1. Strategic Business Planning for Commercial Producers Alternative Financial/Organizational Structures: How Should I Organize and Finance My Farm Business?

2. Strategic Business Planning for Commercial Producers Objectives Identify criteria for choosing a financial/organizational structure Describe the options –Legal organization –Business arrangement –Leasing options –Equity –debt

3. Strategic Business Planning for Commercial Producers Financial/Organizational Structure of the Farm Firm: Choices and Options Legal organization Business arrangement Leasing options Equity Debt

4. Strategic Business Planning for Commercial Producers Financial/Organizational Structure Alternatives Legal Organization Business Arrangement Leasing OptionsEquityDebt Sole proprietorship Partnership Corporation Land trust Cooperative Independent Contract Subcontractor Joint venture Franchise Licensing Real estate lease Facility/equi pment Capital/fin- ancial Leveraged Sale- Leasebacks Sources –Initial capital contributions –Retained earnings –Stock –External equity Business Practices –Payout policy –Family transfers Loans –Maturity –Interest rate –Amortization arrangements –Collateral –Conversions Bonds –Convertible –Callable –Zero coupon

5. Strategic Business Planning for Commercial Producers Criteria for Choice Control Returns Risk Maturity/permanence/liquidity

6. Strategic Business Planning for Commercial Producers Organizational Structure and ROE Leverage Ownership 26%50%70% Mix of rent,Mean17.0%20.1%24.9% share, ownStd. Dev.5.3%7.1%10.0% All ownedMean9.9%10.7%12.3% Std. Dev.2.4%3.5%5.5% Rent Mean25.6%30.7%37.9% $110/acreStd. Dev.11.8%15.2%20.0% ShareMean20.3%23.9%28.9% (50/50)Std. Dev.5.8%7.5%9.8%

7. Strategic Business Planning for Commercial Producers Financial Performance of Pork Production Units Financial Structure 0% Debt40% Debt80% Debt Pork Production Business Arrangement Mean Return on Equity (%) Prob- ability of Default Mean Return on Equity (%) Prob- ability of Default Mean Return on Equity (%) Prob- ability of Default Independent farrow to finish 17.00.023.50.0556.50.26 Efficiency and marketing incentive contract 10.40.012.50.0023.10.33 Death loss incentive only finishing contract 11.30.014.00.0027.60.11

8. Strategic Business Planning for Commercial Producers Legal Organization Sole proprietorship Partnership –General –Limited Corporation –Regular –Subchapter S

9. Strategic Business Planning for Commercial Producers Legal Organization Limited liability company Land trust Cooperative

10. Strategic Business Planning for Commercial Producers Business Arrangement Independent producer Contract producer Subcontractor Joint venture Strategic alliance Franchise agreement Licensing

11. Strategic Business Planning for Commercial Producers Contracting Options Marketing agreements Profit/Loss sharing Profit/Loss sharing with provided resources Flat fee plus efficiency bonuses

12. Strategic Business Planning for Commercial Producers What Do End Users Want From Producers? Cost competitiveness Consistent quality Timely delivery Predictability/reliability Flexibility/adaptability A qualified supplier

13. Strategic Business Planning for Commercial Producers What Do Producers Want From End Users? Equitable reward and risk allocation market presence/position Dependability Access to innovation –products –markets –technologies

14. Strategic Business Planning for Commercial Producers Types of Networks: Information networks Marketing networks Production networks

15. 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

16. Strategic Business Planning for Commercial Producers Limitations of Networking Commitment of people Joint responsibility Formal business procedures Loss of markets and suppliers

17. Strategic Business Planning for Commercial Producers Networking Questions: 1.Who to partner with? 2.How do I identify? 3.How to negotiate? 4.How to govern? 5.How to manage? 6.How to finance? 7.How to exit?

18. Strategic Business Planning for Commercial Producers Leasing Options Real Estate Lease –Cash lease –Share lease –Flexible cash base –Shared appreciation lease

19. Strategic Business Planning for Commercial Producers Leasing Options Facility/Equipment operating lease Capital/Financial lease Leveraged lease Leaseback

20. Strategic Business Planning for Commercial Producers Equity Sources –Initial capital contributions –Retained earnings –Valuation Equity –Stock common stock preferred stock –“External” equity/contributions –Warrants or options –Venture capital

21. Strategic Business Planning for Commercial Producers Equity Business Practices –Payout (dividend or withdrawal) policy –Intrafamily transfers –ESOPs and stock options –“Buyout” policies

22. Strategic Business Planning for Commercial Producers Debt Loans –Maturity –Interest rate –Amortization arrangements –Prepayment features –Security/collateral –Conversion of terms

23. Strategic Business Planning for Commercial Producers Debt Loans –Shared appreciation mortgages –Reverse mortgages –Interest rate strips, futures, options, swaps

24. Strategic Business Planning for Commercial Producers Debt Bonds –Convertible bonds –Callable bonds –“Zero coupon” or deep discount bonds

25. Strategic Business Planning for Commercial Producers Conclusions – Financial/Organizational Structure Critical strategic decisions Significant impact on ROE Numerous alternatives Diversification

26. Strategic Business Planning for Commercial Producers