Thinking of diversifying? DON’T. Or not at least until you have considered the simple principles of how to make it a success.
The countryside is littered with examples of failed diversification enterprises. Rusty organic flour mills and sausage machines lie gathering dust across the countryside, so where did it go so wrong? Often the reason is explained by a simple statistic that was reported by a large firm of agricultural accountants some years ago: the top performing 25% of farms have the least diversification. Why? Well to make a worthwhile profit of say £50,000 making those organic frankfurters is very difficult. However, if you take your eye off the ball managing a 1,000 acre farm, £50,000, will vanish before you can say sausages.
Having said that, the time is right for diversification. Brexit will undoubtedly scare a lot of people off farming, and many others will be scratching their heads thinking how their core farming business can survive the Brexit process. If the answer is it can, they will want to create a business model of what can work – and diversification could be a significant result of that process.
So despite my slightly exaggerated foreboding at the start of this article, don’t think that diversification can’t work at the moment. Brexit may well be the opening you need. The example of others is important, too. I still see a lot of very successful diversification projects. I recently met someone who wants to turn a machinery store into a bunk house for holiday accommodation. That person has the right attitude and the right building in the right place. There are plenty of examples like this of diversification being done really well.
But there are a lot of bad examples, too – and some of them arise from such simple mistakes as running a holiday cottages business when just letting the cottages out would make just as much money with far less hassle. Your business may be one of those which the statistics show is making a lot of income from its farm diversification project. It’s true that these can save an ailing business, but they can also just mask one. So a first principle should be to make an existing business work well rather than let it continue failing.
Think, too, about whether you are prepared for diversification. An estate whose main business is property investment may not be geared up for trading. Letting out an old barn to a local business looking for space may be a much easier option than starting a flour mill, for example. It will bring in an income straight away for an absolutely minimal effort whereas the mill will have to sell an awful lot of flour to make any worthwhile income. Unless you have a family member with an enthusiasm for selling lots of organic flour at every farmers’ market in the area and beyond, it’s probably not a good idea.
Farms, on the other hand, are used to trading, and some of the best examples of diversification I know are farms where one sibling does the farming and another does the sausage making. Both do what they do very well and the overall business is a much bigger success as a result.
But even farms should be wary of passing fashions. Vineyards are all the rage in the South East, but look behind those smart rows of vines, and the reasons for their success become a bit clearer. One large local vineyard – one of the first to make it in the current rush for wine production – designed everything around a visitors centre, so the wine sales were almost secondary to the visitor income. I don’t know of any commercial farmers who have changed over to a vineyard to save their business. Planting vineyards is mainly for those who have already made a lot of money and can afford the lifestyle choice of not having anything to sell for the first few years.
There are other pitfalls in diversification, too. Planning has become easier, but watch out if you are in a national park or Area of Outstanding Natural Beauty. It can be very difficult in these areas to have a fundamental change of use from a rural business to commercial lets. Accounting is often tricky, with some running their diversified business through the main farm without good management accounts. So a shoot can appear to be doing very well, but the accounts do not show the additional costs of the gamekeeper living in a cottage on the farm or using a Land Rover. Running management accounts, preparing them well and working out the real costs to the business are all essential.
I am not arguing diversification is a bad thing: of course not, simply that a little thought and consideration should be given beforehand to avoid the pitfalls and give your project the best chance of success.
5 Simple Steps
1. Identify your current business
The primary business of many estates is investment. Moving into trading business, for example a farm shop or vineyard, is not just a new project but a fundamental change to the business activity. Most farms, by contrast, are trading businesses and can be more flexible about what forms of diversification to consider. Think about what you want to achieve and how it can fit best into your current business.
2. Do what you do well
Make sure the current business is working at 100%. Diversification tends not to fix an already struggling business. It should add to your strengths, but will also exaggerate any existing faults. There’s no point making £50,000 per year on sausages if the pig business is losing the same amount.
3. Choose Wisely
Choose a project which will fit in with the current business and add to it, which can be managed alongside it and plays on your strengths. If your aim is to increase income then take the easy steps first: for example, let out those redundant buildings before you send granny out to run the organic flour mill.
Think about concentrating time and skill, could one family member concentrate on the letting of those redundant pig sties whilst another concentrates on making the existing business run at it’s best? Many of the most successful farms split the management team’s (or family’s) skills and abilities according to individual flair.
Once you are running that exciting new venture, make sure it adds to your quality of life as well as the bottom line. Be honest and have a good set of management accounts separating the various enterprises. Fully cost that worker’s cottage, your management time and those hidden extras so you can see clearly how well the enterprises are doing. If bed and breakfasting is making less than letting out that cottage would, then don’t be afraid to think again.
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