Investors were fleeced of over Ug. Shs. 1.6 billion (approx. US$ 446,000). See: Alleged Fraud Involving Capital Chicken for details.
In October 2023, Ugandans woke up to headlines about a scam in which people who could not have direct involvement in farming, invested in a chicken farm. They were promised monthly interest payments.
Reading this, I was reminded of a similar scam with fish ponds full of fish which disappeared into thin air right before the slated harvest date.
Agriculture is essential for our existence and economy. The commercial farming enterprise presents lucrative opportunities DATE: June 2022 but also requires very high capital investments over time.
So, what can an investor look out for when investing in a farming enterprise that is operated by another person?
An investor must conduct an extensive due diligence – business, financial, legal. Today, we will examine the business due diligence.
Business plan & projections
First, ask for a business plan and business projections. Then ask other people involved in a similar business whether the business plan and projections are realistic. For example, is the promised return on investment consistent with the industry returns. What is the frequency of returns in the industry?
For example, the Capital Chicken people offered a 40% to 60% return in 5 months on broiler chicken. A broiler chicken farmer would know that the broiler chicken business does not generate such returns on a monthly basis.
Understand that margins of farmers are generally low albeit repeated over time.
If you are satisfied that the projections and returns on investment are realistic, then proceed to the next step.
Does the business exist?
Find out if the business actually exists. Do not rely on the word of the person soliciting for the investment or other people who have invested in the business, like you might.
Do not rely on merely visiting an office. Find out where the farm is located. Independently and without appointment visit the farm without giving away your intention and ask questions.
Ask the farm neighbours about the ownership and activities of the farm. Discreetly find and talk to the farm workers. Follow the common advice and talk to the village drunk.
If you cannot do this yourself, then hire someone to do it. It turns out that Capital Chicken did not own a chicken farm.
If you are satisfied as to the existence and track record of the business, then conduct a legal due diligence.
Legal Due Diligence
Find out if the business is registered and how it is registered. Get advice on what the registration form means to you the investor. For example, what are the implications of investing in a limited liability company versus a sole proprietorship?
What assets does the business have and can these adequately secure your investment in case the business does not deliver the promised returns? What do you need to do so that the assets secure your investment? Remember, agriculture is a risky venture. For example, animals fall sick and die despite the best animal husbandry practices.
What are the contract terms? Are the contract terms enforceable? For example, Capital Chicken described itself as a partnership and so investors were partners in the business. But were the investors truly partners? Did they have a say in the management of Capital Chicken? Did they know anything about the operations of Capital Chicken? Do not be deceived by the title given to you when you invest. Look into the structure and determine whether it is real.
What recourse do you have if the venture does not work out and your return on investment is not paid? Are the business proprietors willing to give personal guarantees secured by some assets?
Due diligence may seem expensive and over exaggerated given the amount of money you are willing to invest, but remember, most scams bank on your repeated investment.
They are structured to make sure that you continue investing your principal and capital earnings or interest. This makes the amounts invested more substantial.