Business Deal with Neighbor

[Jennifer L.]

My neighbor wants to come in with me on beef and hay. I'm not sure how much time he is willing to put in, so I figure just do a trial plan for a few years on a limited basis and see how it goes. They are good folks, responsible, and I wouldn't entertain this for a lot of people, but they have raised their own meat in the past (pigs) and garden and hunt. They are the kind of people you'd like to encourage in this kind of life of farming and homesteading. He is a full time self employed contractor and mechanic and works pretty hard but has expressed interest in "slowing down" and looking towards some kind of farming part time as he gets closer to retirement.

I think his interest has been sparked by his in-laws, who have made a killing this year on small square bales. I have the equipment for this, but I've been doing round bales the last ten years or so because of the savings on work.

I've got no problems figuring out how to deal with the beef aspect of things (probably his involvement with that would be more limited), but when it comes to selling small square bales, this would be a different enterprise on the farm than I've done in the past.

I would supply the equipment, the standing hay, the barn for storage, and probably do some of the tractor work. He would be responsible for the majority of the labor, and the marketing. So how would you split this income? Should it be 50/50? Should it be 50/50 after twine, fuel and equipment repairs? 60/40, 40/60? My main concern is a large parts bill on a major breakdown. He would be doing this in the evenings after his regular job, so I'm not figuring on doing over 30 acres this way. His farming experience is working on farms when he was a teenager.

Any thoughts?

[o&itw]

I can't answer your question. I would be wary, though, of going in with a neighbor on any kind of business deal. It usually doesn't work well for relatives, and if it goes awry, you might be at odds for a long time. If you were going in on a simple thing, like bying a herd together because neither of you could handle the number of animals, and had already decided how you were going to split them... that would be fine.

I don't want to be negative, but I have seen siblings, that were close, get into these kinds of deals and end up hating each other. On the other hand, if it works it may be a good deal. If you decide to go ahead, you need to draw up some kind of paperwork between you detailing exactly what each persons responsibilities are. Then you must ask yourself, if your neighbor dumps on doing his share, are you going to be able to deal with it without getting angry or puting yourself into a bad economic situation..

[uncle Will in In.]

If you are furnishing the hay, equipment and basicaly making your own hay to be put in your barn, there isn't much left from him except the labor of handling the bales. Making hay in the evening after work won't get the job done unless he has hired help working on it during the day. His share should be an hourly wage to cover him and his help. You could figure that out to be so much per bale.. It could work out, but I wouldn't even consider it.

[JoePa]

Fences make good neighbors - business deals don't -

[ErinP]

Despite the warnings you'll find here, business deals amongst neighbors are very common and have been for hundreds (thousands?) of years.

Yep, they can go bad. They can go bad no matter who you are (or aren't!) in business with.

In my area, the local extension agent will have access to what is a common split for these types of deals. In Nebraska, there are NebGuides for it, even. Yours is a little unusual, but you can probably find a ball-park... Personally, I would think 50/50 is about right, but that's throwing out a completely uneducated guess!



you guys want to sit down and hash out ALL of the possible scenarios you can possibly think of and get your shares, contingency plans, etc. all in writing.
Just make it a friendly thing like, "I tend to lose track of this stuff and I sure don't want to forget what we decided we'd do!"
You might actually have an easier time if you just lease him your equipment in some fashion...

[Ozarks Tom]

Unless it's a strictly 50/50 business deal, with both putting equal assets and labor, it can't work. Somebody, you or him, is going to feel shorted for their contribution and over time build resentments. If he's wanting to do a side job just for the money, I'd offer him an hourly rate with the understanding the hours are set by you. If he's wanting to do this for the beef, let him run a head or two on your place for a % in payment for your time and effort caring for them.

There's an old saying in business: "If two partner agree on everything, one of them isn't needed". It's rare two people are going to agree on everything, somebody has to make the final decisions. If it's clear from the start who's the boss it's a lot easier to get along.

[Jennifer L.]

Everyone has good points, especially about doing business with people that are close to you. I don't have ANY relatives I would even consider this with: They don't know the meaning of work and well, you can see how that would never work out. The one word I would use for my neighbors, though, is honorable. I have no qualms on that part.

I suspect that this would not last long term, as he has never really experienced farming. But when it comes right down to it, what's 30 acres of hay? I don't use all of my hay fields now every year, so I can easily afford to let someone take one on and see what they think of it, even if it just turns out they are doing an E-I-E-I-O. But I don't want to set a precedent on splits if it turns out to be a longer term venture. That and the cost of repairs on equipment are my only real concerns.

[Nate_in_IN]

I would approach this by splitting the harvest rather than the profits.

A 50/50 split of the bales if he provides labor and equipment, 70/30 if you are supplying the equipment.

I would suggest asking for rent to store the hay in your barn, although say the first 4 months are included. That handles the problem of not being able to sell the hay (if that's possible).

Your bales are yours to do with as you wish. If you have more than you can use or want, offer them to him for a set price, below what he is selling for. Then he can take possession of the bales and make whatever profit he can get in markup.

I feel this keeps a better dividing line should anything come up.

Nate

[chester5731]

Easy! Run the other way. You will end up enemies when you are all done.

[edcopp]

You have all of the assets of real value involved, and he has none.

To say that he has no skin in the game would be correct. He has no recent experience making hay. So what is he putting into the pot?

On the other hand: I would seek out a person who would come in and cut the hay for you. Put your portion in the barn for you. Use their own equipment. Then a negotiation could be done on the cost of fuel and twine, or those supplies could also be negotiated into the deal.

It could be agreed on what percent of the crop that the other person would want for their share. If an agreement could be reached then the agreement could, and should; be put in writing. Sighed in front of a Notary, and a performance bond might be a good idea on a 30 acre tract of hay.

This would be a business agreement, that I could perhaps live with.

[joebill]

Not only do you guys have to feel that each of you are getting an even shake, but each of your WIVES have to feel the same way. Maybe rent him some ground and equipment, but partnerships are for the birds. Every enterprise needs a boss, somebody to decide EVERYTHING. Both partners usually think that's "ME". I wouldn't touch it, and I'd let him read this thread by way of explanation.....Joe

[Harry Chickpea]

I might approach it differently. Each of you individually draw up a contract of what you want and expect. Set a renewable time limit of a year. Go to an accountant and get it set up as an LLC or subchapter S Corporation, with the accountant as a partner.

Anytime you have a business, you incur risk and liability. A corporation or LLC limits that risk and allows pass-through income with little or no tax liability. Having an outside partner and a clear set of by-laws prevents a lot of the "well I'll do this, he won't mind" type of thinking.

[Allen W]

Your equipment, your grass, your barn, your equipment (yes I said it twice) Hire him as a hand plus commission for selling the hay.

[am1too]

I'd say pay by the bale to be stacked in the barn. Opt to pay in hay at fair price. This would by pass the tax question. IRS won't accept hay.

Let him pasture the beef on his place (pay with hay) or rent pasture for your share. Of course he buys the calf - maybe with your help (guidance).

[rambler]

That is an unusual split.

Normally you would have the land growing good hay.

Your neighbor would have all the equipment, and supply machinery and labor.

The split would be near 50-50, each of you getting about 1/2 the bales.

As everyone is pointing out, you are supplying everything other than labor.

If this business evolves, I would think he would want to get his own equipment.

And it sounds like you kinda have some land you aren't using well anyhow...

So how about this?

30% of the hay goes to labor and brains.

35% of the hay goes to equipment and supplies and storage.

35% goes to the land owner.

You would get more money to start with, he would get experience.

Should he start buying his own machinery, you could transition that middle 35% between the two of you, depending on who is supplying more of it.

Maybe it should be split differently, probably 20%, 40%, and 40%, but some version of this?

Do not try to split 'profits'. That will sour the deal and make you resent each other. Only split bales produced, gross income. People on both sides get way too creative when they try to figure out true 'profit' in such splits. Do not go down that path.....

Paul

[Old Vet]

Any way you can go about it baling hay is a day time job not after work. If he bails half of the crop and it rains on it then what will you do? In the few hours after work you cant bail and haul the hay and stack it in the barn. Unless he works half of the night and those bails will be heavy after the due fall on it and it will rot in the barn. Just because of his in laws making a killing by selling square bails doesn't mean he can even make money our of it. If it were me I would go for round bails and sell it that way. That way you can have round bails left over for next year if you don't sell it. I understand that square bails sell for more but not that much when you figure the labor involved.

[7thswan]

If your neighbor doesn't have his own equitment and land and has never done his own hay-he can't know what is involved. It sounds to me like he see $ and wants to move in on your deal because he thinks it's easy money. If you want to have him involved do it on shares or pay him for his time.

[Appalachia]

Too many chiefs, not enough Indians.

Don't do a split.

[geo in mi]

Too many variables and details to cover in any ironclad agreement--and certainly not a handshake agreement.. No mention of bale quality and poundage. Personally, I like to be in control of the variables and the product. And I wouldn't want somebody else representing(or misrepresenting) my product. I would continue on what I do best(round bales) and bale a few squares to sell to him in the field--cash up front-- and let him haul and resell. If you couldn't come to an agreement, then you can go ahead and make round bales out of them. If square bales are so hot, why haven't you heard about it????

geo

[Jennifer L.]

I really appreciate the different perspectives. I know it's really a way for him to do some farming to see how he does at it, see if he likes doing it. And I'm all for mentoring someone. But I don't want to do something that's going to cause stress for myself, either (I'm big on avoiding stress. )

I guess I'll be spending some more time thinking before making a decision on this.

Thanks, everyone!