Guide to Investment Capital and Equity Financing for Purebred Beef Cattle Producers

Traditionally, many producers source capital for their purebred operations through personal equity, their family’s personal equity, or through bank debt. As part of the CBBC Purebred Risk Assessment (PBRA) project we explored the potential of attracting investment capital investors into purebred operations.

An equity capital investor usually takes a lower priority position (behind the bank) and therefore looks for a higher rate of return on their investment, compared to a standard interest rate.

CBBC explored what an investment fund is looking for in prospect investments, and to see what challenges they might see in investing in the agricultural sector:

  • Likely need an investment size of at least $2 million
  • Purebred producer’s management abilities and overall business plan extremely important
  • Producer must show a strong rate of return (versus banks seeking repayment ability)
    • (Funds seek: Profitability/Cost of Production)
  • Producer must address how the equity investor is typically the last person paid
  • Producer must provide an exit strategy for the equity investor, when they want to exit
  • Overall we found difficulty generating interest in cattle operations, equity investment funds tend to focus more on land

As most purebred cattle producers seeking external investment capital will likely require less than $2 million, they may alternatively seek an individual investor—potentially with varied reasons for investing in a purebred operation, including: personal family attachment to agriculture, desire to diversify their investment portfolio or an interest to invest in order to become actively involved, on a part-time basis, in the operation.

Seeking equity financing


If you are considering an equity investor in your purebred cattle operation, the following issues are essential to consider. The outcome of accepting investment capital can significantly impact the success of the venture and the wealth potential of the company founders and management team.

Carefully consider each of the following before approaching any investment capital source:

Prepare to answer these questions
  • What is the capital needed for?
  • How much money do you want?
  • How long do you want it before it is to be all paid back?
  • How will you pay it back?

Consider the implications of the size of the investment
  • Small cap funds typically do not invest if the investment is below $2 million
  • Large cap funds typically seek out investments greater than $10 million
  • Both of the above, look for growth in the business

Understand your financial strengths and weaknesses
Complete a self assessment tool to understand your current net worth, profitability and debt serviceability - before you meet with a potential investor. Investors’ initial assessment of your business as an investment prospect will be based on these numbers. The investor will ask questions regarding these figures, therefore being prepared for this will be helpful to build your case. The self assessment tool is based on the Agricultural Business Analyzer (ABA) program created by Ron Lyons from Alberta Agriculture and Rural Development.

Visit the Financial Self Assessment Tool page of this website

Note: At the bottom of the Assessment page it indicates whether you, as a potential ‘borrower’ are in the range of, “Good”, “Caution” or “Not Good”. For more details on farm financial ratios, and how to interpret your assessment results, see the following link: http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/econ2198

Business Planning and Goal Setting
  • Understand that the larger amount of debt relative to the value of your assets the higher risk you are to an investor. Thus more detailed projection preparations are needed
  • Have you developed a plan?
  • What is your farm history? Tell them your story
  • What are the long-term goals? Growth? Succession? Diversification?
  • Who is running the farm? Outline your management team and skill set.
  • How does this investment fit into the long-term plan of the operation?
  • What is your ability to pay the equity investor?
  • Do you have strategic partnerships? Vet’s, other producer’s/established sales)
  • Competitive Advantages? Cheap pasture? Residual feed? etc.

Business Planning Template and Example for Agricultural Producers:
http://www.farmcentre.com/File.aspx?id=b44db8ff-c6e2-43ab-8173-33c28e51619c
Goal Setting for Farm and Ranch Families:
http://osuextra.okstate.edu/pdfs/F-244web.pdf

Management abilities
This area tends to be subjective and based on meetings between the equity investor and the person seeking investment funds. Typically discussion will consider the producer’s individual business track record and their plan for the future. This also includes:
  • Who does the business use for advisors? Those individuals using outside advisors are likely lower risk
  • Producer’s ability to make the venture look viable
  • Opportunity to invest in the livestock production enterprise

Complete a projected cash flow
Show your ability to pay an investor their expected return.

Please refer to the following link to aid you in completing your cash flow.

ABA: http://www1.agric.gov.ab.ca/$Department/softdown.nsf/main?openform&type=ABA&page=information#guide

Also, specifically address how the equity holder tends to be the last one paid.

Complete a summary of net worth
Refer to self assessment tool and see that: Net Worth = Total Assets – Total Liabilities

Asset base value to equity
What position will the fund have? (who is in front of them from a security perspective)

Understand business risks and risk solutions (market hedging, crop planning etc.)
What is your business plan in a worst case scenario?

Visit these links for informational on risk and risk management:
http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/bmi9815

http://www.farmcentre.com/Resources/Detail.aspx?id=d39aefc7-0cd9-4e32-83e6-cd630d2a13e6

Financial records
At minimum, have financial statements/tax records for the last three years readily available.

Rate of return
Typically, equity investors seek investments with an annual rate of return of 25 to 30 per cent. This is in part due to the security position of the investor relative to financial institutions. Also, typically those seeking outside equity investment are unable to secure traditional debt financing which indicates a higher level of risk.

The current financial market has some investors seeking higher rates of return than the above range while other investors are targeting 10 to 15 per cent per year if the risk profile is lower than their current investments.

Possible options for structuring the investment:
  • Guaranteed annual rate of return plus a share of the annual profit
  • Guaranteed annual rate of return plus future capital appreciation

Exit strategy
When will the investor want to exit? Some investors will guarantee a minimum number of years with an annual renewal option. Other investors give no time guarantee and will seek to sell to another investor if they want to exit or alternatively will force a sale of assets.

How will the investor be able to get their money out of the investment?
Options are:
  • Payment out of cash flow
  • Sale of assets
  • Sale to another investor
  • Management obtain debt financing to pay out the investor

What does the business have in place to ensure they will be able to provide the required cash to pay out the investor? Possible options which become covenants to the deal:
  • Business provides a guarantee on the debt to equity ratio they will maintain to ensure they can borrow the money if necessary to pay-out the equity holder
  • Business manager must seek approval from investor on capital investment above a certain threshold

For further information on investment capital and equity financing, visit:

http://www.lynheath.co.uk/pdf/BSUWhatdoinvestorslookfor-summary.pdf
http://www.agmrc.org/business_development/starting_a_business/raising_money/equity_financing.cfm