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Understanding the Money Game

The Finances Behind Your Horse Farm

Editor's note: This article is Part 2 of a two-part lesson on purchasing your own horse farm. See also: Part 1, "So, You Want To Buy A Horse Farm!", describing how to select the right property.

In Part 1, we discussed real estate, what mattered most to you, and performed a basic "break-even" analysis so we could find affordable property you could actually consider. Now, we're going to get into the details of performing a real analysis, writing a business plan, and making your dream actually happen.

What To Know About Loans
When starting a business, you need to educate yourself about the types of available loans before you start looking for real estate. You may qualify for a $500,000 residential mortgage, but that doesn't mean you'll qualify for a commercial loan of the same amount. Commercial lenders insist on much larger down payments — typically 30% or more of the appraised value — not of the asking price. They also want to see that you have enough money left over in your bank account after the down payment to cover several months of payments. They rightly assume you won't be able to generate sufficient cash flow from operations in your first several months of business. And unlike residential mortgages, the term of a commercial note will never be more than 20 years. That will significantly increase your monthly payment for the amount of money you want to borrow compared to a 30 year residential mortgage.

In addition, commercial lenders will want to assess your net worth. This assessment will include all retirement funds, vehicles you own, other property, such as your horse trailer and horses minus all your debts. You may suddenly find that loans on your engagement ring, vehicles, or a piece of art could be affecting your "commercial" credit worthiness. Your past experience running such a business could also be questioned. Writing a credible business plan will help to show that you understand the details, are organized, and have the ability to manage the business and its finances.

Commercial loans employ variable interest rates. You need to know if you can afford not only the current payment, but an increase in that payment over the next couple of years if rates were to go up. Lastly, you may own a home already and have your property taxes and insurance in an escrow account attached to your mortgage. Commercial lenders do not escrow money for taxes and insurance on your behalf as part of servicing your loan. YOU will be responsible for budgeting to put aside cash for taxes, insurance premiums, and any other property-related costs as they become due.

Of course, you can get creative if you're looking at buying non-residential property. There are private investors that may consider investing in your business. The Small Business Administration (SBA) offers special loans to first time borrowers. Programs are also available in both the public and private sector to women and minority owned businesses as well. Utilize resources at your alma mater or local university for more information and networking. You may even find family members willing to invest in you — you won't know until you ask. No matter what avenue you pursue, be sure to fully understand all of the terms of any agreement required so you know your purchasing power when you start looking at properties.

Making it Pay
Once you know and understand what you're buying and its real cost both in personal cash, borrowed monies, or funds invested by others, you need to consider whether the property you're hoping to buy can pay for itself. To make this determination, you'll need to do a preliminary cash flow and break-even analysis. We covered this analysis in part 1, but this time, we're going further and into more detail.

Start by listing the expenses you know you'll have on a monthly basis, such as insurance, taxes, electricity, water, loan payments, and other costs. For any annual or quarterly payments, convert them to monthly payments. For example, an annual insurance premium of $3,600 represents a monthly cost of $300 per month. Then figure out your cost of goods sold (COGS). For a horse farm, this is generally your hay, grain, and shaving's costs per horse on a monthly basis. If you intend to hire teenagers to muck stalls, their wages must also be included. Then assume a number of horses you expect to board; for this example, we'll use the number 10. Now, calculate the total expenses for the month and divide by ten. If your total costs per month are $10,000, then this number divided by ten is $1,000. That means you need to charge $1,000 per horse just to break even — it doesn't even include any money to pay yourself for your labor and management or to grow the business. Is this realistic? With this example, you'll likely need to charge $1,500 per horse when you include labor, repairs, miscellaneous expenses, etc.

Now you must ask yourself the tougher questions: Can the horse owners in the surrounding towns in which you're locating your business afford such board payments? Do your amenities and other "extras" you can provide support such a payment? If not, you need to consider another property that either costs less or is in a higher income district. Possibly adding more stalls will help (assuming you can), but that will take time and you need to pay all of your monthly fixed costs before those stalls are built and filled with paying customers. Plus, as you add stalls, there will be more work and you'll need more help. If you expand, can you realistically expect to attract and keep that many boarders?

Why You Need A Business Plan
Even if you don't have to write a business plan to secure financing, the process of writing one is often an enlightening experience. Consider a business plan to be the backbone of your company. It's a compilation of data that will serve you as a great resource even years after your business is up and running because it includes the details of your planning and you can compare your estimates with your real costs and revenues. You can also use it to "tweak" your plan and perform "what if" analysis, such as evaluating those extra ten stalls to see if you'd make or lose money.

For a horse farm venture, you may not have to write as extensive a business plan as someone starting a software firm. Yet, there are some basic points you want to cover, even if you're only writing it to help organize yourself.

Writing the Plan
First, you should write an Executive Summary. This is usually a two or three page document that outlines your business. You briefly describe the purpose, products, services, market segment, and goals. Sometimes it helps to draft the Executive Summary as an outline and not finish it until your entire business plan is written. You will find the summary itself will evolve as your plan develops and grows with information and ideas.

Next, you explain your products or services. Typically horse farms provide more services than products unless you're breeding and selling offspring. Outline in detail each service, how you'll provide it, and how it will benefit your customer. You don't need to go into detail here about what you'll charge, although you may allude to it if it is an uncommon product or service. Later, your marketing section may mention pricing as a market niche or your financials may explain it better. Don't get bogged down in numbers of your business until you're actually writing the financial part of the plan. It will be easier then when you've fully defined your plan and can focus directly on costs and revenues.

You will need to do some market research about competing farms and include this in your plan. This will better assure you understand the market you're entering and that you know who your competitors are and how you'll position your business to compete with them. You really need to know how you'll gain market share and your potential lender will want to know why you think you can get market share away from existing business already in your geographical area. Don't assume any of this is common sense just because you "know in your head" you can make it work. Lenders see many different types of business plans everyday and know very little about any of them. Write as though you're explaining this to a 12 year old and the more detail, the better. If you've gathered any actual data through surveys, add some charts to show trends and better explain your projections.

Financial Data – The Critical Stuff
Now, we come to the financial data. It's the MOST important part for you to assess the viability of your plan and hopes, and equally so to a potential lender or investor. They want to see numbers that support your belief that you can MAKE MONEY in your business venture. You need to present 5 years of cash flow projections and income statements. You also will need to write some dialog about the numbers you present that explain them in detail to someone who knows nothing about your horse business.

To begin, gather the most up to date and concrete data you can get to support your financials. Document your sources as to where or who you received price quotes from. Justify quantities on your COGS (Cost Of Goods Sold). Explain the why's and why not's of using certain value-added products to increase the price of your services and products. Propose in your plan how you will monitor and cut costs and how you will contract with your vendors for competitive pricing. List and total all of your expected start-up costs and then increase that number by at least 25%. This is realistic "padding" to account for things you've forgotten or could not have foreseen. And believe me, you WILL forget some things and some unplanned problems WILL occur that you haven't accounted for, such as repairing a burst water line, a leaky roof, rotten or insect-eaten fencing, etc. Buildings and facilities deteriorate over time and you need to have contingency room embedded in your funding, costs, and revenues to assure you can cover those repairs when they happen — repeat after me: THINGS WILL BREAK AND WEAR OUT! Keep in mind that this part of the business plan is the heart and soul of your plan and needs to be as thorough as possible.

If you make a good business plan and it passes the "reasonable man (or woman) test, you'll instill comfort not only in your investor(s) or loan officer, but much more importantly, in yourself that you've really done a thorough job of assessing your costs and risks. There's nothing like knowing you've been thorough, are on solid financial ground, and have a business model that's going to work. You'll sleep better at night knowing it and you'll work more confidently and happily pursuing it.

If you've never written a business plan before, or struggle with organizing your thoughts around starting one, there are many ways to proceed. First, there are many books available on how to prepare a business plan. If you prefer, you can contact a professional for help. There are many free and low-cost resources available through the Small Business Administration (SBA), local business schools, and financial institutions that are there to help. If you're currently utilizing your local unemployment office for tools and services, they'll likely have information to help you, too. There are also consulting companies out there who help people start a business and find investors to back them. Whether you look for outside help or attempt to create a business plan on your own, just remember you're giving your dream a real life on paper — make sure it doesn't read like fiction.

Live Your Dream
Obviously, living the dream of having your own horse farm takes business savvy in addition to your equine knowledge. You need to consider the farm, not just as your home, but also as your "office" and source of income — YOU MUST be able to make a return on your investment, or you won't survive. You need to do your homework and consider all of your cost and income expectations before moving forward.

Dreams can become reality, but not without hard work upfront and a brutally honest assessment. As the foregoing explains, gathering the information you need to make realistic financial assessments and decisions is readily available for those who seek it.

Jennifer Goddard has been training horses of various breeds for over 20 years using her natural horsemanship methods. She has also ridden and shown in multiple disciplines and is owner of Levaland Farm, a 30 stall horse farm in Massachusetts. Jennifer has a degree in Finance and Entrepreneurial Studies from Babson College, and is also President of Equine Business Solutions, a business specializing in the starting and running of equine businesses.

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