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In the 1980s, stallion syndication became very popular
because of certain tax advantages available to syndicate share
owners. When those
tax advantages largely disappeared with revisions to the
Internal Revenue Code, the popularity of stallion syndicates
steeply declined. However,
forming a stallion syndicate may still make business sense.
The recent announcement that top Quarter Horse pleasure
sire “Invitation Only” will be offered for sale at an
auction to be held during the 2005 AQHA World Show has sparked
much discussion in the breed show community.
Many smaller breeders are fearful that “Invitation
Only” will be purchased by a large breeder who will not
stand the stallion to outside mares, thereby limiting the
availability of this popular stallion’s get.
However, the winning bidder could be a syndicate rather
than a single ranch or individual.
What is
a Stallion Syndicate?
First popularized in the Thoroughbred racing industry,
stallion syndicates were historically formed as a way to
finance the cost of stallion ownership and spread the business
risk of stallion ownership among multiple investors.
Typically, a share in a stallion syndicate entitles the
share owner certain breeding rights to the stallion;
principally, the right to breed to the stallion without paying
stud fees.
Modern
stallion syndicates offer more options.
Most of the stallion syndicates that Equine Legal
Solutions creates for its clients take the form of limited
liability companies where the members share the costs of
stallion purchase and ownership, but also share in the
proceeds, with breeding rights as an added benefit of the
syndicate stake. The
LLC’s operating agreement serves as a governing document for
the stallion venture, including provisions for stallion
management, additional capital contributions, breeding rights,
sale of syndicate shares and so on.
Why Form
a Syndicate?
Syndication
can provide the means for several individuals to purchase a
stallion that would otherwise be beyond their means.
Pooling resources means more purchasing power – you
and nine friends may each be able to afford a $20,000
stallion, but if all 10 of you join together, you can afford a
$200,000 stallion. With
the modern LLC model, syndication also allows you to reduce
the ongoing costs of stallion ownership.
If you join with nine friends to purchase one stallion
instead of each of you purchasing one stallion on your own,
you would each have one-tenth of one stallion’s expenses
instead of 100% of one stallion’s expenses.
Plus, you have a greater possibility of return on your
investment because of the greater value of the stallion, given
the typical industry concentration of outside mares to a small
number of top stallions. Advances
in equine reproduction allow a single stallion to breed more
mares than ever before, increasing the possibility of revenue
from bookings to mares outside the syndicate.
For the mare owner, the modern syndicate still offers
the opportunity to guarantee the availability of breedings to
a particular stallion.
Another
advantage of being part of a syndicate is the ability to
benefit from other syndicate members’ expertise.
In the example above where you form a syndicate with
nine friends to purchase a stallion, you have the benefit of
nine other breeders’ experience and connections in the
industry. If you
are new to the breeding business, you can form a syndicate
with breeders who have the requisite knowledge to succeed.
If one of the syndicate members is an equine
reproduction expert, they can serve as the managing member of
the syndicate who oversees the stallion’s care and
collection and shipping of semen.
How to
Form a Syndicate
Before you proceed to form a syndicate, you need a high
quality detailed business plan.
In the example above where you join with nine friends
to purchase a stallion, your business plan would include not
only the stallion’s purchase price, but also his monthly
expenses such as boarding, veterinary care, farrier care,
insurance, training, showing, advertising and collection and
shipment of semen. Your
business plan would also include projections for revenues from
outside breedings, based upon previous years’ bookings and
taking into account such factors as the stallion’s semen
quality, collection rates, and claims on live foal guarantees.
As
noted above, Equine Legal Solutions recommends using a limited
liability company as the structure for your syndicate.
The LLC structure limits your personal liability to
your investment in the syndicate, a significant advantage not
afforded by a partnership or sole proprietorship.
The LLC, if properly formed, also includes a detailed
operating agreement to serve as your governing document in
managing the syndicate. A
corporation structure provides its shareholders with the same
protection from liability as an LLC, but corporate bylaws are
typically not detailed enough to be of great assistance in
running the day-to-day operations of the business.
When offering shares of your syndicate, you should seek
legal advice from qualified counsel to avoid violating state
and federal securities laws. In general, each offer to sell a
share of your syndicate is an offering that would need to be
registered under the federal securities laws (or qualify for
an exemption). Therefore,
without registering your syndicate as a public offering under
the federal securities laws (an expensive and time-consuming
proposition), you could not advertise the availability of
shares of your syndicate in breed publications, on your
website or in Internet chat rooms.
Your prospective syndicate members may need to meet
certain financial criteria in order to qualify your syndicate
for a registration exemption under federal securities laws,
and your offering materials, such as information that you mail
out to prospective syndicate members, must contain certain
information and meet certain criteria.
Be sure that the counsel who advises you is not only
familiar with securities laws, but also familiar with stallion
syndication.
Also seek qualified tax counsel who can advise you
about the tax implications of forming a syndicate.
Be sure that you understand what tax filings and
payments the syndicate and its members will be required to
make, and include the syndicate’s obligations in your
business plan.
Finally, be sure that your syndicate members are people
that you will want to do business with for an extended period
of time. Check
their credit and their horse industry references, no matter
how well known they are or what a good reputation they may
have. Many top
players in the horse industry are heavily leveraged and
therefore may not have the capital required to meet the
ongoing needs of the syndicate, regardless of whether they
place monthly full-page ads in breed journals.
So that the syndicate will have options if a particular
member is not working out, be sure that your operating
agreement contains provisions regarding sale or transfer of
syndicate shares, death of syndicate members and the ability
of the syndicate and/or its members to buy out members’
interests.
Ready to
Form a Syndicate?
Just
contact Equine
Legal Solutions – we’d be happy to assist you!
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