organizeandfinance - North Central Region Extension...

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North Central Region Extension Publication No. 568 April 1995 Michael Boehlje David Lins Alternative Financial/Organizational Structures of Farm and Agribusiness Firms
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2 Contents 3 Introduction 4 Criteria for Choice Control Returns Risk Maturity/Permanence/Liquidity 5 Legal Organization 7 Business Arrangements Independent Production Contract Production Subcontracting or Contracting for Services Joint Ventures Strategic Alliances Franchise Agreements Licensing 9 Leasing Real Estate (Farmland) Leases Facility/Equipment Operating Lease Capital/Financial Lease Leveraged Lease Leasebacks 11 Equity Capital Sources of Equity Business Practices That Affect Equity Capital 15 Debt Capital Loans Bonds 19 Some Final Observations About the Authors Michael Boehlje is a professor of Agricultural Economics at Purdue University. David Lins is a professor of Agricultural Economics at the University of Illinois. The authors wish to acknowledge the helpful review comments from Robert Jolly, Iowa State University; Warren Lee, Ohio State University; Burton Pflueger, South Dakota State University; and Ross Love, Oklahoma State University. North Central Farm Management Extension Committee October 1994 Illinois: Dale Lattz Indiana: George Patrick Iowa: William Edwards Kansas: Mike Langemeier Kentucky: Richard Trimble Michigan: Gerald Schwab Minnesota: Richard 0.Hawkins Missouri: Norlin A. Hein Nebraska: Dick Clark New York: George Caster North Dakota: Harlan Hughes Ohio: Bernie Erven Oklahoma: Ross Love South Dakota: Burton Pflueger Wisconsin: Bruce Jones USDA Extension Service: Don West Farm Foundation: Steve Haibrook Administrative Advisor: David Petritz Canada: Ralph Winslade, Wayne H. Howard
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3 Introduction The range of options for organizing and financing a business has expanded considerably in recent years as innovations in financial markets created new alternatives to meet the varied needs of business managers. The purpose of this publication is twofold: (1) to provide a comprehensive listing of organizational and financing options for farm and agribusiness firms, and (2) to explain the circumstances under which these various options are likely to be most useful. The approach to the financial/organizational structure of most farm and agribusiness firms is very tradition bound. Historically, financing focused primarily on internally generated equity, with debt used if internal sources of equity were not adequate to finance the growth of the business. The dominant organizational structure has been the sole proprietorship with limited forward or backward "linkages" (i.e., contracts or ownership of successive stages of production). The options and alternatives available to finance and organize farms and agribusiness firms are now much broader in terms of (1) business/legal arrangements, (2) asset control strategies, and (3) financing instruments/options. Table 1 (below) summarizes these options; each option is discussed in detail in the following sections. Managers need to develop a strategic plan
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organizeandfinance - North Central Region Extension...

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