Stallion Syndication

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 declined steeply. However, forming a stallion syndicate might still make business sense.

The announcement that top Quarter Horse pleasure sire “Invitation Only” would be offered for sale at an auction during the 2005 AQHA World Show sparked much discussion in the breed show community. Many smaller breeders were fearful “Invitation Only” would be purchased by a large breeder who would 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 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 might 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, 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 your syndicate shares in breed publications, on your website or in internet forums. Your prospective syndicate members might need to meet certain financial criteria to qualify your syndicate for a registration exemption under federal securities laws, and your offering materials, such as information you mail out to prospective syndicate members, must contain certain information and meet certain criteria. Be sure 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 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 your syndicate members are people you will want to do business with for an extended period. Check their credit and their horse industry references, no matter how well-known they are or what reputation they might have. Many top players in the horse industry are heavily leveraged and, therefore, might 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 the syndicate will have options if a particular member is not working out, be sure 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.