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A gem of an idea

William Waterfield from The Farm Consultancy Group reveals how to get diversification projects off to a flying start

Diversification should help farmers and landowners build more resilient businesses. Too often the reverse is true and the resources committed to the new venture result in the core farming business falling behind. Avoiding this pitfall requires a comprehensive understanding of both the current business and the proposed venture; after all, planning is cheap when compared to bricks and mortar. When done well, diversification should not only reduce the exposure to a narrow range of commodity markets but can help secure the business for generations to come.

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The introduction of a younger generation can bring new ideas and skills, learned from time working in other businesses. It may also enable the older generation to develop ideas that lack of time has prevented in the past.

The starting point for many successful diversifications is a gem of an idea. To make this a success the entrepreneur needs to create a detailed SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis of the existing business. This should include not only the hard resources and finances of the existing business, but also the soft factors such as people skills and understanding of markets, as well as a willingness to adapt or adopt new techniques. For many farming businesses, the strengths are in the balance sheet but the weakness is one of poor cash flow and lack of expertise outside the farming environment.

Completing a detailed feasibility study for the new venture is time well spent. Identifying the market and the role of promotion including social media and how to service the venture are key components of any plan. Planning permission, the demands of the food hygiene regulations or the local council are bureaucratic hurdles that frustrate many a new venture, therefore these issues are better addressed at the planning stage. The preparation of detailed budgets, cash flow projections and the funding proposals need to be included in any feasibility study.

Ensuring that the existing farming business continues to perform at optimum level can sometimes be achieved by a contracting arrangement, which enables the farm to continue and the owners energies to be devoted to the new venture.

Broadly, diversification can be categorised by its location on or off-farm and whether it is a service or a product-related business. Diversifying the current farming system by marketing a small proportion of the existing products directly to the consumer can add substantial income. The conversion to organic farming has provided the opportunity for adding value to an existing product or in some cases the introduction of whole new enterprises.

The conversion of old buildings to enable the introduction of a specialist contract rearing livestock enterprise has proved a popular option for some dairy farms. The level of investment can be quite low and a regular income achieved.

Off-farm investment that utilises the farms balance sheet to borrow money for investment in property has proved a simple way for many farming businesses to reduce the risks associated with being exposed to a single sector. The use of agents or other professionals to manage these off-farm investments can avoid the need for the owner to develop new skills or devote time to the enterprise.

Successful diversification comes in all shapes and sizes and depends on the needs of the owner. A level of return that reflects the investment is critical. The business may need substantial scale to generate a worthwhile return. Identifying a niche in a local market that requires little investment but provides a consistent level of return may be worthwhile.

Contact William by calling 01264 367900.