The UK dairy industry is at a crossroads. It has a multi-million pound market on its doorstep, but a marketing structure which is failing to extract value that can return adequate prices to producers.

Until farmer-owned dairy processing is profitable and dominant in the market place there will be no clarity of direction. Meanwhile the number of milk producers will continue to fall from the current 15,000, slowing down only when:

• Assets such as milk quota and dairy livestock have fallen in value to enable a sensible return on capital to be generated
• Good, young people enter the industry with vision and the ability to be competitive
• The two can come together in viable, profitable and effective working partnerships.

Business owners' challenges

For business owners there are a number of key issues which are challenging their future. These include a lack of quality staff often resulting in a high staff turnover. Poor working conditions in old facilities with limited space, lead to inefficient use of time and adds to staff dissatisfaction. In many cases this results in high production costs and therefore low returns for money invested in effort and assets.

Getting out isn't that simple. When the dairy ceases, it is very hard to replace income - particularly as we all expect to enjoy longer lives (which have to be financed). The loss of trading status where farming is stopped altogether also has a knock on effect in reducing Inheritance Tax benefits.

There are real benefits from finding a way to continue trading through partnership, share farming or joint venture.

The challenge is to establish a long term sustainable business providing good return on capital that rewards and retains the best people in the industry. Any such change must generate adequate returns for those working and investing in the business - perhaps through access to a share of surplus profit.

For the farmer who wants to ease out, there is an opportunity to generate a "Farming Pension" to optimise tax benefits from continued trading and to minimise Inheritance Tax liabilities.

A Vision of the Future

For all these reasons, Fresh Start is a very appropriate initiative for the UK dairy industry at this point in time. The establishment and reward of the next generation of people in the industry is essential to deliver the necessary changes on-farm.

Traditional routes into farming have been through education leading to employment on farm, often a start via a small county council tenanted farm leading on to a larger rented unit and/or ownership.

However, if more farms are retained by current owners for Inheritance and Trading tax reasons and the smaller county council farms are either unviable or no longer available, new routes to farming are required. These may include:

• Share farming
• Contract farming
• Management companies
• Equity partnership
• Farm business tenancies

Fresh Start entrants and current business owners considering such options need to be rewarded. These will include a salary to the entrant for working the hours in the business and a Return on Capital (ROC) for all assets involved in the business joint venture such as a rent equivalent on the land, facilities, milk quota and livestock.

Surplus profit generated by a successful business with the correct investment after the above deduction should be shared so that the Fresh Start entrant receives the highest percentage to reflect and incentivise high quality delivery.

Essential points to consider

Capital is a key early consideration. Banks will support new ventures provided they have a credible and achievable business plan. It is also important that the key decision maker has a good track record of delivering good results and there is adequate security for borrowed funds.

It is essential to have a robust, practical and thought-through legal agreement that documents:

• Partners returns and management decision making
• Length of the agreement
• Specific levels of capital committed
• The introduction of additional capital
• Details of the reward calculation and payouts
• "Ground rules" for finishing the agreement

Good management information is required to ensure the original business plan and positive amendments are achieved and if not, to identify quickly the problems to be addressed. The plan needs to be in place at the beginning of the new business. It is also essential that budgets and actuals are monitored monthly and that annual management accounts are produced within 3-4 months of the business year end.

Good communication is important - both between the partners and the professionals advising and servicing the business. In addition to creating the annual business plan (before the trading year starts), this must also include regular management meetings (eg, monthly initially then perhaps quarterly provided monthly management accounts are produced) and a Joint Venture Review - to ensure all participants are happy and motivated.

Sometimes, at key points in the business's development and progression, it is both essential and valuable to employ the services of an experienced consultant or professional advisers - one that both parties respect.

What does success look like?

For the Fresh Starter, there is the real need to generate wealth and capital growth in excess of their "standard" salary. In turn they need to demonstrate ability and delivery that excites a potential joint venture partner. The Fresh Starter needs to focus on cow profit and not cow type, have a positive vision, be confident, and demonstrate respect and maturity.

As for the asset owners, they must not be led by tax decisions to start with, but look for positive cash solutions. They need to ensure the business is viable and be realistic about expectations and rewards for both parties, be sure the people mix is correct and be supportive and focus on growth for both.

Partnership or joint ventures are a serious way forward. They allow knowledge and experience to be passed down and enthusiasm and energy to reinvigorate a business. They provide a sensible exit route for the owner and a viable entrance for a new starter. Planning and preparation are important but the rewards - in both commercial and human terms - can be very real indeed.

Back to Fresh Start and Share to Farm: creating opportunities from change