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Diversification on your farm: A guide to setting up and getting started

Diversification can be a daunting prospect and will not be the saviour for every farm.

 

For those farmers who are considering taking a leap, Guy Banham, head of business consultancy at Berrys, discusses the key areas when starting out.

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Diversification on your farm: A guide to setting up and getting started

With Brexit fast approaching, farmers are being urged to take a long hard look at their businesses to ensure they are in peak health to cope with a future where farm subsidies and grants may not be quite so forthcoming.

 

To make the best use of their assets some farmers may have to step beyond the comfortable realms of traditional commodity farming and venture into something new.

 

It is important to realise there are many issues to consider before bringing a new enterprise on to the farm.

 

Strong core

 

Diversification is not a sticking plaster to slap on an inefficient or failing farm business. Farm diversification is not guaranteed to boost your income and you need to have a strong core business that your new enterprise can work alongside.

 

Your financial accounts will show how your current enterprises are doing and how a new enterprise will affect your cash flow and turnover.


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Spread risk portfolio

 

Having a range of different enterprises on-farm will help spread the financial risk of your overall business and may help you juggle your cash when income from say, cereals, is low. This may be particularly important if the current support payments disappear or become more targeted, perhaps toward environmental improvements.

 

Whether or not you choose to diversify and whether you choose to develop an agricultural product or something outside of agriculture will depend on the finance you have available to you to invest in the new enterprise.

 

Many farmers, particularly owner occupiers have access to a range of assets which can be used as collateral against a bank loan to finance a new enterprise or can be sold to release capital for the investment.

 

In this instance you may wish to carry out a partial budget seeing how, for example, selling several acres of land could provide the income for the purchase of some commercial office premises which would provide an income throughout the year and a higher return on capital that the farm land offers.

Diversification vs new enterprise

 

Before deciding if diversification is the way to go you should consider why you want to diversify and look at the impact any new enterprise will have on your existing farm activities and staffing and how it will affect your cashflow.

 

You also need to consider who is going to run it, who has the skills and qualifications and dedication and enthusiasm, how it will be marketed and if there are any legal requirements or tax or insurance implications.

 

Whether you stick with an agricultural related enterprise will depend much on who is going to run it.

 

An enterprise is much more likely to succeed if it is being managed by someone who is enthusiastic and interested. For some farmers the best option will be to stick within their comfort zone of agriculture and look for a new crop or product to grow or an alternative livestock enterprise.

 

Generally, diversifying into alternative agricultural activities will make use of existing farm facilities and not require planning permission, although this must be checked with your local authority.

Planning requirements

 

You will need planning consent for any new development on the farm, but if you decide to make use of a redundant farm building you may not need full planning permission as you may be able to convert them under Permitted Development Rights.

 

Planning policy is generally in favour of rural development as local authorities are encouraged to support diversification on farms as being vital to the continued viability of farms. You can check with your local authority or adviser if your intended project is supported and planning permission application likely to be successful.

 

Some tourist enterprises won’t need planning permission. For example, if you were considering using a field as a caravan site you will not need planning permission for a site of up to five touring caravans on agricultural land and you can also run a temporary site to accommodate any number of caravans for up to 28 days without planning permission.

 

To operate a five-touring caravan site, you will need to be certified with the Caravan Club or the Camping and Caravan Club.

 

If you decide you want to accommodate more than five caravans you will need to obtain planning permission not just for the caravans, but for the toilets, showers, foul drainage facilities, laundry and hard standing areas/pitches.

 

To avoid problems with connecting to services you are best to choose a site not too far away from electricity, water and foul drainage.

 

Most councils will look favourably on applications for touring caravan sites as they bring tourism to the area and boost the local economy. In addition to planning permission, a site of five or more touring caravans will need a site licence to operate from the council which you can get after planning permission has been granted.

 

If your project does need planning permission you need to gain support from local people if this is possible, so our advice is always to communicate your plans well ahead of making an application and make sure you have all the necessary surveys, reports and paperwork in order.

Tax implications

 

Taking a farm building out of a farming operation could increase your tax liability in the process.

When diversifying you have to consider whether or not you will retain the Inheritance Tax Relief on your asset so you need to weigh up the options before you proceed. You could gift the asset to the next generation before achieving planning therefore removing it from your estate.

 

A tenant farmer will need to get approval from their landlord to diversify as this may impact on Inheritance Tax Relief. A landlord may wish to use a Farm Business Tenancy which will allow a tenant to diversify while the landlord gets a better return through increased rent and protection against Inheritance Tax, although there are pitfalls for the unwary.

 

It is always best to seek professional advice at the idea stage rather than once you have made significant investment and you can no longer be flexible.

Business plan

As with any new enterprise you should prepare a business plan for your diversification project. This business plan will be essential for any application for finance and will provide a focus and highlight potential pitfalls. It is vital you research your ideas fully, establish you have a market and plan ahead as you are likely to be entering a new world of competition and risk as well as opportunity. The business plan should include:

 

The introduction

 

  • Cover sheet to include name, address and all other contact details for the business
  • Statement of purpose which captures the essence of proposed business
  • Table of content

The business

 

  • A description of the business – legal identity (sole proprietorship, partnership, co-operative, etc), what are your products and services, what are your markets and who are your customers?
  • Location – where is it, why there, important attributes such as acreage, soil and water resources, rental or ownership, terms of lease, parking, what is your catchment area?
  • Management – who does what and why, your management training, skills and experience
  • Personnel – Current and future number of employees, their qualifications, rates of pay, training, benefits and how they are managed
  • Insurance – what have you got in place and future needs

Who will be your primary customers?

 

  • Customer demographics – age, sex, income, education, lifestyle, where they live
  • What is your major competitor and what is their location, strengths, weaknesses as well as your comparative strength and weaknesses
  • What are the trends in the market based on data available on your product and customer?
  • Predicted sales of your product in quantity over the five years
  • Services needed for marketing – storage, packing, digital design, advertising, transportation

Finances


  • What is your source of fund(s) and how and when will they be used?
  • Profit and loss statements – last three years or projected for next two years if start-up
  • Balance sheets – what are your assets and liabilities and what are the projections for the next three years?
  • Cashflow statement – income and outcome statement on a monthly basis for the last three years
  • List of collateral, debts, and financial agreements made with others
  • Capital of current equipment, including dates purchased and the amount
  • Capital of equipment needed – estimated cost and time line
  • Historical data – last three years of business tax returns

Supporting documentation

 

  • A mission statement
  • Personal financial statement
  • Letters of reference
  • Credit reports
  • Product or service literature
  • Leases, contracts, letters of intent
  • Anything additional which can strengthen your plan such as photographs, equipment,
  • product, branding, evidence of market research

 

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