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This month we are focusing on rural diversification and how landowners can explore alternative routes of income for their businesses. We asked James Thompson, a Senior Surveyor based at our Doncaster office, who is also the firm’s regional agent for the Agricultural Mortgage Corporation (AMC), his views on rural diversification and how anyone considering trying something new can easily look at their funding options.

Diversification does not always mean farm shops or glamping pods. Diversification can still be agricultural; I would go as far to say that diversification is such a broad term that it could be interpreted as any change being made within the business.

Sometimes a business will continue to provide a service purely because of the amount of time, effort, or money that has been invested, regardless of whether it is profitable or not. This economic behaviour is known as the ‘Sunk Cost Fallacy’ and can be a hugely limiting factor to a business which needs to consider his long-term future prospects. Diversification allows rural businesses to break that pattern and provide a profitable enterprise as well as being able to spread any risk across a business.

Agricultural costs have risen by 25% in the last year and may continue to do so, we also have the looming net reduction in subsidy income as Countryside stewardship or Environmental Land Management Schemes (ELMS) income will not make up for the decline of the Basic Payment Scheme (BPS).

When rural businesses have been faced with high inflation and times of financial uncertainty, they have simply decided to ‘batten down the hatches’ and wait until things change but unfortunately this is not an option, and they must make a conscious effort to ensure that their businesses are sustainable for future generations.

One possible answer to this real threat to profitability and risk is to consider diversification, however, this can throw up financial issues for farmers and landowners. Diversification can open new sources of revenue and offer business opportunities to younger members of the family, however, before making any changes it is important to consider all your financial funding options including any tax implications a change to the business may bring.

A few points to consider when looking into diversification projects:

Put people first - carefully assess what impact the new business will have on existing employees and whether some of them have the capacity and skills to work in the new enterprise. It is likely that the farmer’s own attention will be diverted away from the traditional business, meaning they may not be able to dedicate as much time to the core business as they have done in the past. If new employees are required, consider how will these be found and managed and if there’s a particular skill set needed to make the enterprise a success.

Know your numbers - It is essential to have the gross margins and profit and loss accounts in order and up to date alongside a sound budgeting system. From an organised set of budgets, it is then much easier to extract the relevant information to base informed decisions upon. It is also much easier to extract the relevant criteria that lenders are looking for when you require funding for the proposal. For example, Earnings of the business Before any Interest, Tax, Depreciation and Amortization (loans) (EBITDA)which shows the current operating profit of the whole business.

Don’t let rising interest rates put you off - we have previously enjoyed a period of relatively low interest rates which are now starting to rise; however, this shouldn’t put off a good investment with a thorough set of projections and cash flows. There are products out there that can provide flexibility. However, there is a trade-off in borrowing between security and flexibility. Taking a fixed rate gives certainty to the annual cost, but if for any reason the unforeseen arises and the debt must be reduced or repaid then penalties can be faced. There are pros and cons in taking a mixed bag of arrangements such as having a proportion of debt fixed, possibly for different periods and maintaining a proportion on a variable rate. This requires more investment of time and thought at the outset but can spread the risks and pay dividends.

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