The Business of Making Money with Horses

By Don Blazer, taught by Eleanor Blazer

Lesson Seven

Stallion profits are in syndication.

If you are willing to put up with the problems, do the selling work yourself and wait a few years, you can make money with a stallion.

If you get extremely lucky, you can become a millionaire in a couple of years.

But it probably won’t happen the way you think.

The secret to making money with a stallion is to take the gamble out of the venture, and put hard work and salesmanship into the business.

But before I tell you the details of making money with a stallion, I want to explain why so many lose so much attempting to stand a stud.

Let’s look at some probabilities and statistics which will demonstrate what you are up against if you take the conventional approach. This approach is to prove the horse good enough to be a stallion in selected competition, then stand him to outside mares and derive income from the breeding fees.

How tough and how costly is it to make a name for a prospective stallion? Well, if you’ve ever competed at halter, jumping, pleasure, reining or racing, you know there are always more losers than there are winners. There is a lot of politicking which goes into the making of a champion, and a lot of advertising and a lot of traveling. Quickly estimate what it has cost you to race or show your horse in the past year. Is he one of the top horses in the nation competitively? If not, but you still think he has the ability, how much more in time and money do you think it will take?

My most conservative estimate is that it takes $30,000 per year to get a show horse national ranking. A race horse, on the other hand, is making money if he is nationally ranked. But then it probably cost no less than $100,000 to purchase the horse as a yearling, or to breed and raise him.

If you can get the horse national recognition for less, terrific!

Just to be nice, let’s say your horse if nationally ranked by your breed association. Now what? Well, there’s the competition to get mares.

The following figures are calculated guesstimates. There is no single source, no factual data on stallions at stud. I am using Quarter Horses as an example because the amount of public information is large and available, thereby giving the guesstimates a higher probability for accuracy.

It is estimated there are already 9,000 Quarter Horse stallions standing in the United States. No one knows for sure because no one counts. The majority are not publicized regionally or nationally, and a great many are simply standing in backyard operations. The same, I’m positive, is true with other breeds. So while the number of competing stallions may be much lower in the breed you have chosen, the total number of horses would also be lower.

Let’s be generous again, and suggest all the stallions have good bloodlines, even though half or more are by and out of horses with no popular pedigree. Remember the catalog sheet? How good is the catalog sheet on stallions with which you are familiar? Probably not as good as some of the local competition.

Now let’s be realistic and see what it is that attracts mare owners to a particular stallion.

It’s potential!

To be successful, a stallion must show potential to produce winners. And he shows potential by having been a champion himself, or by having such an outstanding pedigree—one absolutely loaded with winners—that everyone believes he can’t help but produce.

By focusing our attention just on race horses, we can reduce the statistical numbers to a manageable level.

There are approximately 30,000 running Quarter Horses born each year. Nature being what it is, one half, or 15,000, are colts. Of these, at least 7,500 are gelded, die or are otherwise eliminated as stallion prospects. So there are about 7,500 prospective new sires each year. For simplicity’s sake, assume as many older sires are retired or die, so the number remains constant, and competition doesn’t get any tougher.

Only 2.8 per cent of all running horses ever win a stakes race or become a champion, meaning only 210 of the 7,500 possibles have attractive potential. If you are dealing with show horses, you are well aware the odds of producing a champion are just as tough, if not tougher.

If 15,000 of the 30,000 Quarter Horse foals are fillies, only about one-third (5,000) enter racing each year. Of the 5,000 we know attempt to race, only 20 per cent ever win any kind of a race, including c heap claimers. But let’s say any winner is good enough to breed. That leaves 1,000 possible new broodmares.

The total each year is 1,000 qualified new broodmares for 210 qualified stallions.

That means there are less than five good mares for each good stallion.

Data from a regional West Coast Quarter Horse magazine reveals 195 stallions advertised, 62 of which were running horses. Of the 62, seven did not list a fee, or where advertised at “private treaty”, meaning the fee was negotiable.

Fifty-five stallion breeding fees were listed, 38 at $1,000 or less and 17 at more than $1,000. The average breeding fee was $1,200, with the median fee being $850.

Using our earlier figures, a qualified stallion could expect to get five qualified mares per year, at the average breeding fee of $1,200.

The total income to the stallion owner would be $6,000 per year. (Don’t consider mare care and boarding at this point.)

Not too good. Wait. It gets much worse.

Factor in $1,000 (very reasonable) to maintain the stallion for a year, and 12 advertisements at an average price of $670 each, and the outlay for those two items alone is $9,040. This represents a loss of $3,040. (Remember, this loss is for a horse that cost no less than $30,000 to qualify as a stallion prospect.)

You can’t make money losing money that fast.

But you are positive you’ll get more mares, so the breeding income will be much higher.

Good thought. Maybe you will. I hope so. If you check with the breed registries, you’ll find most stallions are lucky to get five mares booked a year. And remember, if you get five good mares, any others are probably unqualified mares and will do more damage to your stallion’s reputation than they’ll ever return in dollars during the first few years. Once a stallion has foals on the ground, his potential for profit is gone. He must now earn points on results, and that is much harder to do. It is so hard, in fact, that the very best stallions in the nation, the cream of the crop, are considered to be doing well if they produce four or five good winners a year. And those super-studs aren’t breeding just five good mares a year; they are breeding dozens. In addition, the top 20 stallions of any breed have been around for awhile. You won’t knock them off the mountain with a new stallion, unless he’s just been named “Horse of the Year.”

By looking at the facts, the competition, the costs involved in qualifying a stallion, it’s obvious you probably won’t get rich taking the conventional approach.

However, a stallion can make you money if you maximize his potential and use our location to our advantage.

Syndication is your answer to big profits.

Let me show you how the big money does it, then show you how a little money can do it.

In a standard syndicate, there are usually 40 shares, so theoretically, in a $30 million dollar syndicate, each shareholder pays $750,000. If each shareholder is entitled to one breeding per season for 10 years, each breeding costs $75,000. This is pretty standard in the Thoroughbred industry. You would think then that the resulting foals from each breeding must earn or sell for at least $75,000, plus expenses, for the shareholder to break even.

But it is all done with mirrors!

Just suppose each investor put up $750,000 in cash and the syndicate buys the stallion for, say, $2 million cash.

Now the syndicate has a $2 million stallion—no slouch, and with plenty of potential—and $28,000,000 in cash. You can do a lot with that, and they do.

You have to have a place to stand the stallion, so the syndicate purchases a nice ranch for $4 million. They operate the ranch as a business, but breed to no outside mares and have no horse-related income. Operating expenses are projected at 400,000 per year, including depreciation on the stallion.

The interest alone on the cash remaining, if well-managed, will generate about $2 million a year above expenses, or $50,000 for each partner. So the foals really only cost $25,000 and still have the potential to earn or sell for much more than that amount. And they usually do. Research the sale prices of early Easy Jet and Secretariat foals—they sold for hundreds of thousands of dollars.

In the syndication chart, you’ll see the partners will still make a profit even if the foals of the syndicate stallion return less than their actual cost.

SYNDICATION

Capitalization (000 Omitted)

	CASH	PROPERTY	TOTAL	1 SHARE
40 @ $750	$30,000		$30,000	$750
Cost of Stallion	-2,000	2,000	30,000	750
Cost of Ranch	-4,000	4,000	30,000	750
Operate 10 years	-4,000		26,000	650
Depreciation		-2,000	24,000	600
10% for 10 years	20,000		44,000	1,100
Net worth 10 years	$40,000	$4,000	$44,000	$1,100
Partner's return
from 5 foals, net
of expenses of
$20,000 each				$100
Partner's value of 1 share plus minimal foal return				$1,200

Percentage return on original investment, minimum expected: $1,200,000 equity less $750,000 original investment equals increase of $450,000 divided by $750,000, or a 60 per cent increase.

Pretty good deal. You get a 60 per cent increase in your investment, five foals, all of which could make a profit, and part ownership in a ranch which could be worth many times its original cost.

Okay, okay, you say $30 million is too much for you. You don’t know anyone with $750,000 to invest, and you don’t get invited to parties where the guests discuss buying and selling $2 million stallions.

The syndication doesn’t have to be for $750,000 per share. Can you handle $2,500 per share?

You can! Well let’s get started, because this is where you put in work and a bit of salesmanship. Then you reap the profits from syndication, not from the stallion.

First you have to find a suitable stallion prospect. This won’t be a snap. It will take some searching and research, but you can do it.

Always keep in mind that the horse must have potential. His potential is in this record as a competitor and in his bloodline. Both must be much better than average. Find a stallion with a record you can sell.

Develop a catalog sheet you can use to show his potential in black and white.

Don’t lose a good horse trying to shave the price. The price must fit the syndication, and you can pay up to $60,000. You’ll get the cost of purchase back through depreciation.

Potential. That’s the key. You must find the horse with potential you can believe in and get others to be excited about.

You know your horses and your market. Don’t attempt to go national. Sell where you are located, so the horse becomes the local hero and dominates your local area. Local shareholders will also help you promote the horse. They want to profit, too.

Buy a horse you know your prospective shareholders want. Buy a horse with potential your prospective shareholders can see. Wins, victories, championships are easy to see. They are a permanent record.

Once you have found the horse, secure a purchase agreement and start selling shares. (There are lots of books on the market which provide detailed guidelines for syndication agreements, or an attorney can write an agreement for you.)

As with all the other methods of making money with horses, the profit is in the horse’s potential and your ability to sell that potential.

Sell the shares, and without anything special happening during the next 10 years, there’s a good possibility the percentage increase of each share will be close to 300 percent.

In the chart, I used a 10-year average breeding usefulness. Lots of stallions go on longer, but exhaustive studies by the Internal Revenue Service (IRS) have set this as a guideline for tax purposes.

At 40 mares per season, that comes to 400 breedings per sire. Some will argue the figure is too low, but not every breeding results in a live foal, and some years the horse’s book may not be full. It’s a good average and is used widely in the industry.

At an average service fee of $1,200 your stallion will earn $480,000 before expenses. Only in exceptional cases will this vary. I hope it will happen to you.

The stallion’s bloodline will not change, nor will his competitive record, if he is retired to stud.

However, the performance of his foals could make a big, big difference. His first few foals should give you an idea of whether or not his fee must remain constant, or can be increased.

In part, it is up to you to do all you can to make his foals outstanding competitors. Don’t leave it to chance or to someone else. Get out and promote the potential of those foals.

PROFORMA EARNINGS OF STALLION SYNDICATION

	CASH FLOW	TOTAL EQUITY	SHARE VALUE	PERCENT
				INCREASE
FIRST YEAR
Investment $2,500
times 40 shares	$100,000	$100,000	$2,500
Purchase of stallion
with record and
potential	-60,000	100,000
Expense of syndication	-1,500	-1,500
Expense of stud's 1st year	-16,000	-16,000
Depreciation of stud
straight line, 10 years		-6,000
Estimated income 15 mares
at $1,200 per mare	18,000	18,000
Income from excess cash	2,000	2,000
Status at end of first year	$42,500	$96,500	$2,412	-3.50%
SECOND YEAR
Expenses, second year	-16,000	-16,000
Depreciation, second year		-6,000
Estimated income 35 mares
at $1,200 per mare	42,000	42,000
Investment inome
estimated at $40M	4,000	40,000
Status second year	72,500	120,500	3,012	20.00%
THIRD YEAR - TENTH YEAR
Expenses, third year
through 10th year	-128,000	-128,000
Depreciation, third year
through 10th year		-48,000
Estimated income
40 mares for 10 years	348,000	348,000
Investment income,
estimated at $100M	80,000	80,000
Status at 10 years	$408,500	$408,500	$10,212	308.00%

Note 1. Average appreciation on investment, 30.8 per cent, per year.

Note 2. This performance is on an average stallion with no great achievements by his foals to increase his stud fee. It is assumed his foals were good enough to keep his book full.

One good son or daughter in the first, second, or third year, and your stallion’s service fee could double or triple. More importantly, a good son or daughter creates demand for the stallion, and that creates demand for syndication shares at an increased price. Shares can be sold and resold.

In the proforma chart offered, I haven’t allowed for any special luck. I’ve kept the service fee the same for 10 years, shown only 15 mares bred the first year, and only 35 mares bred the second year. You can do better than that if you work at it.

I’ve been conservative. You can be too, and still make a great return on your investment and efforts.

If you get very, very lucky, the sky is the limit. You could make millions.

But, you protest, “What if I don’t get the number of mares projected each year?”

And I reply, “That could happen whether the horse is syndicated or not. And it probably will.”

If you own and attempt to stand even a qualified stallion, the chances are good you won’t get enough mares per year to make it pay. Very few stallions do.

If you don’t think that is true, and you don’t want to believe my earlier statistics, just open any equestrian magazine and pick out any stallion being advertised, even the top ones. Now multiply the breeding fee times 40 mares per year and that is his income. Subtract the cost of the stallion, his maintenance for a single year of his life, annual advertising, insurance, and a few thousand for incidentals and you’ll see there is little or no profit.

Now figure the same stallion syndicated for $100,000 or $2,500 per share. If everything stays the same—costs and income—you’ll be ahead by $40,000 or $50,000. That ain’t hay.

It’s not the stallion which makes money; it’s his syndication, based on his potential.

Stallions can make money for you. But it won’t usually be in the conventional way.

Syndicate and you will make money in the form of return on investment as a share holder.

Syndicate and you will make money as the general partner, through salary for services.

Syndicate and you will make money boarding and caring for the stallion ($16,000 per year in expenses, remember. That’s in your pocket.)

And if you syndicate, you will make money from the revenue generated by mares brought to the farm for breeding.

Follow the rules. Syndicate, be willing to get out and sell the horse’s potential, and have your shareholders sell their friends and neighbors, then wait a few years.

SYNDICATION OR LIMITED PARTNERSHIP GUIDELINES

How you go about establishing a syndication is up to you.

You can approach syndication several ways. You can be casual, writing a very simple agreement to be used strictly with friends and neighbors, without making a public offering. Or, you can make a public offering. In either case, you may wish to use the services of an attorney to prepare your partnership agreements.

The choices are up to you. I want to make it perfectly clear, I am not, nor are the schools, HorseCoursesOnline.com, Equine Studies Institute or Breyer State University, practicing law. I am not an attorney, nor am I your attorney. It is important you understand there are many legal ramifications to making any kind of public offering in which persons invest money.

WARNING: Shares in limited partnerships are considered securities under all state and federal laws. The offer for, and sale of securities, are regulated by law. If you want to prepare a limited partnership agreement, the following is a guideline only. It should be used only to offer ideas as to what you may wish to include and cover in the agreement. The following information is provided as suggestions only. Consult an attorney to create a Certificate of Limited Partnership, a document which must be filed in the state in which you are establishing the partnership.

A limited partnership, or syndication, usually consists of a general partner (in this case, that would be you) and several limited partners. You, as general partner, would have control over partnership affairs, and would make all the decisions concerning the partnership’s business.

The general partner may or may not invest in the partnership.

The general partner—keep in mind this is you—has unlimited liability for all partnership debts and obligations.

The limited partners are not active in the day-to-day business activities of the partnership. They only invest money, and therefore their liability is limited to their investment. If the partnership is sued, creditors cannot attach the personal assets of limited partners. The partners are protected.

You can have a few limited partners, or up to 40, the number or shares you would expect to sell in a stallion. (The stallion will be expected to cover 40 mares per year—one for each partner.) A limited partner may buy any number of shares, so some partners may have two shares, while others could have 10 or more shares. The idea is to sell out the total number of shares planned to produce the total amount of venture capital needed.

You must keep complete records on all persons entering the partnership. List yourself as the general partner, and then list all the limited partners, including their residences, businesses and e-mail addresses, phone numbers and fax numbers. In addition, you will keep an updated record of the shares purchased. The partners are not required to give the business additional money if it is needed at a later date, but they can do so. Careful, accurate record keeping is a must.

Name the partnership. When syndicating stallions, the partnership is usually named after the stallion, such as, “Paint Me Profits” limited partnership.

You must name the principle place of business of the partnership, which is usually the general partner’s ranch or business.

Always develop a statement of the purposes of the partnership, such as: “The partnership is engaged in the business of acquiring and standing at stud the Paint horse, Paint me Profits.”

The division of profits and losses must be clearly stated. Each partner’s profits or losses will be based on his percentage share of the total partnership. If the partner owns 10 per cent of the total partnership, then his division of profits should be 10 per cent, or his losses would be 10 per cent. A limited partner, however, cannot lose more than he has invested.

The compensation to the general partner for the work performed for the partnership should be clearly indicated. This is another way horses can make you money, so be sure you pay yourself adequately.

Also, be sure to include a statement that the general partner is NOT required to devote full-time effort and attention to the partnership.

The following is a bare bones sample of what a limited partnership agreement might include. You are welcome to use the information provided, but again, I warn you that making a public offering has many legal implications. You should have an attorney represent you.

The first step is to say who is taking part in the agreement (the general partner and the limited partners), and the date the agreement is being drafted.

The first article will define the partnership.

Include a statement of formation which will tell where the partnership is being established, the name of the partnership, the purpose of the partnership, the principle place of business and the term of the partnership. The partnership usually ends when the main asset of the partnership—the stallion—is sold or otherwise disposed.

Establish a list of definitions. Things to be included are the terms “agreement, adjusted investment capital account, assignee, cash available for distribution, general partner, limited partner, net income and loss, a substituted limited partner” and the term “vote.”

The second article of the partnership names the general partner and outlines the obligations of the general partner, how the general partner might be replaced, how additional limited partners may be admitted, and what will be given each limited partner as evidence of his interest in the partnership. (Perhaps a certificate.)

The third article will explain the means of capitalization—total amount to be sought—the contributions by the general partner and the limited partners, and the method by which calls for additional capital may be made. This section should clearly state any interest which would be paid on contributions and whether or not there can be withdrawals or return of capital. Be sure to limit the distribution of any partnership property to “cash only” so the stallion cannot be taken out of your control. You will also want to make it understood the general partner can award a distribution of cash to partners whenever deemed reasonable, if cash available for distribution has been sufficiently generated through profits, sales, etc.

This is also the place to award the general partner immediate reimbursement for any and all expenses advanced for the partnership.

The fourth article can cover the allocation and distribution of profits and losses.

Here you must establish exactly what you will pay the general partner. If, for example, you want to get 30 per cent of the profits, take the 30 per cent off the top, then split the remaining money according to the percentage owned by each of the limited partners.

Remember, you are entitled, as the general partner, to be paid and paid handsomely for your ideas and efforts.

Don’t limit the general partner. Make it possible for the general partner to be able to refinance or sell partnership assets to provide cash for distribution. Always keep the doors open for the general partner to be able to sell the stallion if a profit opportunity arises.

Article five can determine the latitude allowed the general partner in management.

The idea is to acquire a stallion and operate a financially successful breeding program, as well as other activities which the general partner feels would be advantageous to the partnership as a whole. Give the general partner plenty of room in which to operate, such as acquiring other property—horses, corrals, barns, land, etc.—selling of assets, or borrowing from third parties so additional money is available for allied investments.

Place restrictions on limited partners so it is difficult for them to take part directly or indirectly in the day-to-day business operations. You want the limited partners to promote the stallion with others and help make the operation profitable, but you don’t want them in your way. Give the limited partners the right to act, if so desired, as a contractor, agent or employee of the partnership, to consult with the general partner, to act as surety for the partnership or guarantee one or more specific debts.

Be sure to include a statement that the limited partners authorize the general partner to act alone in acquiring property, entering contracts, arranging financing or completing other arrangements needed to reach the goals of the partnership.

You must make a generic statement regarding the standard by which the general partner conducts business. Say something like “unless fraud, deceit, or wrongful taking is involved,” the general partner is not liable or obligated for mistakes resulting in any loss to the partnership or partners.

Make it difficult for the limited partners to remove the general partner.

Make removal based on cause, defined as dereliction of duty directly related to dishonesty, fraud, improper use of partnership assets, or self dealing to the detriment of the partnership. Require at least 75 per cent of the partnership to vote for removal at a general membership meeting which represents 100 per cent of the partnership shares.

The sixth article can deal with records and accounts.

Keep the partnership on a cash basis and close the accounts annually, making the fiscal year the same as the calendar year.

The required records, which should be kept at the general partner’s office, will include a current list of all limited partners, a copy of the Certificate of Limited Partnership, if such exists, copies of the limited partnership’s federal, state and local income tax information, copies of the agreement and amendments and financial statements.

It should be noted that upon request, any limited partner can get a copy of the records and he can inspect the records during normal business hours. The general partner should furnish financial statements on an annual basis, plus a report of progress when deemed necessary.

Of course the general partner must open a bank account in the name of the partnership. All partnership funds and no other funds shall be deposited into the account.

Article seven can define the rights, powers, duties and restrictions of the partners. It is important that the first section give the general partner the full and exclusive control over the management, conduct and operation of the partnership in all matters.

Again, the general partner should not be required to devote full time to the business, and again, a salary or form of compensation should be stated.

The limited partners should have voting rights on the following matters: a change in the nature of the partnership business, a transaction in which the general partner has a conflict of interest, the removal of the general partner, loans to the partnership, transacting business with the partnership and partners engaging in other businesses.

Article eight list all the requirements for meetings, such as notification, how a meeting can be called and w here it can be held, what constitutes a quorum, requirements for limited partners to act and proxies.

You will need an explanation of how the general partner and the limited partners can assign or transfer their interests in the partnership. This can be tricky and legally sticky.

Normally, the general partner is not allowed to transfer or assign any interest in the partnership to anyone.

However, the best thing to do, in my opinion, is to keep it simple and say interests can only be transferred to family members.

A limited partner can, of course, sell his interest at any time, upon the approval of the general partner and the other limited partners. Requiring approval of the sale of an interest protects the other partners from being burdened with a partner they do not want for various reasons.

The death, bankruptcy or incompetence of a limited partner should not keep that partner or his heirs from all rights under the partnership.

Article nine might cover the liability of the partners. The liability of the general partner is usually unrestricted. The liability of the limited partners is restricted and limited to the amount of actual capital contribution each partner has made.

Partners should not be allowed to disclose to any non-partner any of the partnership business practices, trade secrets or other information not publicly known. No partner should act contrary to the agreement or detrimentally to the success of the business or make it impossible for the partnership to carry on the business.

The general partner should not use any of the assets of the partnership, directly or indirectly, for any purpose other than the conduct of the partnership business.

There should be a section of indemnification in which the partnership agrees to act to protect the general partner if he were threatened, or named in a proceeding, and the partnership agrees to pay legal costs to protect the general partner.

The next article could cover the dissolution of the partnership which should take place when the purposes of the agreement have been met, or when the assets of the partnership have been sold.

The partnership could also be ended with the loss of the general partner, or by judicial decree.

You may wish to add a section in which it specifies the general partner is not obligated to tell the partnership about any other investment opportunities which might be available, and that the general partner has the right to take advantage of such opportunities. Frequently, during the normal course of doing partnership business, the general partner will be afforded the chance to participate in other profit centers. The right to do so should not be compromised.

End your agreement by stating that amendments may be made by a vote of the general partner and a majority interest of the limited partners entitled to vote. Any amendment shall be in writing, dated and executed by consenting partners.

Finally, state that the agreement contains the entire understanding of the partners and supersedes any prior written or oral agreements.

“There are no representations, agreements, arrangements or understandings, oral or written, between and among the partners relating to the subject matter of this agreement that are not fully expressed herein.”

Once a limited partner signs the agreement and gives you his investment money, there can be little argument as to who is in charge, and that you have the right to conduct the business affairs as you see fit.

Using this guide you can, with some effort, write an agreement to serve your purposes.

Syndications are a good way to raise capital, a good way to be compensated for your efforts and an excellent way to make money with stallions.

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