Cover Story by, Ron Ross
www.AGprofessional.com
Summer 2004
Thinking of buying or selling an agribusiness? The experts
say there couldn't be a better time to do either.
An uncommon combination of several
factors makes a good, profitable agribusiness a hot property,
according to Jim Kent, president
of the Kent Group, Inc., Minocqua, WI. Kent has managed
more than 175 merger, acquisition and divestiture transactions
in his 23-year career.
"There is a waiting list of buyers for viable agribusinesses,"
addsJerry Savill, with
Advance Agribusiness Appraisals, a division of Advance Trading,
Bloomington, IL. Savill has appraised more than 1,500 ag-related
businesses.
Many different types of country agribusinesses
are selling today, including family-owned and co-op ag retail
centers, grain merchandising firms and feed companies. There's
still plenty of activity among the giants, too, such as the
recent combining of IMC Global and Cargill Crop Nutrition
to form a new publicly traded company and Syngenta's purchases
of Golden Harvest and Garst brands.
Jim Kent, Kent Group, Inc.
Reality Time
"Growing ag supply/custom application businesses today
need at least $50 million in revenue to be viable, and have
enough cash flow to reinvest in the company," Kent says.
He expects that benchmark number will climb to $100 million
within three or four years. He estimates grain merchandising
companies already need about $100 million in sales to justify
investment in unit and shuttle train facilities.
"You can see it all around. If you don't have revenue
base to generate enough gross margin to cover fixed costs,
you can't be competitive. Some $10 million to $20 million
companies, which just a few years ago could get along quite
well, are barely surviving today. We continue to see businesses
that should have sold or should be selling right now and the
only way they are maintaining any kind of viability is that
they are using depreciation for cash flow. But they don't
have enough cash flow to reinvest in the business," Kent
explains.
That doesn't mean that a small company can't be profitable.
"There are viable operations at all levels of income
streams," says Savill. "I have recently appraised
fertilizer plants in the $4 million to $10 million range that
are doing fine. It just depends on how their fixed and variable
costs impact the overall business. But the trend is certainly
toward greater diversification and growth."
Maximizing Margins
A Kansas State University graduate study that tracked mergers
revealed Nebraska co-op numbers dropped by 67 percent between
1980 and 1999, from 225 to 75 administrative locations. Meanwhile,
South Dakota co-op numbers decreased 46 percent. But in North
Dakota co-op numbers declined only 18 percent during the 20-year
period. As co-ops in Nebraska and South Dakota joined forces,
sales and assets increased dramatically. And look at what
happened to income: four-year EBITD (earnings before interest,
taxes and depreciation) for Nebraska co-ops was 10.77 percent,
compared to 9.34 percent in South Dakota. In North Dakota,
reporting the fewest mergers, EBITD was only 7.13 percent.
"The recent joint ventures of industry giants, like the
Cargill/IMC deal, are worth noting because they show we're
seeing consolidation all the way from manufacturing through
distribution down to retail. The ag industry is consolidating
fast and it needs to consolidate even faster," Kent comments.
"The same factors driving the giants are influencing
local businesses: They need to reduce unit cost to generate
greater margins and cash flow that warrant reinvestment."
The ability of China, former Soviet bloc countries and other
overseas nations to adapt new technology will only trigger
a faster consolidation pace in the U.S., thinks Kent. "China
and the Ukraine will both be pumping exports of cereal grains
into Europe this year, and Brazil is out-competing us for
soybean export markets. As the U.S. loses more global market
share, it will place more pressure on our ability to maintain
margins," he says.
How far will it go? Kent cites an old rule of thumb that says
the greatest economy of scale exists when eight companies
within an industry segment have 80 percent of the market.
"If you look at the manufacturing side - fertilizer,
ag chemicals and seed - we're probably there, as is the grain
trade at the export and processing levels. The feed industry
is not there yet, but recent acquisitions would indicate it
won't be long," he says.
Why This Is a Good Time to Sell
Current tax laws, low interest rates and an improving ag economy
provide agribusiness sellers an opportunity to maximize after-tax
proceeds.
"The fact is, our current tax laws create a real 'sweet
spot' for sellers," adds Kent.
He cites four contributing factors:
• Capital gains taxes - at 15 percent - are the lowest
since the early 1950s.
• Income and dividend
tax reduction provide sellers more yield structure options
to increase after-tax proceeds. "We've been able to put
together some transaction structures that even defer taxes,"
says the broker.
• Business values of agribusiness companies are paralleling
upswings in the ag economy. "Increased business sales,
an upsurge in the stock market and lower cost of capital all
contribute to a higher selling price," he explains.
• Estate taxes are at record lows. Owners can sell for
a good price, not pay extraordinary taxes and restructure
their estate to defer or eliminate estate taxes.
What's Your Business Worth?
Methodologies of appraisal haven't changed much in recent
years, according to Savill. He combines three standard industry
benchmark approaches to determine overall value of a retail
agribusiness.
Cost analysis:
Savill first re-creates the physical plant, using current
costs, and subtracts accrued depreciation from all causes.
"In the past, one of our challenges was determining the
economic life of the facility. But most of the older, inefficient
plants built two or three decades ago have been sold off or
abandoned and don't impact the market. Many of the plants
we're appraising today are newer or have had significant improvements,"
he says.
Income stream:
The appraiser then prepares a pro forma income statement for
the past four or five years. For a fertilizer plant it would
be based on tonnage handled and typical operating expenses.
"Income stream is a very important part of the appraisal,"
he says. "One rule of thumb is that a business should
be showing 15 to 20 percent return before taxes to provide
for upgrading of facilities and equipment and an acceptable
return on investment."
Direct sales comparison: No two facilities are alike, which
can complicate a direct sales comparison, Savill explains.
"We use a data sheet that breaks out relative values
of land, buildings and types of facilities - dry, liquid,
anhydrous, etc. - and compare them to the property being appraised."
Reconciliation of the respective approaches is the final step.
The numbers should be within 5 to 10 percent of each other.
"Typically, the cost approach will come in on the high
side, income stream on the low side and sales comparison in
between. I seldom average the numbers; in my reconciliation
report, I justify one number over the others as being the
most credible, based on observation and personal judgment,"
Savill says.
Steps to Selling
Kent says knowing how to structure and price deals is a big
component of the value a company like his brings to the table.
"Selling a business is totally different than running
a business. We maintain you need a team of professionals who
know where the buyers are and how to present the business
from all the confidentiality, legal and tax aspects.
He lists seven key steps the Kent Group goes through during
the selling process:
• A detailed memorandum describes the business in detail.
"It's a critical document since it is the basis for prospective
buyers' first impression of your business," Kent says.
• An "A" list of potential buyers is condensed
from 15,000 companies maintained in the firm's global database.
• CEOs or executive vice presidents are contacted without
naming the company for sale.
• The company for sale is revealed to interested buyers
only after a confidentiality agreement has been executed;
the agreement allows the prospect to name the selling company
only within executive meetings.
• An off-site meeting is arranged between the seller,
a prospective buyer and Kent group professionals.
• Next, a "silent auction" is created between
multiple prospects. The prospect with the best proposal is
ultimately selected. "Some buyers don't like this part
of it, but it's our role to manage the selling process,"
Kent comments.
• Finally, a letter of intent is created with the selected
buyer and discussions with other parties stop. A definitive
purchase contract is prepared while environmental assessments
are completed and accountants verify financial statements.
Then, a closing date is set.
Typically, a sale from beginning to end takes between six
months and a year. However, if you're thinking of selling,
you often need to factor three to five years into your planning,
Kent warns.
"Experienced buyers know the value of smooth transitions,"
he says. "If an owner walks out the day a deal closes,
he takes a lot of goodwill to the parking lot. Often, buyers
will pay more if the sellers are willing to manage the business
for three years or more before they retire. Some sales have
been clinched on this kind of deal."
Why Is It Hard to Sell?
Environmental issues raise the reddest flags. Kent says no
one will buy a business today without an environmental assessment;
if the sellers believe they have problems, those problems
should be addressed before the business is listed. He recommends
a phase one assessment to assure "buyer comfort"
before negotiations start.
Smaller business with older facilities can be difficult to
match up with a buyer, but not always. Buyers focused on organic
or identity-preserved markets are often looking for smaller
elevators with multiple bins.
"We're actually seeing growth in this area. Japan and
parts of Europe are providing good niche markets for certified
non-GMO grains," Kent reports.
"In some Midwest communities, I've seen older dry fertilizer
plants converted into community recycling centers. The holding
bins are perfect for segregating glass, aluminum and other
materials," adds Savill.
Synergy Sets the Price
"Many people think there is some proven multiple to use
when we determine a selling price. In reality, there is no
such thing," Kent says. "You need to find a situation
that creates the most synergy between a buyer and seller to
have a win-win. For example, it would be difficult to go in
cold turkey with a new ag retail center and expect it to be
successful. You would have to take too much business away
from someone else. That's why consolidations are happening
and why they can be very profitable for buyers and sellers."
Editor's note:
For more information on selling or buying an agribusiness,
check out Kent Group's Internet site, www.kentgroupinc.com
or send an e-mail to jwkent@execpc.com.
Ron Ross is an agricultural writer residing in rural Minnesota.
He can be reached at 651/388-8867 or e-mail mrross@redwing.net.
