M University;

Taskforce MeMbers: Karen W. Craig, Information and Technology

Director, College of Agriculture, Environment and Nutrition Sciences, Tuskegee University;

Kevin H. Crenshaw, JD, Attorney and Consultant, Alabama Cooperative Extension System;

JaMarkus Crowell, Program Assistant, Small Farms Research Center, Alabama A&M University;

Kathryn B. Friday, County Extension Coordinator, Alabama Cooperative Extension System;

Marcus L. Garner, Urban Regional Extension Agent, Alabama Cooperative Extension System;

William H. Hardin, Economist, Alabama Cooperative Extension System;

Alice Paris, Economic Development Specialist, Tuskegee University Cooperative Extension;

Michael D. Reeves, Regional Extension Agent, Alabama Cooperative Extension System; and

Nii Tackie, PHD, Professor and Economic Development Specialist, Tuskegee University Cooperative ExtensionARCHIVE

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AlAbAmA A&m And Auburn universities

in pArtnership with tuskegee university

A Guide for AssessinG AGriculturAl Ventures

What are Agricultural Ventures?A venture is a risky undertaking involving uncertain outcomes. It is a business enterprise or speculation in which something is risked in the hopeof profit. Thus, agricultural ventures refer to agricultural-related enterprises or businesses that have uncertain outcomes. Typical examples include ventures involving innovations, niche marketing, or ventures that add value to the product, i.e., value-added agricultural ventures such as biofuel enterprises that transform raw products into fuels like biodiesel and biogas. Ventures involving value-added agriculture are drastically transforming production agriculture and rural America.

By definition, value-added agriculture entails capturing or creating value. Adding value is the process by which a producer captures a larger portion of the existing value or creates additional value in a product. Regardless of whether you capture value or create value, you get paid for providing value. If your agricultural business venture does not provide value to the system, there is no reason to expect a return. So, the process of creating a successful business involves the search for providing value. Providing value can be in the form of marketing a unique product, filling a market niche, simplifying the supply chain, providing a service, lowering costs, or many other ways. The more value you provide the more return you can extract from the marketplace.

The commercial potential of value-added agricultural ventures and innovations is not obvious, often is not realized, and may frequently be over-estimated (Coltrain, Barton and Borland, 2000; and Gray, Boehlje, Amanor-Boadu and Fulton, 2004).

A systemized process for venture assessment and planning is needed to

structure the often haphazard development associated with such ventures if they are to be successful. An important question that aspiring producers or entrepreneurs must ask themselves early in the venture planning process is whether they should write a formal business plan. A business plan and a strategic plan are always good ideas for beginning a new business. Your local community college, economic development office or Cooperative Extension system, may have a small business center or small farm center to help you with these plans on a one-on-one confidential basis, and free of charge.

There are a number of reasons to develop a business plan. First, a business plan provides direction by encouraging a producer to evaluate where he or she wants to take the venture and define what they want out of it. Second, a business plan provides structure to a producer’s thinking by making sure he or she has considered the most important determinants of success. Third, a business plan may help a producer to think about the future. For instance, a business plan can serve as a blueprint as a producer implements his or her goals and objectives, or faces adversity. Finally, a business plan helps to communicate the essentials of the business venture, not

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common. Across much of the South and Midwest, the investment opportunities have ranged from meat packing facilities to fruits and vegetables to poultry and livestock production to egg-laying facilities to ammonia fertilizer production. Deciding whether to participate in these investment opportunities has become an important decision for most farmers and ranchers. The points listed below can help you make the decision for your situation:

1. How much can you afford to lose?• Don’t invest more than you can afford to

lose.• Determine the amount the impact and the

loss would have on your farm business.• Never use an investment to try to make

up for a financial shortage in your farm business.

• Set aside a certain amount of funds each year as “risk funds” to be invested in outside business ventures.

• If these “risk funds” succeed, the rewards are like “found money” that can be invested in the farm business or reinvested in an outside business venture.

2. Can you estimate the growth of the business venture?• Evaluate the potential for business

success that comes in the form of a presentation at a meeting or workshop.

• Take notes and write down questions about the business investment

• Seek a telephone number that is related to the venture and call to ask questions for more insight.

• Attend another meeting that can improve your knowledge and understanding of the business and the investment.

3. Should you invest in an outside business or your farm business?• Evaluate whether your finances will

be greater by investing in an outside business venture rather than investing in your own business.

• Evaluate the needs of your farm business before considering an outside investment.

4. Will the investment impact your farm business?• The investment may impact your farm

business by creating new markets or better markets for the products from your farm.

only to bankers or financers, but also to current and potential employees, suppliers, and customers. Thus, deciding whether to participate in an investment opportunity requires careful thinking and planning.

The Guide for Assessing Agricultural Ventures is designed for entrepreneurs, value-added agricultural producers, and small business owners who are interested in starting a small agricultural business or desire to make changes to their business to make it more profitable. This publication will help the reader work through the challenges and opportunities associated with new business development.

Additional research-based information on assessing agricultural ventures, new or alternative enterprises, is available from the Alabama Cooperative Extension System, the Tuskegee University Cooperative Extension, and the Small Farms Research Center at Alabama A&M University.

Should I invest in agricultural start-up business ventures?For many years, agricultural entrepreneurs have had the opportunity to invest in a variety of agriculturally-based business start-up ventures. Many of these have focused on business ventures just past the farm gate such as the processing of fruits and vegetables, field crops and livestock. Some of these ventures have focused on the production input side of agriculture.

In the Midwest, for example, the most common investment opportunities have been biofuel businesses such as ethanol and biodiesel. In the South, businesses involving fruits and vegetables are

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Guide for Assessing Agricultural Ventures 3

1. Investigation and Planning• Has the business concept been

observed and fully planned?• Has a detailed business plan been

prepared?

2. Leadership• Are the project leaders capable of

creating a successful business?• Do they have the skills necessary to

grow the business?

3. Economic and Business• Will the business succeed?• Are there budgets of per unit costs

and revenues?• Do these budgets use realistic

assumptions and project adequate profit margins?

• Are risk mitigation programs in place to provide protection from an unexpected incident?

4. Management• Is management capable of

successfully operating the business?• Will the leaders search for the most

qualified candidate and pay the person the wage needed to attract him/her to this business?

• Do the managers have experience starting and running a business?

5. Markets/Industry• Will people or companies buy the

product?• Have the industries and markets

been analyzed relative to the opportunities for this business venture?

• Are contracts in place with buyers to purchase the product?• Are contracts in place with sellers

of raw materials, ingredients, and other inputs?

• Have potential competitors been identified?

• Can the business venture beat the competition?

6. Facility/Technology• Will the process work?• Are all permits in place and

regulations met?• Will the product meet market

requirements?

• Investing in outside business ventures is a way of having more than one source of income, while continuing to use your labor and management on your primary business.

5. What is the business risk or reward profile?• All start-up business ventures have the

potential for rewards but hold the risk of failure.

• Evaluate the risks and returns of the venture; they play an important role in your investment decision.

6. Does the proposed business model fit your needs?• Is the business model designed to

provide an income into the future?• Such a model is often used for business

ventures past the farm gate such as commodity processing. Good examples in recent times include corn ethanol.

• The business model is designed to build the business as quickly as possible by investing the profits back into the business.

Assessing Agricultural Investment OpportunitiesWhen considering an investment in an agricultural processing business, focus your thoughts on the following six areas. These are some of the major topics to investigate when considering a business investment. This should improve your odds of making a wise investment decision.

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7. Financial• Are there funds in place for start-up

and operations?• Are there sufficient funds to cover an

unexpected industry downturn?• Is there sufficient equity planned?• Are lenders in place to provide

sufficient debt financing?• Are the lending terms reasonable?• Do the financial projections appear

reasonable?• Do the projections show adequate

debt repayment ability?• Are profitability and cash flow

projected under various price and production levels (sensitivity analysis)?

Legitimacy of Agricultural Ventures and Avoiding Investment FraudIn today’s complex world, there are many agricultural investment opportunities. Some hold great promise of financial return, while others do not. No matter how you choose to invest your hard-earned money, there will always be a degree of risk involved. Usually, the greater the “promise” of return the riskier the investment. Often, the investment that sounds like a sure winner is the invention of a con artist and should be avoided altogether. To invest wisely and avoid investment scams, research each investment opportunity thoroughly and ask questions. Get the facts before you invest, and only invest money you can afford to lose. You can avoid investment scams by asking questions and getting clear and simple answers to your questions. The North American Securities Administrators Association (NASAA), the Securities Exchange Commission (SEC) and other leading agricultural investment experts recommend the following precautions:

1. Contact your state or provincial securities regulator to see if the investment vehicle and the person selling it are registered. Many investment scams involve unregistered securities. So you should always find out whether the company has registered its securities with the SEC or your state securities regulators.

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2. Contact the Better Business Bureau to determine the legitimacy of the company; and to see if any complaints have been filed against the venture’s promoters or principals.

3. Ask for written information on the investment product and the business venture. Ask for a list of names and addresses of others who have invested in the business venture. Ask for the location of the business venture selling the investment and what kind of business it conducts. How long has the business been in operation? Such information, including financial data on the agricultural venture and the risks involved in the investment, is usually contained in a prospectus.

4. Don’t take everything you hear or read at face value. Ask questions if you don’t understand, and do your own sleuthing. Independently verify the terms of any business investment that you intend to make; and do not invest in anything unless you understand the deal.

5. Be wary of agricultural ventures that offer high returns at little or no risk. Never invest in an opportunity or venture that promises “guaranteed” or “risk-free” returns. That is, beware of promises to make fast profits. If the “venture opportunity” appears too good to be true, it probably is.

6. Don’t assume a business is legitimate based on “appearance” of the website. Research the parties involved and the nature of the venture; and be cautious when dealing with individuals outside of your own country.

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Guide for Assessing Agricultural Ventures 5

2. Sole Proprietorships: Simplest form of business structure and relatively easy and inexpensive to start and maintain by a single owner. The owner need not file with the secretary of state to create the business. Sole proprietors have unlimited personal liability. There is no legal distinction between the owner and the business. This means that creditors of the business and individuals who have other claims against the owner can reach both the owner’s business and personal assets.

3. Subchapter C Corporation (C Corporation): A Subchapter C Corporation is a legal entity that is separate and distinct from its owners. The C Corporation can hold bank accounts, own property, conduct business and borrow money. The C Corporation can sell shares of stock to shareholders who become the owners of the company, considered a taxpaying entity and must pay taxes on its profits. Owners of a C Corporation are protected from personal liability for the business’ debts and legal liabilities. C Corporations pay corporate income taxes, and their owners pay personal income taxes on any compensation they draw from the organization.

In fact, the name “C Corporation” denotes that these organizations pay taxes under Subchapter C of the Internal Revenue Service code.

4. Subchapter S Corporations (S corporation): A Sub-chapter S Corporation is a corporation whose profits and losses are taxed to its owners on their individual income tax returns instead of being taxed as a corporation. Sub-chapter S status must be elected by the corporation after it is chartered. Sub-chapter S status allows a corporation the limited-liability benefits of a corporation with the tax benefits of taxation at the personal tax rate. They are corporations that decide to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes.

Finally, the SEC has spelled out all the questions you will need to ask in its “Ask Questions” publication. When you ask these questions, write down the answers you received and what you decided to do. If something goes wrong, your notes can help to establish what was said. Let your broker or investment adviser know you’re taking notes. They’ll know you’re a serious investor and may tell you more or give up trying to scam you. The SEC has developed a form for taking notes. You can get this and other useful publications by visiting the Investor Information section of the SEC’s Web site at www.sec.gov/investor or by calling 1-800-SEC-0330.

Legal Considerations of a Business VentureMost business ventures need an organizational structure. The selection of the best organization for any business venture involves an analysis of many practical and legal considerations. Major areas of consideration in determining which type of organization suits a given business venture include the following:

• Cost and formality of organization–start-up cost of the operation

• Ability of owners to protect their personal assets from the claims of the business’s creditors,

• Management and control• Manner in which the owners

participate in profits.

An entrepreneur or owner must also decide on an organizational structure from the following:

1. Limited Liability Companies (LLCs): Separate legal entity, it can obtain a tax identification number; open a bank account, and do business all under its name. LLCs enjoy better tax rates and the opportunity for investors and partners to invest in the company. Taxes are still linked to the owner’s personal taxes if the LLC is operated by a single person, but the owner is no longer liable for debts taken on by the business entity or venture.

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administer it for the advantage of its beneficiaries who hold equitable title to it. The beneficiaries receive certificates of beneficial interest as evidence of their interest in the trust, which is freely transferable. A business trust is considered a corporation for purposes of federal income tax and similarly under various state income tax laws.

Ownership of an organization focuses on two questions. First, who can participate as an owner of the business? Partnerships, C Corporations, S Corporations, Limited-Liability Companies (LLCs), and cooperatives do not restrict the maximum number of shareholders, partners or members. A shareholder or member is always liable for any amount of unpaid subscriptions for stock or interests in the business. The risk of the shareholder or member is limited to its investment in the shares or his or her interest plus and contractual liability (insurance).

Ownership InterestIn a partnership, ownership interests may be transferred subject to the requirements of a partnership agreement. The complete transfer of a partnership interest will result in the termination of one partnership and the creation of a new partnership. In a limited partnership, the addition of a new partner or the transfer of a general partner interest often requires the consent of other partners. In both C Corporation and S Corporation, ownership interests are transferable by assignment unless restricted by the shareholders.

In a cooperative, shares of stock or membership interest are transferable only with the consent of the board of directors.

State Business Structure RestrictionsIn a general partnership, each partner shares equally in management unless otherwise agreed by the partners. In limited partnership, all general partners participate in management and share that responsibility equally unless the partnership agreement states otherwise. Limited partners cannot participate in management or they will lose their limited partner status. LLCs may be managed by members or managed by appointed representatives of members usually designated as a management committee or board of

5. Cooperatives: A cooperative is an autonomous association of persons who voluntarily cooperate for their mutual, social, economic, and cultural benefit. Cooperatives include non-profit community organizations and businesses that are owned and managed by the people who use its services. All members of a cooperative have equal voting rights regardless of their level of involvement or investment.

6. General Partnerships (GP): A general partnership is a business entity that is made up of two or more entities to carry on a trade or business. Each partner contributes money, property, labor, or special skills and each partner shares in the profits and losses from the business. It is arrangement by which partners conducting a business jointly have unlimited liability, meaning their personal assets are liable to the partnership’s obligations. All the partners are personally liable for the partnership debts. The partnership is terminated by agreement of the partners, upon a partner’s death, through bankruptcy, or by court order.

7. Limited Partnerships (LP): Two or more partners are united to conduct a business jointly, and in which one or more of the partners is liable only to the extent of the amount of money that partner has invested. Limited partners do not receive dividends, but enjoy direct access to the flow of income and expenses. Partners do not have any kind of management responsibility in the partnership in which they invest and are not responsible for its debt obligations.

8. Business Trust: This is not a legal entity, but it is used in connection with running a business for the benefit of others. An unincorporated business organization created by a legal document, a declaration of trust, and used in place of a corporation or partnership for the transaction of various kinds of business with limited liability. A business trust is similar to a traditional trust in that its trustees are given legal title to the trust property to

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directors. C corporations and S corporations are managed by a board of directors. Shareholders may participate in management to the extent of voting on issues as a shareholder group and voting for different directors. Cooperatives are governed by a board of directors, too; however, only members of the cooperative are eligible for election to the board of directors.

Other Local Issues and RegulationsMany states have laws that restrict certain organizational structures from owning agricultural land or engaging in various forms of production agriculture. Many states also restrict foreign citizens or entities in their ownership of land or participation in certain agricultural industries. A proposed agricultural business that has foreign entity involvement or investment should review state laws restrictions prior to proceeding.

Before you make the initial investmentin the desired agricultural venture, you will need to check with your local planning board on zoning or other land use restrictions or property tax issues. Depending on the activities you plan, you may need to check with the local health department. ADA accessibility is sometimes required for entrances, exits, and restroom facilities. If you have not already incorporated your business, you may want to check with an attorney and/ or a CPA on business incorporation and estate planning issues. You can find an attorney who specializes in businessand estate planning through the local or state Bar association. Consideration needs to be given to how your venture,or entity, will be operated. Often, through lack of attention, sole proprietorshipis automatically chosen. However, alternative entities exist, including partnerships, limited-liability companies, and corporations such as Subchapters C and S, with a variety of trust arrangements. Income and property tax consequences vary significantly, depending on the legal entity chosen. Liability to third parties is also an important consideration in structuring your business, as is ease of operation within a chosen structure. Your local economic

development office may have information of other local development activities or future initiatives that might affect what you are planning either positively or negatively.

Concluding RemarksInnovations and new ventures have been part of the food production and distribution industry for decades if not centuries (Gray, Boehlje, Amanor-Boadu and Fulton, 2004). In recent times, new ventures under the banner of value-added agriculture have become the mantra for producers, politicians, and agri-businesses that are searching for better margins and higher incomes than provided by traditional commodity production and distribution. However, as previously noted the commercial potential of value-added ventures and innovations is at times not so obvious, often is not realized, and may frequently be overestimated (Coltrain, et al., 2000; and Gray, et al., 2004).

Developing and launching a new agribusiness or business venture requires considerable research and meticulous planning to improve the odds of success (Ehmeke and Boehlje, 2005; Gordon,2002; and Johnson and Holcomb, 2006). Aspiring investors must heed that many investment opportunities are offered by both legitimate sales representatives and con artists. A legitimate investment can offer excellent returns, while a deal with a con artist is guaranteed to result in financial loss. The information in this publication is, by no means, exhaustive. It is hoped that individuals seeking or pursuing new agricultural investment opportunities or transitioning to new agricultural ventures will carefully consider their options and look to other sources of valuable information for guidance. Cooperative Extension, small farms research and outreach centers, and/or small business development centers are some of the sources for this valuable information and guidance for rationale decision making. Your local securities regulator and/or Business Bureau are good sources of information regarding the legitimacy of a business venture. Cooperative Extension has traditionally been a source of some of the latest and unbiased research-based information for

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all types of agricultural production and marketing in the United States. Potential or aspiring investors are strongly advised to check with their local Extension office and other credible sources for additional guidance and advice. References cited in the publication should also serve as a valuable source of information for any agricultural investor or entrepreneur.

ReferencesThis publication benefits and draws from material previously published by the following references. Excerpts from Hofstand (2011) and Hanson (2000) are reproduced here with permission from the authors (Don Hofstand and Mark Hanson).

Coltrain, D., Barton, D., & Boland M. (2000, June). Value added: Opportunities and strategies. Cooperative Extension Service Kansas State University. Retrieved from http://www.agecon.ksu.edu/accc/kcdc/pdf%20Files/VALADD10%202col.pdf

Ehmeke, C., & Boehlje, M. (2005). A methodology and model for assessing entrepreneurial ventures. Agricultural Economics. Retrieved from https://www.agecon.purdue.edu/cab/research/articles/AICCmodel.pdf.

Gray, A., Boehlje, M., Amanor-Boadu, V., and Fulton, J. (2004). Agricultural innovation and new ventures: Assessing the commercial potential. American Journal of Agricultural Economics, 86(5), 1322–1329.

Gordon, K. T. (2013, October). Three rules for niche marketing. Entrepreneur.com Retrieved from www.entrepreneur.com/marketing/marketingcolumnistkimtgordon/article49608.html.

Hanson, M. (2000, January). Starting a value-added agribusiness: The legal perspective. Illinois Institute for Rural Affairs. Retrieved from http://agmarketing.extension.psu.edu/Processing/PDFs/StartingValueAddAgBus.pdf.

Hofstand, D. (2009, December). Assessing agricultural processing investment opportunities. Iowa State University Extension and Outreach. Retrieved from http://www.extension.iastate.edu/agdm/wholefarm/pdf/c5-230.pdf.

Johnson, A., & Holcomb, R. B. (2006, April). Golden rules of new venture creation. Journal of Extension, 44(2). Retrieved from http://www.joe.org/joe/2006april/iw2.php.

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For more information, call your county Extension office. Look in your telephone directory under your county’s name to find the number.

Published by the Alabama Cooperative Extension System (Alabama A&M and Auburn Universities) in cooperation with the U.S. Department of Agriculture. An Equal Opportunity Educator and Employer. New December 2013, UNP-2034

© 2013 by Alabama Cooperative Extension System. All rights reserved.

UNP-2034

TUANR-1311-02

Published by the Tuskegee University Cooperative Extension Program. Tuskegee University offers educational programs and materials without regard to race, color, national origin, religion, sex, age, veteran status or disability. It is also an Equal Opportunity Employer.

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