The Lost art of Stallion Syndications

Stallion syndications have long been a part of the horse industry. While still prevalent in the Thoroughbred and race horse industries, most show horse breeds, including Arabians, have seen the presence of the stallion syndication dramatically decrease or disappear over the past ten to fifteen years.

Story originally posted by: Michael Beethe, Esq.

While the reason for the decrease is somewhat speculative, many believe financially unsuccessful syndicates in the past have discouraged future syndicates. Despite the past troubles, stallion syndicates remain a viable option for certain stallions and certain owners, provided it is used in the proper situations.

What is a Stallion Syndicate?

Stallion syndicates are joint ventures where multiple owners combine their resources to purchase and maintain a breeding stallion. There will typically be thirty-two to forty fractional interests in the stallion, with each fractional interest being called a “share.” Each share entitles its owner to one breeding per year, which breeding the owner can generally use on his or her own mare or can sell the breeding to an outside third party. Each owner of a share is considered a “member” of the syndicate.

Why use a Stallion Syndicate?

Stallion syndicates provide each syndicate member (generally mare owners) with access to a valuable breeding stallion where sole ownership of such stallion would not be financially feasible. The syndicate members benefit because the no longer have to pay expensive breeding fees for high-dollar stallions. Similarly, the members will not be required to keep or maintain their own stallion. The members are required to pay for the purchase and maintenance of their fractional interest in the stallion. These costs include any and all expenses related to the stallion, which could include daily care of the horse, training fees, promotion/advertising, and nominations. In the long run, however, the stallion syndicate can provide mare owners with access to an excellent stallion at a much lower price than his advertised stallion service fee.

In addition to the ability to breed to the stallion, the syndicate will also provide the ability to combine for a group effort in promoting a stallion, which may including showing the stallion. The group effort in promoting the stallion could give each individual member the ability to participate in the chance to “win big” without bearing the entire expense or risk of the venture.

 
The Syndicate Manager

Each syndicate needs to have a manager who takes responsibility for the day-to-day activities, as well as overseeing the long-term planning, of the stallion and syndicate. The syndicate manager is appointed at the initiation of the syndicate, but can usually be changed depending upon the syndicate agreement. The syndicate manager is an integral part of the syndicate, because the manager will generally represent the syndicate to the public. As a general rule, the syndicate manager is compensated for his management duties by receiving some set number of breedings to the stallion. This compensation does not include any boarding, training, showing or care fees, as the manager will indeed be compensated for those expenses.

 
The Syndicate Agreement

One of the most important aspects of a stallion syndicate is the syndicate agreement. The syndicate agreement should contain all of the provisions necessary to form and administer the syndicate. Special care should be taken when reviewing the agreement, and you should consider contacting your attorney to review the agreement prior to your signing. Certainly, if you are forming a syndicate, you should work with an attorney in drafting the syndicate agreement.

Tax Consequences
For tax purposes, the IRS will generally treat a syndicate as a partnership. Thus, each member’s share of the income, loss and depreciation will be passed directly through to each member.

 
Problems in the Past

In the late 1970’s and early 1980’s, stallion syndicates appeared everywhere. Unfortunately, the common syndicate resulted in unhappy members, mainly because they lost a great deal of money on their investment. The bulk of the problems occurred at the inception of the syndicate, when the members purchased their shares. Typically, an individual stallion owner would syndicate their stallion, actually valued at $100,000. While the stallion was actually valued at $100,000, the syndicate would offer forty shares at $12,500 per share (or more). Simple addition shows that the initial individual owner syndicated the stallion for $500,000. Thus, the members paid a highly escalated price for their shares. If the horse had been syndicated for the true value, $100,000, the shares would have cost $2,500.

The problem with this situation is that the increased price in the initial purchase of the share made it difficult, and often impossible, for the member to come out ahead. To add to the problem, the syndicate managers were often paid a significant sum of money to manage the stallion, thereby raising the costs of maintaining the stallion. In the end, the cost to purchase the syndicate share and maintain the stallion greatly outweighed the benefit which the member received.

 
Factors to Evaluate – Members

When contemplating purchasing a syndicate share in a stallion, you should consider the following factors:

1. The Syndicate Manager. The syndicate manager is the one party that a member will work the most during the term of the syndicate. Further, this manager will be representing you and your stallion to the public, requiring additional skills of this manager.

2. Cost-Benefit Analysis. The potential member must determine if the initial purchase of the share and continued maintenance of their fractional interest will be less expensive than purchasing breedings to various stallions outright. Also the potential member must evaluate the potential for increase in the value of the stallion and his breeding fees.

3. Location of the stallion. While not as much of a factor as in the past, because of the ability to transport semen, the location of the stallion may play a factor in your decision to purchase. There may be times when syndicate meetings are required, and you should factor in any travel costs for such meetings.

4. Stallion’s Reproduction History. Before a sizeable investment and commitment are made, the potential member must consider the stallion’s reproduction history. In other words, does he have a proven track record. This is not to say that you cannot purchase a share in an unproven stallion, but the share price should be somewhat lower to reflect the risk involved with the stallion’s unknown ability to reproduce.

5. Goals of the Syndicate. Before investing, the potential member must know the goals of the syndicate. If the syndicate’s goal is to attempt to promote the stallion to a national win, the member must have the same goals, as these goals will affect the costs of maintaining the stallion as well as the ability to breed mares during some times. It is essential that the members have the same or similar goals for the stallion so as to avoid disputes down the road.

6. Long-Term Responsibility. When purchasing a share, the member is obligated to assist in maintaining the stallion for the duration of his ownership of the share. Unfortunately, the member must take into account the possibility that the investment does not prove successful. In such a case, the share will probably not be marketable, yet the member must still satisfy the maintenance obligations on the horse.

 
Factors to Evaluate – Stallion Owners

If you wish to syndicate your stallion, the initial stallion owner should proceed cautiously, evaluating the following factors:

1. Goals of the Syndicate. Certainly, if you own a stallion which you think has the quality and value to syndicate, you have in mind certain goals for the stallion. Be sure that the people that will eventually be members have the same goals for the stallion so that you do not encounter great disappointment down the road.

2. Financial Ability. If you believe that your stallion has the ability to be a top show horse and/or breeding stallion, but do not have the financial ability to pay for the stallion, syndication may be the proper approach.

3. Horse Knowledge. Someone who has a top quality stallion, but has no knowledge of how to handle, maintain and promote the stallion, may benefit from syndication.

4. Cost-Benefit Analysis. If the initial owner successfully syndicates their stallion, they will generate revenue for themselves from the initial offering. In addition, the initial owner’s cost in maintaining, showing and promoting the stallion will drastically decrease. On the other hand, if the stallion proves successful, the initial owner will only receive a fraction of the benefit. The initial owner must evaluate the benefits and risks to determine if the syndicate is the correct approach for them with their stallion.

5. Loss of control. The initial owner of the stallion must understand that they will lose control of the stallion if syndicate, unless they retain a majority of the shares. The majority of the members decides what happens with the stallion, which may not correlate with the initial owner’s wishes.

6. Syndicate Manager. Often times the initial owner sets up the syndicate so as to appoint themselves as the syndicate manager. This could be beneficial, as the syndicate manager usually receives the benefit of the syndicate (breedings) without the detriment of the syndicate (the initial purchase price and maintenance), in exchange for their efforts as manager.

 
Conclusion

Stallion syndicates remain a viable option for many people in the horse industry. It offers the owner of a high-dollar stallion to reduce its cost in maintaining and promoting the stallion, while still receiving breeding rights to the stallion. Similarly, a stallion syndicate can offer the outside individual the opportunity to own a portion of a this valuable stallion, with access to the stallion for breeding, at a somewhat low cost. Provided the syndicate is set up and administered properly, it can prove successful for all involved.