1. What does a good business plan look like?

It needs to be clear, well-structured and relevant to the project or business. A plan that is used to support a loan application, for example, should have a different focus to one that is targeted at equity.

Once the basic structure is in place, it is important to make sure:

• It is realistic – and can be implemented in the real-world environment, rather than just looking good on paper.

• It is focused – through setting targets, timeframes, action points, etc, all of which can be tracked and/ or measured. Set key performance indicators to assess ongoing performance.

• Define responsibilities – part of which will include how the management team will be structured and the business resourced. Consider qualifications, licences, etc required, plus who is responsible for them.

• Justify assumptions – and challenge yourself on how realistic they are.

• Consider the way you want to communicate the plan – who will read it, how will it be incorporated into other aspects of the business management. Don’t get too lost in technical detail.

• If it’s for the purpose of raising funding, don’t just produce it for “the bank” – and leave it in the bottom drawer once done. It should be referred back to, reviewed, revised as the business develops (and as targets are inevitably missed…).

2. What supporting evidence will I need?

There is no set list to work to, but a good starting point includes:

• Market analysis – what does the current commercial landscape look like at the moment?

• What’s the competitive edge – if it’s a new product or service, how have you identified the gap in the market? If it’s an additional or replacement product, what will compel your target customers to switch from their current provider? Analysis around Target Addressable Markets is useful here as a tool to define the potential opportunity and scale of the business.

• Credentials – management experience and track record.

• Contracts – or other evidence of support from potential customers, to demonstrate some form of commitment (key if looking for long-term funding).

• Supply agreements – from suppliers, where cost of sales are important to manage and preserve margins.

3. What are the options in terms of finance, loans, and remortgaging and where are the main sources of finance?

Establish how the diversification will be structured with the existing business. If it is as a part of an established business, obtaining funding may be easier, but the lender will want to make sure the new enterprise won’t be a drain (in cash terms and management time) on the existing business. Conversely, if it is set up as a separate business, don’t necessarily expect the same terms – it’s not the same business or legal entity, so you shouldn’t expect it to be treated as such.

A start-up or diversification project will often fail to get bank support if the expectations for funding are unrealistic. It can be a challenge for those starting out, often with limited cash to invest, but consider external equity as a way to bridge this. (Yes, it means giving away some of the value in the business, but it could also mean bringing in some additional experience and business management skills.) Alternatively, providing security over other property via a re-mortgage can be a way to 'de-risk' the proposal for a lender, as the value of the cash equity is effectively replaced by the security value.

Engaging the services of a professional advisor – a consultant, accountant, etc is advisable, as they will consider different business structures, efficient ways of investing, effective use of tax reliefs, as well as sources of capital, but the end position will invariably be a compromise between all of the above.

Banks are still the main source of funding, especially for more traditional purposes such as land purchase and investment in fixed assets, but specialist lenders are increasingly active in the market and may offer more bespoke funding structures, particularly for working capital solutions.

4. What are the common pay back periods?

Generally, these are aligned with the useful life of the asset. In the case of property and buildings, up to 25 years is common, and for plant and machinery, typically three to seven years. It’s important to differentiate between finance for fixed assets (ie. buildings, machinery, etc.) and working capital – the lender will want to see how these different aspects of the business will be funded.

5. Will my loan be reviewed at any point?

Generally, banks will hold a formal review at least once a year, but often more frequently where new diversifications are concerned as there is an increased risk with the lending. Lenders will often want to see an independent consultant’s report, eg. to monitor performance against budget, and this may be carried out on a quarterly or even monthly basis. More formal monitoring via loan covenants is another means of assessing how a borrower is performing.

6. What about tenants who are aiming to diversify, how do they raise finance without security?

A conversation with the landlord is a good starting point, especially where there will be an element of capital investment – it could ultimately serve to benefit the landlord as well, so they have an interest in the project. Debt is available, but equity or equity partners need to be a part of the capital structure and this is where a joint venture can play a part – they could be active, where the diversification benefits both parties, or silent, where the equity only, and possibly a limited element of management input is provided.

Lenders will want to see management teams with well-balanced skills and suitable experience. If this involves bringing in specialist operators, do your homework. Who are they? What is their history and track record? Can you obtain references? Are they individuals or part of a professional operator (such as is common in the hospitality sector)? Another option could be a franchise model, where the business benefits from an operating template and central franchise support that often includes a financial package.

7. How should a landowner raise finance for a diversification project if they have little or no trading history?

This can be difficult as track record and experience are important in an overall risk assessment, but areas of weakness can be mitigated by bringing in external parties.

Don’t start off with unrealistic expectations. It might take longer to get to realise your long-term ambitions, but it is better to start out small and build up than risk everything on day one.

Explore different funding options, including grants that may be available in your region or targeted at specific areas or sectors, and be prepared to obtain funding from a number of different sources.

• ashbridgepartners.co.uk

_{Read the articles within Spotlight: Farm Diversification below.}