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Anyone with horse sense has a stable mind.

Making Sense Out of thehorse Business

Introduction !Human beings have five traditionally recognized senses: !1) Sight, 2) Hearing, 3) Taste, 4) Touch, 5) Smell !If these senses are not operating properly and synergistically the human body is not in balance. !Small business owners, in general, and horse owners and equine professionals in particular, also have five “senses” to work with:

!Not unlike the human ecosystem, the horse business must have all five of it’s “senses” operating in harmony, in order for the business to be run efficiently, legally, and most critically – profitably. Unfortunately, experience has shown that most horse and equine business owners do not work with these five senses in balance, and hence, their businesses, and all too often their pocketbooks, suffer as a result. People tend to focus on only those areas that they feel comfortable in, ignoring the others. While this is a natural human tendency, it is ruinous for a horse business in the long run. !This goal of this book is to provide you with the critical areas of concern that you must understand, some common issues that are relevant to each, and approaches that you can take to address any gaps in your business that might exist. This will help to provide balance, congruence, and a more symbiotic approach to how you handle your business affairs. Of course, no book or guide is better than a personal consultation with a trained professional in any of the key “Sense” categories.

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1 Horse Sense 2 Business Sense 3 Legal Sense 4 Tax Sense 5 Financial Sense

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Section One: Horse Sense !!While it might seem obvious, clarity is critical: You must pull out all the stops to know everything possible about horses. Seems like a no–brainer but you might be surprised to see the number of people who enter the horse business knowing next to nothing about horses! !Some examples of core horse fundamentals you must master include the following: !

1. EQUINE CARE AND MAINTENANCE !• Proper care and feeding • Proper medical care • Selecting the right vet • Proper hoof care • Selecting the right trainer and other professionals !2. HORSE SELECTION !From a business stand point you’ll need to know how to properly select a profitable horse. Included in this matrix are things such as how to maximize the profit potential in the shortest time possible of a horse, and crucially how to know when to cut your losses. Maximizing profit is all about bloodlines and and understanding what the market demands are and making sure you meet them. !3. PERSONAL FITNESS (for riders) !If you choose to ride you need to understand that this is an athletic pursuit. That means that to be the best rider possible you need to train like a champion. Weight training, cardio training, proper nutrition, lots and lots of riding experience, and the employment of an experienced coach. !4. STABLING FACILITIES !Perhaps one of the most important elements of all of this is selecting the right facility to assist with all of this. This could be your own facility, or a commercially available location or maybe even both.

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!5. EQUINE BREEDING !If you’re involved in horse breeding there are additional considerations. Perhaps most critically you’ll want to be spot on when it comes to understanding bloodlines so you can properly match up stallions and mares to ensure maximal foal production and the smallest chance of failure. Among these failures are: a) Breeding that doesn’t ‘take’, b) Mare’s who abandon their foals, c) Foals who are stillborn. All of these will cost you BIG if you don’t do the proper due-diligence from the outset. !

Most who enter the horse and equine business arena are most focused on this first “sense”, as it goes hand-in-glove (or hoof-in-shoe…) with their love of horses. For some they might even be experts in one of these areas. However, even when that’s the case, the other four areas are often neglected. !We’ll address the other disciplines next, starting with the all–important Business Sense. !!!

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Section Two: Business Sense !!The Business Plan. !

All prosperous ventures start with a business plan. It is the skeleton onto which you build the body of your company, and provides a yardstick to measure whether or not you are reaching your benchmarks. It helps you get a handle on a variety of components, such as pricing, marketing, sales, inventory, contractors, capital needs, and equipment, as well as a thorough understanding of what the costs are. You wouldn’t show up at your house, leading a horse, without a place to stable it or food to feed it, right? That would be half crazy. You’d have a real mess on your hands! It’s no different with your business. !Don’t hesitate to ask questions to get help when you are creating your plan, and then along your path to success! Employing trusted advisors along the way is perhaps the best way to ensure that the best possible decisions are made at every juncture. A CPA, Attorney, and Financial Advisor specializing in the horse and equine business are among the most important members of a solid horse and equine professional business without question.When creating this crucial structure, there are several key elements to include: !

1. Vision Statement. You need to articulate what you are trying to create, what it is that you are picturing in your mind’s eye. !

2. Company Description. Break your vision down. What kind of equine enterprise do you want to build? !

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The successful equine business owner always makes sound decisions with the good of the business in mind, despite their love of the horse. That is, perhaps the most overarching priority you must keep front and center, when running your business.

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3. Toot Your Horn. What makes your company different? Why is it special?!

4. Market Analysis. Here you will describe the niche you are trying to enter, your competitors, and where you fit into it. Also, try to determine what market share you might procure. When it comes to the equine market, here are some specifics you should consider: !• The breed of horse that is most profitable given your business

model. • The best bloodlines to pursue. • The core activity of the business

model (i.e. breeding, boarding, training).

• The core services provided by the business. !

Also, understand that your chosen market is often a moving target. Therefore, you’ll want to maintain a pulse on it, so you can ensure that your business model is aligned properly with the opportunities present. Slow reaction time in any business can be devastating, so be flexible and stay on your toes. The market is an unforgiving as a jilted lover!!

5. Description of Your “Team”. This is where you include your key players, and why they are your best choice…why you picked them! Your team includes your trainer, the facility, where you procure your horses’ feed, your CPA, and financial advisor, etc. Be detailed and specific! Heck, even include contacts’ addresses and phone numbers!

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One of the big issues in any business is knowing when to cut your losses. It’s no different in the horse business. Many owners simply do not have a plan to unload a horse that isn’t reaching it’s expected potential. Not only is this a bad business move, but it’s a significant omission from your business plan as well. It’s axiomatic that owners’ want to ‘give the horse one more year’, and this is often a mistake.

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!6. Sales and Marketing Breakdown. Marketing and sales are two

different things, though they are linked. Marketing includes the methods that you garner leads, while the sales strategy is the way that you convert those leads located into clients and opportunities. !MARKETING! MARKETING! MARKETING! !

Marketing could have a book of it’s own…or many books…but for our purposes, I will break it down into a few, very broad categories. The Big 11 of Marketing in any business venture are: !1. Natural Market 2. Centers of Influence 3. Strategic Alliances 4. Referrals and Introductions 5. Speaking 6. Writing & Publishing 7. Social Media 8. Website/Search Engine

Optimization 9. Advertising 10.Electronic Media (radio/TV) 11.Blogging !!

SELL, SELL, SELL! !One consistent attitude I’ve found in many small businesses owners, is that they see themselves as being in the ‘appliance’ business, or the ‘tile’ business, or the ‘landscaping’ business…or the ’horse’ business. That’s all true, of course, but the one, ubiquitous business that all small businesses of any stripe are in, is the SALES business! Forgetting this is the death knell for even a strong business model. Improving and developing

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The proper way to integrate these disparate elements is through a hub and spoke system. Your website is your hub, and every other piece is a spoke that directs back to that hub, where you get to brag about what makes your business the greatest! This lead conversion system will convert suspects to prospects, prospects to clients, and clients to profitability!

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your sales model will be among the most profitable and elemental strategies you’ll ever engage in. !

7. Identify Strengths and Weaknesses, Opportunities, and Threats. Giving your idea a hard, honest stare in the eye will help you determine whether your goals are realistic and achievable, as well as scrutinize all your opportunities and challenges. !

8. Construct a Cash Flow Statement. This will help you comprehend what your needs are today and tomorrow. !

9. Project Your Revenue. Setting goals!!10. Summary/conclusion that wraps everything up.

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Section Three: Legal Sense !The Business Structure. !Selecting the type of business structure is important to say the least. The rules that you will have to play by, start with the kind of company you are. You will have several options to choose from: !

• S Corporation • C Corporation • Limited Liability Corporation (LLC) • Sole Proprietor • Partnership !

This is an important step for a number of reasons, the least of which is the protection of your personal assets and the segregation of your business and personal affairs. Some activities have less liability and can be operated as a sole, proprietor or partnership such as breeding operations where no outside horses come in to your facility. !You also need to know if your state has any type of law limiting your liability. For example, in Michigan, there is an equine liability law that does in fact limit your liability. In order for it to be applicable you have to know the law and follow the guidelines outlined. Among the guidelines are requirements that: !

• Written releases are utilized • Safety equipment always be utilized • Ensures that you, and everyone involved with your operation acts

responsibly. !!Be sure to have written contracts for purchases, sales, boarding, training and lessons. Don’t assume anything. Write it down and make it legal. One slip up can result in a catastrophe that you can not recover from. Work with a skilled attorney who specializes in the equine and horse business to make sure you have all of your legal documents in order.

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The rules that you will have to play by, start with the kind of company you are!

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Section Four: Tax Sense !!Taxes probably represent the single trickiest element of the equine trade to understand. They are a complicated, intricate ballet of balance, often, and unfortunately, neglected. That’s a shame, because too many great businesses have fizzled, simply due to poorly managed accounting. !

Income, Deductions, and Depreciation !For starters it’s critical to ensure that all income is properly recorded on your tax return including: !• All cash received • All bartering transactions !When it comes to bartering it’s a reality that most horse businesses are involved in some way, shape, or form and fail to properly record it. You have to be sure to discern between personal and business bartering. !Capital gain treatments are afforded to horses owned for two years and utilized in the business. Which is part and parcel of understanding what you can deduct and can not deduct. For example deductible items include: !

• Depreciation of vehicles and actual expenses. • Standard Mileage deduction (a mileage log is required for

both expenses). • Properly allocating mortgage interest and property taxes for

your facility to your business. • The correct method of allocating utilities to your business

when a separate meter doesn’t exist. • How to allocate cell phone and telephone costs to your

business. • Knowing which assets can and need to be depreciated,

including the time frames which they are depreciated. !

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Too many great businesses have fizzled, simply due to poorly managed accounting.

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Depreciation Time Frames !1. Horses – Either 3 or 7 years depending on their use. Horses

bred on your farm are not depreciated as all costs are depreciated currently.

2. Barns and buildings- 20-39 years depending on their use. 3. Land Improvement – 15 years 4. Vehicles- 5 years 5. Computers & related equipment- 5 years 6. Fences- 7 years 7. Horse trailer- 7 years 8. Show clothes- 7 years 9. Equipment used in a horse exhibit- 7 years !!

Employees versus Contractors !Employees are another key factor in a any business and knowing the difference a sub-contractor and an employee is important to know and understand. There is a 20 factor test to determine if someone is an employee or contractor. !

The 20 Factors are: ! * Source: Federal Library, Federal Editorial Materials,Tax Desk, Analysis !(1) instructions to worker, see ¶ 535,010 ; (2) training, see ¶ 535,012 ; (3) integration into business operations, see ¶ 535,013 ; (4) requirement that services be rendered personally, see ¶ 535,014 ; (5) hiring, supervising, and paying assistants, see ¶ 535,015 ; (6) continuity of the relationship (permanency), see ¶ 535,016 ; (7) setting the hours of work, see ¶ 535,017 ; (8) requirement of full-time work, see ¶ 535,018 ; (9) working on employer premises, see ¶ 535,019 ; (10) setting the order or sequence of work, see ¶ 535,020 ; (11) requiring oral or written reports, see ¶ 535,021 ; (12) paying worker by the hour, week, or month, see ¶ 535,022 ; (13) payment of worker's business and/or traveling expenses, see ¶ 535,023 ; (14) furnishing worker's tools and materials, see ¶ 535,024 ; (15) significant investment by worker, see ¶ 535,025 ; (16) realization of profit or loss by worker, see ¶ 535,026 ; (17) working for more than one business at a time, see ¶ 535,027 ;

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(18) availability of worker's services to the general public, see ¶ 535,028 ; (19) firms's right to discharge worker, see ¶ 535,029 ; (20) worker's right to terminate relationship, see ¶ 535,030 . The court has also suggested and applied the following additional 4-factor test to determine whether a logger was an independent contractor or an employee: (1) the industry practice or custom in the area of the parties; (2) the intent of the parties; (3) whether written, signed independent contractor agreements were executed; and (4) whether employee-type benefits were provided. These benefits include paid vacation, sick leave, medical insurance, and pension accrual. The fact that workman's compensation is provided does not indicate an employer-employee relationship where no other employee-type benefits are provided. 2 !** As with any legal matters consult an attorney and/or CPA for determination of the status of any worker. !!!!

If you are working with contractors you will need to issue 1099’s in many circumstances including: !

• If they were paid more than $600 • If the payments were made to a non-corporation • If the payments were made for services (as opposed to goods). • If the payments were deducted by your business. !!!

Audits !It’s no secret that horse businesses are often an audit target. An audit is something no sane person wishes to endure, but it’s a fact of life. The chance exists that it could happen. Therefore, it’s vital for you to understand what might trigger an audit, and what happens during that event. !!Audit Checklist of things to know: !

1. Knowing which documents the IRS will ask for. 2. Knowing the questions the IRS will ask 3. Understanding the two stages of every IRS audit, for a horse-related

business.

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There will be an examination of supporting documents to determine that:!

1. All income and expenses have been properly reported and recorded.!

2. A review of your horse business to determine if it is, in fact, a business (and not a hobby).

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How to know if the IRS will determine if your equine venture is a business and not a hobby? There is a checklist of 9 factors used. You need to know what the IRS will be looking in relation to each item, in general, and then, specifically, what questions they will ask relevant to each item. You must fully understand the implications and ramifications of your response to each question that is asked pursuant to those 9 factors. !You will probably not be surprised to find out that the IRS will make a mountain out of every molehill of a slip up in your responses. It’s impossible to overstate the importance of having experienced, competent advisors, with a track record of experience in dealing with the IRS, horse businesses, and audits, on your side. There is simply no substitute. Going it alone is tantamount to self-surgery, and makes just as much sense.

Section Five: Financial Sense !!Owning and operating an equine business is an expensive and risky venture. Make no mistake about that. You will need adequate capital resources (i.e. MONEY) to get started and keep it running until it can be profitable. !To determine if you have adequate funding and are properly structured to begin your venture you’ll need to rely in part on a properly structured business plan and accompanying financial projections. There is no good excuse for saying ‘ I never knew it would cost this much.’ You have to do your homework. As the old adage goes, “measure twice and cut once”. Leaping into a horse-based venture, without thorough pre-work, is often a recipe for financial disaster. Even if you are wealthy, this makes little sense and is a pointless waste of resources. !This is another area where experienced advisors can be of great service to you. !!Every horse business needs a competent Financial Advisor for a variety of important reasons: !

1. To help them determine the funds needed to start the business.

2. To obtain how to best acquire and draw the funds to open shop.

3. To help allocate funds appropriately to sustain the business up to and through profitability.

4. To help ensure that the business does not lead to a bankruptcy or cause financial distress.

5. To help determine if and when the business should be discontinued. 6. To determine what if adequate insurance is in place- and to help provide

it and prepare any illustrations or projections needed to develop a solid risk management program for the horse business. !!!!!

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Q: How do you make a small fortune? !

A: Start out with a large fortune and

BUY A HORSE!

Section Six: The Bottom Line !!1. Just as the horses that are part of the business are living, breathing

entities, that change and evolve, so too must these five horse senses be for you and your business. !

2. You must never become complacent, or satisfied with the development of these senses. !

3. You should always be striving to improve your knowledge and mastery of these senses.!

4. You should always strive to maintain balance between these five senses and never allow one to become dominant over the others. !

5. Your chances for success and financial profit are significantly increased if:!a. Each sense is developed to it’s maximum potential b. A balanced approach is taken in developing the senses !

6. The Five senses are interrelated, synergistic, and work exponentially to help drive your ultimate success and profitability. !!!!!!!!!!!!!!!!!

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Grant, Millman, & Johnson, P.C. Certified Public Accountants & Advisors 39475 W. Thirteen Mile Rd., Ste. 200 Novi, Michigan 48377 Phone: 248.994.8500Fax: 248.994.8505